San Miguel takes another pot shot at Indonesian coal

True to its avowed aim at diversification outside its core foods and beverages business, San Miguel Corporation (PSE: SMC) has reportedly trained its sights on acquiring a stake worth about $500 million in PT Adaro Energy (JSE: ADRO), Indonesia’s second=largest coal producer, according to news wires.

San Miguel president Ramon S Ang confirmed that his company is in talks with Goldman Sachs, its financial advisor on its diversification forays, on the planned acquisition but declined to say how much stake it is aiming for.

Bisnis Indonesia has reported that investors Goldman Sachs itself, hedge fund Farallon, Citigroup Global Special Situations Group and Atticus Investments Pte. Ltd. are looking at buyers for their combined 17% stake in the coal firm. Analysts say that these investors, who participated in the coal miner’s $1.3 billion initial public offering (IPO) last year, are looking to sell out at IDR 1,200 per share, given the uncertainty of coal prices amid global economic downturn.

Two members of the same consortium who has a combined 26% at the end of the IPO, the Government of Singapore Investment Corporation and Kerry Coal, are reportedly not keen on selling out at this time.

The other largest holders of the company are PT Saratoga Investama Sedaya which is owned by Indonesian entrepreneur Edwin Soeryadjaya and Teddy Rachmat, one of Indonesia’s richest businessmen, who own 32% each.

That asking price is just slightly above the IPO price of IDR 1,100 a share and the current prices which has hovered at the same level. The selling investors would still reap windfall profits since they have been long-time investors in the coal firm.

The planned sale was already expected given that the lockup period ended in March for these financial sponsors.

Would this foray into an unrelated business from its core food competence be good for San Miguel and its shareholders?

Hard to say at this time.

During the last two years, SMC has weaned itself from the food business by taking a 27% in electricity distributor Manila Electric Company (Meralco, PSE: MER) and planning a majority stake in oil refiner petron Corporation (PSE: PCOR). It has also a joint venture in telecommunications with a foreign partner and is looking at entering the water distribution business locally.

Its intentions in Adaro is its second attempt at getting a foothold at Indonesian coal after its planned acquisition of a significant chunk of PT Bumi Resources (JSE: BUMI), Indonesia’s largest coal producer, fizzled out.

For sure, SMC won’t be calling the shots at Adaro since its planned 17% couldn’t exert significant management influence and control. It would be entering a business firm whose sole product coal is a commodity whose prices are subject to world economic movements.

When oil prices were rising, so did the coal prices. But when commodity prices collapsed, so did the latter.

At this time when the global economic downturn appears to be stretching longer than expected despite pronouncements of an imminent economic recovery, commodity prices including that of coal, may be struck in the doldrums for a long time.

That could mean that, should this deal push through, SMC investors would have to wait patiently before the firm’s Adaro stake could bear fruit.

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.

Meralco shows way in sourcing ‘clean energy’

Can you choose a ‘clean energy’ supplier for your electrical power needs? Theoretically, yes, even if you are tapping the transmission grid.

 Manila Electric Company (PSE: MER), the country’s biggest power distributor that supplies Metro Manila and environs with electricity is showing the ‘clean energy’ path by planning to source part of its electricity load from two more methane-gas recovery plants.

 In a recent press briefing, Meralco president Jose P. De Jesus said the distribution company will source electricity from the methane gas fired plants to be owned and constructed by Montalban Methane Power Corp. (MMPC) which already owns the pioneering plant at the Montalban (Rodriguez) dump site. The new plants will be situated in Malabon and Sta. Rosa, Laguna.

 Recently, Meralco has already signed a contract with MMPC for the latter to supply it with up to 8 MW of power. The supply arrangement would allow Meralco to source relatively cheaper electricity from MMPC as the generated power would be tapped directly into sub-transmission lines already owned by the firm, thereby bypassing the wheeling charges imposed by the grid operator.

 What is more significant though, is that it allows Meralco “to increase its capacity and alleviate global warming through the reduction of carbon emissions during electricity generation.” Part of the statement may be public relations efforts, but the step it is taking would be a prototype of what steps distribution firms should be taking in the future.

 Sourcing from renewable energy sources is now actually embodied in the recently passed Renewable Energy Law under the heading renewable portfolio standards (RPS). Under this concept, a distribution company is compelled to source a percentage of its electricity supply from renewable energy generators (solar, wind, geothermal, biomass) by a given time, say after ten years.

 Our own renewable energy law do not have specific guidelines on how this is to be achieved as the implementing rules and regulations (IRR) have yet to be hammered out. Of course, these rules are not straightforward to craft.

 Some questions that need to be answered are: (1) what is the appropriate percentage? (2) What would be the timeline for the distribution company to achieve the target percentage? (3) Are there available sources for the distributors to reasonably meet the law’s requirements? (4)Will the prices be competitive enough against traditional sources? (5) Would these renewable energy sources be in the “right places?” And so on.

 These questions are inextricably intertwined and need to be addressed to the satisfaction of all the stakeholders from the government, the generator, the distributor and the consuming public.

 Now that Meralco has actually conscientiously contracted a portion of its distribution needs from a renewable energy source, it would be interesting to watch how this arrangement would pan out. Our energy regulatory bodies, especially the recently-convened National Renewable Energy Board which is tasked to oversee the implementation of the renewable energy law, should study in detail the nuances of this experiment—as well as of others, including that of the Bangui Bay wind farm and the biomass projects in the Visayas—to come up with a sound and equitable renewable portfolio standards.

The success of this particular provision could determine whether we would be getting cleaner power or more of the polluting energy sources we already have in the future.

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.

Electricity prices to go up again

Here we go again.

Expect to receive electric shock from your power bill starting as early as your next bill when the Energy Regulatory Commission has reportedly given the National Power Corporation (NPC) a go signal to increase its generation rates.

Reports said that the increase in NPC’s basic charge would be 46.82 centavos per kilowatt hour for Luzon, P1.15 /kwh for the Visayas and 71.47 centavos for Mindanao.

Part of that cost will be automatically passed on to the ultimate consumers. That’s you and me.

As usual, there will be howls of protest, and the electricity distributors like Meralco, VECO and Davao Light and Power would bear the brunt of consumer anger since these agencies are the one sending us the dreaded bills. For sure, inefficiencies of these distributors—not mentioning the poorly run electric cooperatives—add to the final bill and any improvement to their operations might help lower that.

But if you look closely at your Meralco (or VECO) bill, the generation cost eats up about 50 % of the total while the distribution cost accounts for about 25%. Any significant reduction to the power bill can only be realized if the generation component of the whole power train can be lowered.

It has been pointed time and again that the Philippines has the highest power generation cost in Asia and one of the highest in the world. Any effort at reducing power costs should start at dissecting the causes of high power generation costs.

As to be expected, the loudest reaction to the impending rate increases comes from the business community which is already reeling from the effects of the worldwide financial crisis which is fast becoming into a severe economic downturn.

The Philippine Chamber of Commerce and Industry together with most foreign chambers are in unison in its clamor for lower power rates to make their business globally competitive. Specifically, the business community wants something to be done about the extended value added tax (E-VAT) on power and the royalty on natural gas.

To be sure, our financial managers will be reluctant to roll back the E-VAT rates as the fund generated from this measure has generally kept up the country afloat in the midst of crisis. Tinkering of the E-VAT would have more damaging effects financially in the long run. Value-added taxes are progressive; the more you consume, the more taxes you pay.

And if you reduce the E-VAT on power—who would prevent you from arguing that the taxes on basic telecommunications, water, basic goods, etc., should also be lowered? Think of the catastrophic consequences on basic services if government revenues are suddenly reduced.

Lest it would be misconstrued, this corner is against high and unreasonable taxes. But putting the blame mainly on E-VAT for power sidesteps the issue. The main issue is the inherent cause of generating power here is just too high.

Yes, the royalty tax on natural gas should go. This would be in line with the practice of many countries to encourage the development of their own natural resources. Don’t also forget the various local taxes (the LGU share for example) that add up to cost. What about realty taxes which could add up to millions?

But what really holds up the power generation cost is the uncompetitive industry structure we still have. Despite the EPIRA, the government through the NPC still controls some 70% of generation.

It also helps if our planners understand why out neighbours like Vietnam, China and Malaysia could generate power at a fraction of the cost we need.

We have passed the Renewable Energy Law which ought to foster more investment in the power sector—but where is the set of implementing rules and regulations to guide investors?

To really foster real competition, the government through the Power Sector Assets and Liabilities Management Corporation (PSALM) should fast-track the privatization of power assets. With the given conditions of its remaining power assets like the coal and geothermal power plants, PSALM should not expect investors to bid on them at the price PSALM wants. It can even do away with an unreasonable base price and just let the market dictates the price of these assets.

Disposing of these assets now at a “loss” may in fact augur well for the country moving forward.

And, who knows, the price of power generation might actually come down due to the natural market forces.

Lanao del Sur power cooperative is best argument against these dinosaurs

Unbelievable!

One could use more colourful superlatives to describe the Lanao del Sur (LASURECO) power cooperative, but it is not necessary. The bare facts are stranger than fiction. Consider these:

·         LASURECO has racked up debt of about P3.7-billion.

·         It was considered National Power Corporation’s (NPC ) most delinquent customer with outstanding debt at P2.28 billion as of June 2007 before it was put under management by NPC and the National Electrification Administration (NEA)

·         LASURECO’s systems losses had reached a staggering 63% before it was contained down to 30% by NPC and NEA, when the allowed losses for cooperatives should be only up to 14% which is already very generous

·         Its receivables collection rate had been a dismal 8%

·         It has not been paying its suppliers for years

·         It could not even pay its employees on time, if at all

·         It has failed to install an electrification project funded by NEA

The situation was so bad that NPC and NEA intervened in the cooperative’s operation in November 2007. Since then, its financial situation has improved a bit. At least it can now pay its current obligations to NPC, according to reports.

It has also started paying P1 million monthly for its P107 million it owes the National Electrification Administration (NEA). It should take the cooperative nine years to pay that obligation if there were no interests.

Well, at least NEA is getting some of its money back.

Before LASURECO came into our radar screens, we thought that the situation with the Albay Electric Cooperative (ALECO) was already the worst.

Save for a very few exceptions, electric cooperatives have not been performing well and are woefully managed.  Many of these dinosaurs have been in existence for long, and they should have been declared extinct eons ago.

Our policy makers should have a definite strategy to phase them out as the original business model for these creatures is no longer in tune with modern times.

One could start selling off the bigger of these power cooperatives and make them professionally managed corporations.

Why it is difficult to achieve, we can only guess.

The battle for Meralco: will it matter to you or me?

The Manila Electric Company, or Meralco (PSE: MER) has been in the limelight in the last few days owing to the ramp up of its share prices from around P60 a few weeks back to a record high of P126 a share last Friday. That day coincides with the cut-off date for soliciting of valuable proxies for voting during the upcoming stockholders meeting.

It is no longer a secret then that there appears to be a bitter struggle for control of Meralco. The battle lines are clearly drawn.

The protagonists are the following: On one side is the embattled Lopez group, the incumbent majority shareholder of the Company until recently. On the other side is the SMC group which has acquired a total of about 38% of the Company’s shares, as against the Lopez’ 33.4%, by the end of last year.

Enter Manny V. Pangilinan (known simply by his initials MVP), head of PLDT and First Pacific of Hong Kong, who appears to be on the side of the Lopezes. Last week, MVP’s group disclosed that it has acquired 37 million shares, equivalent to 3% ownership, of Meralco. Talks in financial circles have it that MVP has been acquiring shares from the market and from various institutional shareholders. This could have been the main cause of rapid appreciation of Meralco shares in the last few days.

Meralco of course has long been in the radar screen of MVP. He had tried to acquire a large chunk of Meralco from Union Fenosa, Lopez group’s erstwhile partner in Meralco, before but failed. Meralco also fits well with PLDT’s plan to use a large swath of the former’s fiber optic network for high speed communications. Besides, many of PLDT’s lines ride on Meralco’s power poles; so it is to the best interest of PLDT to have at least a friendly owner in Meralco.

Whatever the outcome of the current tussle, it is certain that Meralco will end up to be owned by one or two powerful groups. And either of the two groups has fondness for monopolies or businesses with dominant positions in their respective business sectors, for which Meralco is a prime example.

Meralco is the sole franchise holder of electricity distribution in Metro Manila and surrounding provinces. Its franchise covers some 25 cities and 86 municipalities and has some 4.5 million customers.

The Lopez group has been increasing its power generation assets in recent years through First Gen Corporation (PSE: FGEN) by acquiring plants and assets from the government. Its aggressiveness however, has cost it dearly, and the group has piled up huge debt, which it finds difficulty in servicing on time, if we are to go by its recent actions.

It has been raising cash by selling assets like its toll way business, the Pantabangan-Masiway hydro asset to its subsidiary Energy Development Corporation (PSE: EDC), and (unsuccessfully) a chunk of Red Vulcan Holdings which is the vehicle it used in acquiring EDC. In addition is has been trying to raise cash from the debt market.

With its precarious financials, will the Lopez group eventually sell out to MVP?

Meralco has been considered the crown jewel of its empire, but head of the Lopez clan has been quoted to blurt out, “they can have it!” referring to Meralco at the height of Winston Garcia’s GSIS failed takeover of the electricity distributor a year ago.

At an acceptable price, any of the chunks of the Lopez empire appears to be for sale.

It used to be that ownership of Meralco—with the exception of the Lopez family—is restricted to 10% to one entity, by virtue of its being considered a vital service provider.

At the pace the Meralco drama is unfolding, it is just a matter of time, which could be sooner than later, that it would end up in the hands of a single dominant group. Which can be frightening to consumers considering the monopolistic status of Meralco in electricity distribution.

In the end, it will not matter much to customers who will end up owning Meralco. Both protagonists are of similar stripes and are likely to run Meralco in much the same way.

Perhaps it is fitting to revisit the original restriction on ownership sans the Lopezes to make Meralco a truly public company—and perhaps it could then give more accountability to the consumers.

Note added: Tuesday, March 10, 2009—Meralco shareholders named Beneficial Trust Fund and New Gallant Limited reported yesterday their combined 113,313,389 shares of Meralco. An apt name if this pair belongs to a gallant white knight in a shining armor.