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.

PSALM to dispose Limay power plant by end of the month

And then there were...none?

At the rate investor interest is waning on privatization sale of the 620-MW Limay power plant complex in Bataan, the Power Sector Assets and Liabilities Management (PSALM) Corp. would be hard-pressed to successfully conclude the sale to private investors by the end of this month.

Already, this target has moved from last month’ schedule.

This time, “we are hoping to complete the privatization of Limay by the end of this month,” PSALM president Jose Ibazeta said. From the tone of his statement, he might as well cross his fingers and wait for a new investor to come out of the blue to snatch the asset.

In 2008, PSALM counted as many as seven groups showing some interest (read: we’d like to have a peek). But during the actual two past bidding in April and September of 2008, only one bidder submitted the required documents which automatically made the sale failures.

This time should be better since PSALM counted three groups still interested.

One of them, the San Miguel group which has been all over the energy landscape lately picking power assets like apples, has already turned bland on Limay because converting it to use other types of fuel was expensive, according to San Miguel’s consultant Alan Ortiz.

PSALM believes the Aboitiz group is still interested, but the latter has its hands full on other projects like the newly-acquired Tiwi-Makban geothermal complex and hydro projects in Mindanao.

The third group remains unidentified.

What makes Limay a difficult sale?

The power complex is composed of two 310-MW identical modules, each comprising of 3 70-MW gas turbines and a 100-MW steam engine. So, 420-MW of its capacity runs on expensive fuel. To make it competitive, the power generators have to be converted to run on cheaper fuel—coal, for instance. This is probably the conversion cost Ortiz is talking about.

Worse, the plants do not have any power purchase agreement attached to the sale. That is, the new owners would have to sell the generation to the wholesale electricity spot market (WESM) where the cheapest power is likely to be dispatched first.

One could very well create a captive market by developing the surrounding area as an industrial zone. This has been in the blueprint for some time. But unless you are an Andrew Tan or a Henry Sy (or at least you could talk to any of them to cast a few billion pesos) you’d better stake your luck somewhere else. At this point when the image of a recovery in the horizon could only be a mirage on the desert of the worldwide recession, creating an artificial oasis is just nuts.

So what value is left?

You might be wondering why after a building is razed to the ground, an army of scavengers starts circling the devastation. Yes, people could see value amid the destruction—in the form of scrap metal that could be salvaged and recycled.

Selling it as such is not really a bad idea. Many of PSALM’s decommissioned plants ended up on the scrap yard. But Limay was only constructed in 1993; surely there must be value left of it. For some decommissioned plants, the underlying land could be a valuable piece of real estate.

The right to own and operate a power plant in itself is a valuable asset. Try to go through the hassles of getting an ECC (Environmental Compliance Certificate) for a greenfield project. You would probably wait 3-5 years before the cornerstone can be laid down.

The odds of a successful sale of Limay are stacked against PSALM. With luck, it could very well dispose the asset.

But definitely not at the price and terms of its liking.

_______

Note added, August 28, 2009: The other day, reports say that the energy unit of San Miguel offered $13.5 M for the asset. At that ridiculous price, the new owners seemed to have bought scrap metal. PSALM apparently agreed to it. I am reminded of a slogan in a pizza parlor: We have no problem if others sell at a low price; they know what their products are worth.

Added, Sep 6, 2009: An SMC spokesperson said they planned to spend $350 million to convert the plant into gas-fired type. Ah, OK.

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.

Dangerously tweaking the EPIRA

The Senate might be treading on tenuous, dangerous grounds when it approved yesterday on third and final reading proposed revisions to Republic Act 9136 or the Electric Power Industry Reform Act (EPIRA).

On a vote of 16 to 3, the Senate passed Senate Bill 2121 which seeks to amend two important provisions of the EPIRA. These amendments are (1) scrapping the provisions that pass on to consumers stranded debts, or unpaid financial obligations; and so-called “stranded costs”; and (2) lowering the threshold percentage level of power assets privatization to 50% from the current 70%.

What are the possible ramifications of these amendments?

Stranded contract costs refer to the excess in contracted cost of electricity agreed on between an independent power producer and the National Power Corporation (NPC), the erstwhile operator of the transmission grid, over the actual selling price in the market of contracted energy. This can arise, for example, when NPC cannot sell the contracted amount of power due to some reasons such as low actual demand or prolonged breakdown in transmission facilities.

The stranded contract cost which applies to all distribution facilities was also scrapped “in order to reflect the true cost of power and avoid additional burden to consumers.”

In other words, according to Senate President Juan Ponce Enrile, if Napocor and the distribution utilities committed errors in contracting electricity costs, they will have to answer for their lapses in judgment. Let their economics be damned. Forget their target internal rate of return or cost of money.

If only the conditions were as simple as that.

Stranded costs are not the machinations of an evil mind. Big power projects have long gestation periods and entail huge capital outlay. For such a project to be viable, there has to be some guarantee that a portion of the output at least has an assured buyer even before the project proponents lays down the first cornerstone. The form could be either a “take-or-pay” provision or a guaranteed price and adjustments.

There are also technical limitations on the amount of power that can be generated. A 20-MW rated turbine running on geothermal steam could not be operated below a minimum output threshold. In a similar way, a high transmission line cannot carry a load below some limit.

During the previous opaque and monopolistic power regime of Napocor, such guarantees could be easily built in into the contract hammered under very amicable circumstances at the expense of the final consumers.

But even if there is no explicit passing on of the costs to the consumers, the generation costs would somehow appear as operating costs. Failure of the generating company to book such costs as expenses could spell the viability (or lack of it) of the project at the outset.

The amendment may dissuade would-be investors from putting up sorely needed additional capacity in the near future.

The other amendment—lowering the privatization threshold to 50%--could have far more dangerous implications. The rationale is that, with the lower threshold, the “open access regime” wherein big consumers can actually choose their source of power would immediately kick in. This is because the actual level of privatization has already been pegged at 57%.

The fatal downside is that Napocor will no longer have to sell its remaining power assets, and thus continue to exert dominance over electricity prices. This would also fell in the hands of the Napocor insiders who seem to be consciously delaying the privatization process for reasons we can only speculate. With this scenario, the open access would ring hollow.

For the investors who have already put up money on the basis of the original EPIRA provisions, they would have to adopt with increased difficulty should the bill be passed into law. Those who are waiting in the wings would have to go back to the drawing board and their financial spreadsheets and assess the changed circumstances. They might back out altogether.

Changing rules in midstream have been the bane of investors. This is why the various foreign chambers of commerce, which represent foreign investors, have been adamant about changing the rules of engagement in the din of battle.

The world economic order is already is disarray and highly uncertain. Investors would like to see some of the uncertainly addressed to by not changing the rules of the game.

Tweaking the EPIRA this time may not deliver the benefits the law is supposed to give. On the contrary, the results could be devastating to the industry and the country.

We just hope that our esteemed senators are actually concerned at the hapless consumers and not looking misty-eyed at the forthcoming 2010 elections.

PSALM finds success—in selling decommissioned plants

The Power Sector Assets and Liabilities Management Corporation (PSALM) which is tasked to privatize the government’s power assets under the Electric Power Industry Reform Act (EPIRA)has apparently honed its skills in selling...decommissioned power plants.

On April 17, PSALM announced it has sold the decommissioned 225-MW Bataan Thermal Power Plant in Limay, Bataan through a negotiated sale to Rubenori Inc., a local scrap metals trading firm, for $2.859 million. The amount was reportedly above the reserve price set by the PSALM board.

The sale is for the structures, the plant or whatever is left of it, unusable auxiliary equipment and accessories and dilapidated parts but excluding the underlying lot.

This was the third successful disposal of decommissioned plants after the 200-MW Manila Thermal and the 54-MW Cebu II power plants were sold off on April 25, 2009 and January 22, 2009, respectively, to scrap dealers.

Scheduled to be sold off this year are other decommissioned power assets including the 104-MW Aplaya, the 22.3 MW General Santos diesel and the 850-MW Sucat thermal power plants.

If PSALM follows the same tack it employed in disposing of the Bataan plant, it should find no difficulty in attracting potential buyers. However, the sale of these essentially heaps of scrap metal does not count as part of the power asset disposal required by EPIRA for the power industry open access regime to kick in.

What are more problematic to dispose are those power assets that are still operation—or can still be theoretically rehabilitated to its peak output. These include the 600-MW Calaca coal-fired power plants and the Bacman I and one of the Bacman II modular plants.

For the case of Calaca, we have noted previously that the sale was stymied by PSALM’s insistence that the potential investors meet its reserve price which may not be realistic. Our estimated reserve price based on published accounts for this plant would even approximate the cost of putting up a new plant from scratch so that any level-headed investor would simple balk at the bidding requirements.

The last “winning” bidder simply walked away and forfeited some $14 million bond, when it realized that the plant was in far more sorry condition than expected, and would stand to lose more going forward if it has to operate the plant.

The 110-MW Bacman I geothermal power plant has been operating at very low loads while the 20-MW Cawayan plant, one of the two modular plants of Bacman II, has been shut since 2005 reportedly owing to poor maintenance and lack of funds for critical spare parts. Any engineer would tell you that equipment that is not used and maintained properly for some time rapidly deteriorates in performance and condition.

We have been insisting time and again that it would be in the best interest of PSALM and the power industry if these assets are sold immediately. The benefits that would be realized in privatizing the power assets according to EPIRA far outstrips whatever any short-term loss PSALM incurs by pricing these asset attractively to investors.

The recent sale of the Bataan decommissioned plant should point the way to the right direction in privatizing the remaining power assets of 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.  

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)

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.

Panay-Bohol diesel plants up for sale, effectively scuttling the Palinpinon sale

The privatization agency Power Sector Assets and Liabilities Management Corp. (PSALM) has just released the invitation to bid for a diesel-fired power plant package comprising a 146.5-megawatt (MW) plant in Panay Island and a 22-MW plant in the island province of Bohol.

In its invitation to bid, PSALM said investors interested in bidding for the plants had until July 30 to submit letters of interest. The deadline for submission of bids is on October 29.

Qualified bidders may conduct due diligence studies on the plants from July 17 to Oct. 27 while a pre-bid conference has been set on Aug. 6.

The Panay facility consists of the 36.5-MW Panay 1 and the 110-MW Panay 3 while the Bohol plant consists of four 5.5-MW generating units.

This should be a straightforward sale.

Wait.

Isn't this the Panay plant which was originally bundled with the 192.5 MW Palinpinon geothermal complex, but its sale is now effectively scuttled because of issues surrounding the geothermal resources sales contract (GRSC)?

It is. So, PSALM is implicitly admitting that it couldn't sell the Palinpinon plant under present circumstances. PSALM actually clarified that the sale will not be held this November, but "next year" in a tone already implying that it may not be able to do so.

What is even more worrisome is that the Panay plant is bundled with the Bohol plant. There have been suggestions from PSALM officers themselves that the Bohol plant was to be bundled with the Tongonan I power plant, and that package was next in line of geothermal assets to be sold.

This seems to be a prelude of an anticipated failure to dispose of the Tongonan asset, and possibly, the Bacman geothermal plant.

The dismal scorecard (score:0, after three years) of PSALM in disposing of geothermal assets as part of the mandate of EPIRA law should give our policy makers a wake up call at the very least why these assets seem to be unsalable.

And to think that we already claim to have the bragging rights about geothermal.

The Palinpinon sale: will it ever occur?

By J R Ruaya

For the nth time, the Power Sector Assets and Liabilities Management Corp. (PSALM) has again moved back the sale of the Palinpinon geothermal power plant complex to November this year from the scheduled bidding this August.

PSALM president Jose Ibazeta said the postponement was necessary to give concerned parties more time to iron out issues concerning the geothermal resources sales contract (GRSC). This was primarily a rehash of the same reason given by PSALM for the previous postponements.

The issues surrounding the GRSC for Palinpinon have already been laid out in a previous item here, and the discussion has been amplified in another piece on the aborted Tiwi-Makban sale which also involves similar issues.

Ibazeta said that the Joint Congressional Power Commission (JCPC), which is tasked to approve the sale of the government power assets as stipulated in the Electric Power Industry Reform Act (EPIRA), wanted to renegotiate the existing GRSC between the National Power Corporation, through PSALM, and steam field developer Energy Development Corp. (EDC), formerly a subsidiary of the government-owned Philippine National Oil Company, but now controlled by First Gen Corp. He added that the decision "is no longer in PSALM's hands. It's between the JCPC and EDC."

True. But it seemed to be conveniently forgotten that NPC, the predecessor of PSALM, was the other party to the contract, and EDC president and chief executive officer Paul Aquino claimed earlier that the former was in fact insisting on the contentious provisions.

What complicates the situation is the intransigience of Aquino against amending the contract saying that it was "sacred" and "nonnegotiable".

According to the GRSC, the steam price is benchmarked against coal price, and at the time of contract signing, Aquino said coal prices were declining, putting EDC on the losing end. Now that coal prices (and so with geothermal steam price) have shoot up, EDC apparently wouldn't relinquish its new-found pot of gold, and would rather sit on the contract for as long as permissible.

Result: stalemate.

Aquino may have all the legal weapons on his side, but it takes two to make, or unmake a contract.

Other than the legal issues involved, we maintain that it would be in the best interest of EDC, the power industry and the consumers if EDC accedes to the clamor for ironing out the issues on the GRSC if only to allow the privatization to finally take place.

One, the Palinpinon plant complex can realize its full power potential in the hands of a professional operator which is likely to be a private entity. That means more steam sales for EDC. But no investor would dare touch Palinpinon (also Tiwi-Makban) with a ten-foot pole, if he could not get any money from the table.

With the likelihood of a failed bidding, the privatization of power assets would be stalled, and it would just make a mockery of the aims of EPIRA to fully create an open and competitive electricity market.

Two, it would be favorable for EDC in the long run if the steam price is based on the cost of production. After all, is that not services for gain is all about? EDC has lived with steam sales contracts for Bacman , Tongonan I and Mt. Apo plants in which the steam price is not based on the price of coal or crude oil, but why not Palinpinon?

True, EDC might suffer some hiccups on its bottom line, but with anticipated increased sales upon successful privatization, these hiccups should be more than compensated for. Huge margins as a result of "onerous" terms in sales contracts also conceal inefficiencies within the organization.

As a result of short-term decreased margins, EDC should be forced to streamline its operations to get back at desired profit levels. Properly implemented, gains in efficiency would resonate throughout the organization which should result in improvement in profitability.

If we follow the logic of EDC top management, then we might as well benchmark the price of electricity from hydro to coal. End of the story.

With steam prices decoupled from coal, geothermal electricity would stand on its own against those coming from other sources such as fossil-fuel based coal plants themselves and possibly, with natural gas-fired power plants as natural gas prices have been rising in tandem with oil's.

The only other item which favors EDC in its stand against the contract re-negotiation is, if it insists on the sanctity of the original contract, sale of the Palinpinon plant would be less than palatable to prospective buyers as a result of the GRSC. That would favor EDC itself, which has made no secret of its drolling over the Palinpinon plant complex which straddles its geothermal field. By then, all the GRSC issues would be moot.

Even if the sale pushes through such as when a philathropic organization bids for the plant against EDC, or even if the complex is finally awarded to EDC by default, that victory is pyrrhic.

So, will the Palinpinon sale ever occur?

The answer lies on EDC's top management.

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!

Palinpinon power plant sale hangs

By J R Ruaya

Energy and Chemistry Consultant

According to a report carried by major papers, the privatization agency Power Sector Assets and Liabilities Management Corp. (PSALM) raises the possibility of again having to shelve the auction for the government's 192.5-megawatt Palinpinon geothermal power plant in Negros Oriental province because of problems with the plant’s fuel supply contract.

The PSALM vice president for asset management and electricity trading, Froilan Tampinco, said the amended geothermal resources sales contract (GRSC) for the plant was now being routed for signature among members of the Joint Congressional Power Commission (JCPC).

The plant was originally scheduled to be bidded out 5 December 2007, then to December 19, moved again to first quarter of this year, and now the tentative date of bidding is August of this year. Even this date is clouded by uncertainty, because, according to Tampinco, even if JCPC approves the GRSC, "PSALM could still end up in a stalemate scenario with PNOC Energy Development Corp.(PNOC-EDC), the owner of the steam fields that provides fuel for the Palinpinon plant" if the latter doesn’t go with the amended GRSC. In that case, the Palinpinon sale will have to be shelved again, he told reporters.

The 146.5-MW Panay diesel-fired power plant, previously bundled with the Palinpinon geothermal facility, would be packaged with the 22-MW Bohol diesel-run power plant and sold in July.

Should the JCPC approve the amended GRSC and PNOC-EDC is okay with it as well, the Palinpinon plant would be bundled with the Panay plant once again.

Mr. Tampinco said the sale schedules for the 289-MW Tiwi and 458.5-MW Makban geothermal plants would also be changed.

"We are still accommodating questions from various interested parties regarding the sale contract of the plant which is why we moved the bidding of the Tiwi-Makban from June 4 to June 27. The rescheduling will also give more time for the parties to complete the requirements we are asking," he said.

If one recalls, The Tiwi-Makban complex was first put up for sale in late 2005, then postponed to first quarter of 2006, then temporarily shelved, and now resurrected for June.

Why is the government having difficulty selling these geothermal assets? There are serious interested parties, with some going into the requisite due diligence process.

The issues involved are far-ranging and complex--from the asking base price, steam sales contracts, conditionalities surrounding like compelling the prospective buyers to rehabilitate aging generation units, bundling the assets with non-geothermal plants, land ownership, to constitutional limits to foreign participation in energy resources development. These are all legitimate concerns. Any buyer acquiring a significant asset would like to know what he is getting in the first place. For the investor-buyer, the overriding question is, can he make money out of it?

Each of the assets for sale has its own peculiarities and problems. Here. let us tackle Palinpinon. Tiwi and Makban would be the subject of a future post.

The Palinpinon contracts

The 192.5 MW Palinpinon power plant complex actually comprises a main 112.5 MW plant (Palinpinon 1) and four 20-MW modular units collectively called Palinpinon 2. Because the plants were put up at different times, PNOC-EDC entered into two steam sales contract with NPC, one for Palinpinon 1 and another collectively for Palinpinon 2.

The pertinent key provisions of the original steam sales contract, according to documents submitted by the company to the Philippine Stock Exchange, are the following:

" The steam sales contract for Palinpinon I provides, among others, that NPC shall pay the Company a base price per kilowatt-hour of gross generation, subject to inflation adjustments and based on a guaranteed take-or-pay rate at 75% plant factor. The contract is for a period of twenty years commencing on December 25, 1988."

"In June 1996, the Company and NPC signed a steam sales contract for Palinpinon II’s four modular plants - Nasuji, Okoy, Sogongon I and Sogongon II. Under the terms and conditions, NPC agrees to pay the Company a base price per kilowatt-hour of gross generation, subject to inflation adjustments and based on a guaranteed take-or-pay rate commencing from the established commercial operation period, using the following plant factors: 50% for the first year, 65% for the second year and 75% for the third and subsequent years. The contract is for a period of twenty-five years for each module commencing on December 13, 1993 for Nasuji; November 28, 1994

for Okoy; January 28, 1995 for Sogongon I and March 23, 1995 for Sogongon II."

When the plant complex was readied for auction late last year, the first contract was about to end. To address potential investor concerns regarding the absence of a steam sales agreement, PSALM and PNOC-EDC crafted a new steam sales agreement, now known as the geothermal resources sales contract (GRSC), which would take effect upon the expiration of the original contract or the takeover of new owners. Except that, the would-be owners were not part of the contract drafting, yet they would have to abide by it.

In all likelihood the GRSC, is patterned after existing NPC contracts with steam field operators with slight changes.

During the Congress hearings late last year when the government stake in the geothermal developer was about to be disposed of, Senator Miriam Defensor-Santiago, chairman of the JCPC, stopped the active efforts by PNOC-EDC president Paul Aquino to secure JCPC approval. She said her specific objections include: (1) the price of electricity is set in U.S. dollars, which allows losses due to weakness in peso against the dollar to be passed on to consumers; (2) certain performance incentives given to PNOC-EDC and (3) the steam price being indexed to coal.

Investor groups on the other hand, bewailed the absence of a take-or-pay provisions and expressed apprehensions on its effects on the establishment of the wholesale electricity spot market (WESM) which affects load dispatch.

To be fair to PSALM and PNOC-EDC, some of the concerns were not anticipated at the time of crafting the document.

Tampinco said the existing GRSC that PNOC-EDC submitted last year to the JCPC would have to be amended to adapt to an environment that had a commercially operating wholesale electricity spot market (WESM).

The electric power industry reform law (EPIRA) created the wholesale electricity spot market where electricity, like any other commodity, is traded by the market players --generators, distributors and consumers--according to supply and demand. If a an electricity generator does not have a long-term supply contract with an offtaker, then it has to trade all of its electricity produced into the WESM--but there is no guarantee that his product would be sold at his asking price.

The EPIRA law mandates that only 10 % of the output need be traded in the WESM on its first year of existence. All the rest may be sold on the bases of long-term contracts with buyers.

Instead of a supply agreement that has no take-or-pay provision, there has to be a certain level of steam covered by a take-or-pay provision so that the new owner of the Palinpinon plant will be assured of steady steam supply, he said.

With a take-or-pay provision, the future owner of the Palinpinon plant will have to pay for a specific level of steam, whether or not this is used to run the plant.

“We won’t adopt the original [steam sale agreement] since that was crafted for a non-WESM environment,” Tampinco said. “The contracted steam level for that agreement was 75 percent. For the GRSC now, we’re looking at a take-or-pay level of around 50-60 percent.”

Under the Electric Power Industry Reform Act, geothermal assets of the government’s electricity producer National Power Corp. (Napocor or NPC) and the steam fields that provide fuel to run them will be sold as one package through a public bidding.

However, since PNOC-EDC, the operator of the steam fields, also became fully private, the sale structure approved for Napocor’s geothermal assets was for the plants to be sold, not with the actual steam fields, but with steam sale agreements attached to them.

Why coal?

The reason given by PSALM for indexing the steam price to coal is that for a long time, the country's electricity generation market is dominated by coal-fired plants. Which was true for a time, but with the establishment of the natural gas plants, the contribution by coal plants is no longer dominant.

A side effect of indexing to coal is that, NPC's coal plants will always be competitive vis-a-vis geothermal-- which is starkedly emphasized these days with soaring coal prices in the world market. To put it in another perspective, geothermal electricity, despite coming from an indigenous resource, cannot hope to compete and win against coal under the provision. Which is a strange provision given that each electricity generator has its own price structure. One might as well index electricity price from hydro and natural gas to coal.

Apparently, NPC has some fondness for coal plants, as newspaper columnist Jarius Bondoc implies in his latest column on NPC's coal purchases.

PNOC-EDC president and chief executive Paul Aquino said the geothermal resource supply contract (GRSC) that it signed with PSALM in 2006 was “sacred” and “non-negotiable.” “You forced us into that contract and now you want to change the terms when the market condition changed? “That is not right,” he said. “So, we’re sticking to our guns on that. That is a signed and sealed contract.”

Aquino said that at the time the contract was signed, coal prices were dropping, which put the now-privatized PNOC-EDC at the losing end of the deal, as steam prices are benchmarked on coal prices.

He said that a few months after the signing of the contract, coal prices shot upwards, and so did the price of steam.

“And now PSALM wants to renegotiate it,” he said. “That’s non-negotiable for us. After almost two years of negotiation, [PSALM] never budged until we were forced to sign because of our IPO [initial public offering of stock]. Now that the market has turned around, they want to renegotiate. No way.”

So, the original contract submitted to JCPC must have turned out to be a potential bonanza for PNOC-EDC despite its apparent early misgivings; otherwise Aquino wouldn't be standing firm on his ground and moving heaven and earth for its approval.

While he may have legal grounds to claim sanctity of the contract, he fails to appreciate that he is now heading a private business--not a government corporation-- where the mantra is, the customer (here, the power plant operator) is always right. Or least, he has to be respected and listened to. Always listen to the customer--is this not taught in Business 101?

He also needs some lessons in business negotiation.

Apparently, PSALM listened, and pushed for an amended GRSC instead.

PNOC-EDC also bidding for Palinpinon

It is no secret that PNOC-EDC is also interested in the power plant complex. It has declared its intentions to the public. After all, with the turnover of the build-operate-transfer power plants at Leyte to it from CalEnergy, the previous contractor, PNOC-EDC is now both a steam field and power plant operator. Owning both the plant and the fuel would have economic benefits. That's a no-brainer.

However, the intention has unintended consequences on the bidding process.

One, PNOC-EDC would have undue advantage as far as steam supply information is concerned simply because it is the steam supplier. Two, by being adamant on the GRSC, PNOC-EDC has unduly delayed the privatization process.

For this--or for that matter, any other government asset sale to push through, somebody must leave some money on the table: PSALM, the seller and PNOC-EDC, the other interested party to the deal.

In the end, a prospective private investor always sees the bottom line: will I make money on this deal? To answer the question, he has to factor in a host of things--asset price, economic risks, political risks, public acceptance, cash flow, etc.--before putting the ante on the table.

If the answer is no, he can go to other more hospitable places.