Why San Miguel sold Limay power plant

Rappler.com
San Miguel is in the process of taking profit and raising fresh funds for future expansion projects.
Limay diesel power plant in Bataan

MANILA, Philippines – Diversifying conglomerate San Miguel Corp., the country’s largest electricity trader and supplier, has sold its stake in a diesel-fired power plant in Limay, Bataan, according to a company report.

On Wednesday, Dec. 28, 2011, local media outlets reported that San Miguel’s subsidiary, SMC Global Power Holdings Corp., has approved the sale of its 100% shareholdings in PanAsia Energy Holdings Inc., the entity that has a stake in the Limay plant.

It likewise said that PanAsia, which has assets of P4.35 billion and liabilities of around P1.23 billion, has signed a share purchase agreement with Millenium Holdings Inc., a privately held company controlled by businessman Mike Valencia.

Takeover requirements are still being ironed out, as well as approvals from government entities such as the Board of Investments, thus PanAsia will continue to trade the output of Limay at the Wholesale Electricity Spot Market.

This is the second time San Miguel pursued the disposal of the 620-megawatt power plant in northwest Luzon. In September 2011, it told the stock exchange of its plans and San Miguel president Ramon Ang himself confirmed it.

“Yes, we are selling it right now. We are talking and will finalize the sale soon,” Ang had told reporters then.

Why would San Miguel, Asia’s biggest food and drinks conglomerate that now is the country’s largest electricity trader and supplier, want to reduce its portfolio of power plants?

Market conditions

San Miguel is in the process of taking profit and raising fresh funds for future expansion projects.

Its unit, SMC Global Power, is waiting for better timing to launch an initial public offering that would raise between P13 billion and over P27 billion in 2012.

This was scaled down from the original P13 billion and P35.5 billion, which would have made it the Philippines’ biggest IPO if it pursued its September 2011 plans.

The Eurozone crisis, however, have caught up with local corporates that now have to temporarily shelve plans to raise funds from the equity market as uncertainties remain.

San Miguel has been diversifying into heavy industries since 2007. The power industry has been one of its main targets, eyeing fatter profits there.

San Miguel’s units, SMC Global Power and San Miguel Energy Corp. (SMEC), have acquired long-term power purchase contracts from the National Power Corp (Napocor), the state power company that has been privatizing existing power plants through the Power Sector Assets and Liabilities Management Corp. (PSALM).

It was good timing when SMEC acquired the Limay plant from PSALM for $13.5 million in 2009. The country was plagued by prolonged drought due to El Nino during the summer months of 2010, prompting the government to tap certain power plants, including Limay, for continuous power supply.

The government paid these power plants extra compensation for ensuring that power supply, especially during the May 2010 elections, were uninterrupted.

But market conditions now, however, are not as friendly to San Miguel.

Demand has since gone down from its peak after the country has been spared from bouts of drought again.

Prices of diesel, the main raw material at Limay power plant, have also spiked, prompting the group to consider converting it to a liquefied natural-gas fired facility

Expansion plans

In February 2011, San Miguel’s Ang had said that the conversion and expansion plans for the Limay plant would require an investment of around $1 billion.

However, the plan fizzled out after studies showed that it would be best for the company to dispose of the plant and build a new facility.

Ang had said the company feels it would be more viable to build greenfield or entirely new power plants. “We will just build a greenfield plants.”

The San Miguel group now accounts for 22% of the installed generating capacity in the country. They are about to breach the 25% national grid market cap that the government has set to keep one group from dominating the industry.

San Miguel had said it wants to increase its power portfolio by another 3,000-megawatt in the next six years, which it could only pursue by building new capacities.

Limay’s 620-megawatt accounts for less than 20% of its power portfolio of 3,148 megawatts. Its other power plants include the 345-megawatt San Roque hydroelectric plant and the 1,200-megawatt Sual coal plant in Pangasinan province.

New power plants

Timing the rationalization of its power portfolio before SMC Global Power’s IPO in 2012 would ensure that plans to build new power plants will have proper funding.

Amounts to be raised would pay for the construction of coal power plants, including two 150-megawatt coal-fired power plants in Ternate, Cavite and another 150-megawatt coal station in Northern Leyte.

San Miguel had planned to complete these by first quarter of 2015, and the power projects in Bulacan and Davao by 2016.

It also intends to participate in the bidding of government’s power assets including the Naga Power Plant Complex and the Unified Leyte Geothermal Power Plant.

Synergies

The San Miguel group has been focused on coal as well as renewable energy sources and power plants since these have lower cost and are reportedly more efficient, Ang had explained before.

For example, Petron Corp, another San Miguel unit and the country’s largest oil retailer, has a refinery plant also in Limay, Bataan that is now in a P75 billion-worth upgrade to, among others, accommodate liquefied natural gas products.

Petron is also eyeing participation in the bid for a Batangas-to-Bataan pipeline that will carry liquefied natural gas from Malampaya in Palawan to the refinery plant in Luzon. – Rappler.com