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CONSIDER
this. Recently, the ownership of approximately 2,000
megawatts of installed capacity controlled by an
American independent power producers (IPP) changed hands
at the cost of $3.6 billion. The effective cost of the
transfer of ownership was $1.8 million per installed
megawatt.
For the
most part, each megawatt has been contracted, thus
assuring the purchaser definitive and long-term markets.
Of the $3.6 billion, soft leveraging was easy as its
valuation had a firm basis in prospective cash flows.
The plants also have fuel-supply contracts under Energy
Conversion Agreements (ECA) with the National Power
Corp. (Napocor).
In the
recent bid for Napocor’s 600-megawatt plant in Masinloc,
the transaction included only 24 percent of the plant’s
installed capacity covered under a transition supply
contract (TSC). Should the buyout be leveraged under a
discounted cash flow (DCF) model, then only a quarter of
its capacity can be securitized as the balance has
neither definitive purchasers nor contracts, save for
the highly competitive Wholesale Electricity Spot Market
(WESM).
Masinloc
must then replace its TSC and compete in the spot
market. Here, forward risks remain higher. Purchasers
should expect lower returns praying for shortages and no
new capacities installed in the near future.
As a
privately owned IPP, Masinloc’s new owners will have to
negotiate an ECA with Napocor or seek its own fuel
supply. As a baseload plant it will also have to replace
its fractional TSC with a full-fledged purchased power
agreement (PPA).
All
these pose no problem for its reputable owners depending
on their internal hurdle rates. Most IPPs require
implementing rules and regulations (IRRs) in the
30-percent range. Masinloc’s new owners may have to
settle for less. Matched against the recent sale of
Mirant assets, for the contractual inconveniences, AES
just purchased substantially uncontracted capacity at
$1.55 million per megawatt.
Adjusting for both dependable and contracted capacities,
that value shoots up to $2.6 million to $6.7 million per
megawatt, respectively. Match that with TeaM Energy’s
assets acquired at $1.88 million per contracted
megawatt. While enough to deck any sober analyst, we
recognize that there are other equally valid
determinants of a winning bid.
Comparing simply for indicative purposes, the Power
Sector Assets and Liabilities Management Corp. (Psalm)
seems to have its most successful bid and Masinloc’s
privatization to the AES Group is indeed noteworthy.
There is
a lot of difference that a dose of competence and
credibility can do for the privatization of an asset.
Newfound competence from Psalm and credibility from the
AES Group catalyze a debt-reduction program long seen
moribund since the Electric Power Industry Reform Act
was passed seven years ago.
When the
plant was first auctioned, it was the first major asset
bid out by Psalm, save for hydroelectric plants with
combined capacities barely the size of a department
store’s power plant. Those were easy fire sales.
When
Psalm awarded our best assets to a company grossly
undercapitalized and inexperienced in operating a
comparable facility, the proverbial gallstones hit the
fan.
Capitalization is an indicator of financial capacity and
comparable experience is indicative of cash flows that
bear out aggressive pricing. On that aspect, as a
counterpoint to a bid, Masinloc’s asset valuation became
critical in substantiating bid-to-win values.
Lessons
have since been learned, albeit not without expensive
pain and international embarrassment. In their
retirement, officials involved in the 2004 fiasco can
scrape the residue from their faces and live on omelets
for the rest of their lives.
Two bids
were received on December 2004. The winning bid was $563
million. The other bid for $279 million was
disqualified. Originally valued at an estimated $600
million in 1992—if we simply base its value on
uncontracted capacities, there being no contracts and a
spot market in 2004—Masinloc’s value was estimated by
analysts at between $250 million and $350 million
depending on premiums and level of risk aversion. One
American IPP was willing to bid as much as $440 million
but had backed out.
When the
winning bidder bid $563 million, officials practically
went blind and relied on an ill-advised proviso that did
not necessitate comparable experience and financial
capacity as legal requisites. They also relied more on
the upfront bid bond and the eventual performance bond.
If $563
million seemed like an over-bid in 2004, indeed it was,
given the variables at the time. They used the WESM as
their business model assuming average tariffs at P7/kWh
and peaking tariffs at two to three times higher the
lowest tariffs if WESM were mature. Thus, peaking
tariffs could go as high as P9 to P12/kWh. Uncannily, in
today’s infant WESM, peaking bids have been registered
at the levels of P10/kWh.
Unfortunately, in 2004, WESM was nonexistent, long
delayed and was even delayed further, coming online only
in mid-2006. The winning 2004 bidder was forced to seek
a bilateral contract with Meralco, for which they were
unsuccessful, and during which time their initial
funders were getting worried by the day.
Today an
operating WESM provides the 2007 bidders pricing
benchmarks. One bidder bid $588 million and another $710
million, perhaps using the DCF’s from a WESM model. Add
a TSC for 141 megawatts, prospective expansion revenue,
scale back IRR hurdles and escalate the WESM tariffs
appropriately assuming looming shortages—and one might
indeed justify bidding from $800 to $930 million for a
600 to megawatt plant. |
