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Wednesday, November 22, 2017 | MANILA, PHILIPPINES
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Date posted: Friday, December 11, 2015 | Manila, Philippines

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The power to grab opportunities

IMAGINE THIS: your biggest gamble in recent years is stillborn, you still have plenty of cash, and there’s a fire sale abroad. What to do?

This is what Manila Electric Co. (Meralco) was faced with in 2013 when the opportunity to acquire a power plant in Singapore presented itself.

Up until early that year, Meralco’s first power generation investment in the Philippines had all but stalled. The Subic power project -- a mammoth 600-megawatt (MW) coal plant rising at the heart of the former US naval base-turned-economic zone -- was held back by a Supreme Court injunction granted to nongovernment organizations opposed to the venture.

The chance of investing in a Singapore power plant that was near completion therefore was very tempting for a Philippine company that had regional aspirations, not to mention with money to spare.

At the time, GMR Energy Singapore Pte. Ltd. was in the advanced stages of building an 800-MW liquefied natural gas combined cycle turbine plant in Jurong Island.

It was no one-way street, as GMR likewise was scouting for someone to take over its remaining 70% in the project, and raise cash to pare down debt back home. The Indian conglomerate in 2011 already sold 30% of the project, which was GMR’s first Singaporean venture, to Malaysia’s Petronas International Corp.

Meralco and GMR therefore could not have picked a better time to sit down and strike a deal.

The acquisition was done through FPM Power Holdings Ltd., a joint venture 40% owned by Meralco’s new unit, Meralco PowerGen Corp. (MGen), and 60% by Hong Kong-based First Pacific Co. Ltd., which controlled the Philippine electricity distributor’s ultimate parent company.

The deal cost FPM an initial $488 million, but would require another equity infusion of $49 million. Soon after the transaction was sealed, GMR Energy was renamed PacificLight Power Pte. Ltd.

In what has become Meralco’s first investment abroad, the deal marked the company’s entry into the power generation business. Talk about hitting two birds with one stone.

Later that year, Meralco would follow up with two other major investments: a joint venture with Electricity Generating Authority of Thailand for a 460-MW coal plant in Quezon, and a 20% stake in Global Business Power Corp. (GBPC), the power sector arm of George S.K. Ty’s GT Capital Holdings, Inc.



BALANCING PORTFOLIO
The entry into the power generation business forms part of Meralco’s move to limit its dependence on third-party suppliers, as well as to meet growing demand for power and improve profitability.

The cost of power bought from third parties comprises the biggest component of electricity bills, increases in which have drawn endless flak from consumers, not to mention the occasional lawsuit.

Besides capturing a greater share of the energy business’ value chain, Meralco’s entry into the power generation segment, which kicked off with the Singapore acquisition, underscores the company’s long-term vision of becoming a regional player in the industry, according to Chairman Manuel V. Pangilinan.

Meralco joins a growing list of Philippine companies that have expressed interest in investing in other Southeast Asian countries with the advent of the ASEAN (Association of Southeast Asian Nations) Economic Community.

The utility’s executives view such a move as risky and one that would entail longer payback periods. But according to them, the key is portfolio mix.

This explains the Singapore acquisition, MGen Chief Operating Officer Aaron A. Domingo said, adding that it complements Meralco’s power generation portfolio, which is envisioned to contain different projects under different stages.

“It takes years to develop and then you’ll have opposition sometimes,” Mr. Domingo said.

In the case of the Subic project, the Supreme Court only recently lifted its injunction, allowing proponent Redondo Peninsula Energy, Inc. (RP Energy) to pursue the project. RP Energy is a joint venture among MGen, the Aboitiz-owned Therma Luzon, Inc., and Taiwan Cogeneration International Corp.

“So you really have to augment it with both development and acquisition,” Mr. Domingo said.

“That’s the whole reason. You have to kind of blend your portfolio with development and some under construction and some under operations. So it’s really just a strategy to always balance the portfolio of assets,” he said.

He said the Singapore opportunity came at the right time since MGen’s Philippine projects were still in the pre-construction stage.

“That’s why when we acquired Singapore, it was actually under construction. So we looked at markets in the region and even outside,” Mr. Domingo said.



“We looked in Europe where there are more assets for sale that are operating and then the group decided that we focus in Asia so when that came about, we acquired it,” he said, referring to the GMR acquisition.

Choosing a project in Asia made sense since the region was the world’s fastest growing, with its power sector amid a “building phase,” Mr. Domingo said.

BUILD EXPERTISE
New as it was in power generation, Meralco also needed to learn the ropes.

This is why the company invested in a project that was nearing commercial operations, sparing it from the tedious process of having to secure permits and undergo pre-development activities common to all power generation projects, according to Meralco Chief Financial Officer Betty C. Siy-Yap.

“As we look at various fuel sources for our Philippine power generation portfolio, it is important for us to build our expertise and experience operating these plants,” she said.

The Singapore acquisition also afforded Meralco the opportunity to learn about electricity markets outside of the Philippines.



Ms. Siy-Yap said the market dynamics in Singapore altered since 2013, citing the demand-supply situation and prices of crude oil. The Singaporean economy’s growth had been halved from that year.

“Realization of cash flows and contribution to the consolidated core net income from the Singapore plant remain, albeit a longer period,” Ms. Siy-Yap said.

SEVERAL CHALLENGES
Mr. Domingo said the Singaporean market may become attractive again when demand for power projects picks up.

“Singapore will take a while for new developments and that’s good for us,” he said, adding that opportunities are limited and Meralco, as a newcomer, is still weathering several challenges in that country.

“Singapore is a merchant market so you’re subject to fluctuation of power prices,” Mr. Domingo said.

“We do have some contracts that keep the revenue levelized but there are some fluctuations with some of our capacity because it’s being sold at the electricity pool,” he said, likening the Singaporean setup to the Philippines’ Wholesale Electricity Spot Market, an electricity trading platform.

Mr. Domingo said retail contracts with customers are renewed every six months to a year, thus creating volatility in earnings. In contrast, contracts for big capacities in the Philippines have longer maturities.

“In the Philippines, most are bilateral so once you sign the contract, as long as you run the power plant, you’re okay. In Singapore, it’s a bit more complicated since you have to deal with the trading environment, hedging your fuel, hedging your forex (foreign exchange),” Mr. Domingo said.

Despite these short-term adjustments, Meralco’s Singaporean investment has begun contributing to cash flow.

“Since it was synchronized to the grid, our Jurong Island plant has consistently provide positive EBITDA contribution,” Mr. Domingo said, referring to earnings before interest, tax, depreciation and amortization -- a proxy for cash.

PARTNERING TO SPREAD THE RISK
Market peculiarities aside, an expansion of Meralco’s Singapore business, however, would have to wait in the near term, as the wind of opportunity has blown elsewhere.

“Singapore doesn’t need capacity. So I think for now, in the region, the ones that are attractive are Philippines and Indonesia,” Mr. Domingo said, adding that the company is “looking at” Indonesia, which “has significant opportunity for growth as well for acquisition.”

Thailand has been checked off the list given its concentrated market, which makes it difficult to enter, according to Mr. Domingo. Given the above, the Philippines is likely to benefit from fresh investments in the short run.

“For now, we’re focusing in the Philippines because here, we have projects now that are moving forward,” Mr. Domingo said.

Among these projects are the 600-MW coal plant of RP Energy, as well as two other coal projects in Quezon: the 455-MW plant in Mauban and the planned 1,200-MW project in Atimonan.

“There is already traction here and the opportunity for the projects to move faster but we still keep our eyes open for opportunities outside. Once they are already under construction, then we can start looking,” Mr. Domingo said.

Future ventures are likely to take the form of partnerships so Meralco can spread the risk.

“Partnering is important. You share risk but besides that, a partner can vet for your decisions,” Mr. Domingo said.

“These are big investments. You have to make sure you don’t only see it one way, somebody should see it and question it. It will be hard because there should be consultations but on balance, it’s better to have dialogue before decisions are made. That’s very, very important,” he said.

He said expansion requires a great deal of study and risk assessment, citing the case of Singapore.

“You have to learn your market first. There are already established players so you have to know how they’re going to respond,” Mr. Domingo said.

“The way we do it is we should have a partner, either local or somebody’s who’s operating something there already,” he said. After all, “power is a very domestic business.”


Before crossing over to the corporate world, Ms. Feliciano had been writing about the energy sector for three years in BusinessWorld.

 
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