Quezon Coal Plant Case Study
Philippine Power Market - Background
• Frequent brown outs ranging from 2 to 12 hrs daily in early 1991.
• Cancelled 625 MW Batam Nuclear plant when it was almost complete.
• Projected growth in electricity demand requires commissioning of new
plants and rehabilitation of old plants.
• State-owned Generating Company was NAPCOR; Approx. 72% of
NAPCOR’s capacity is in Luzon.
• Frequent closure of existing plants due to deterioration of oil based plants.
• Failure to undertake regular maintenance of certain plants
• Postponed maintenance due to insufficient power reserve
• The S&P bond rating for the Philippines was BB
• The World Bank estimated that power outages in 1990 reduced economic
output in Metro Manila alone by $2.4 billion.
Background on Existing State-Owned
Utility Company
• Approx. 72% of NAPOCOR’s capacity is in Luzon.
• Existing plant capacity exceeds peak demand (est. at
3,473 MW).
• NAPOCOR unable to operate its plants at full capacity,
only 2,333 MW (50%) of 4,639 MW total Luzon
capacity.
• Frequent closure of existing plants due to deterioration
of oil based plants.
• Failure to undertake regular maintenance of certain
plants
• Postponed maintenance due to insufficient power
reserve
Context of Power Crisis in Early 1990’s
• To understand the rush to welcome private investment in
the early 1990s, it helps to also see the cost of the chronic
blackouts of that time.
• At the peak of the shortage, the blackouts averaged 12-14
hours per day, 300 days per year.
• A World Bank report in 1994 estimated that gross economic
cost of the outages was US$0.50/kWh.
• Thus, even though IPP-generated electricity (average cost
US$0.0652/kWh) at the time was more expensive that NPCgenerated electricity (US$0.0637/kWh), the inability of the
government to finance rapid expansion of the power sector
made private investment extremely attractive.
Legislation and the Power Shortage
• The Philippines entered the IPP market early, with a 1988 presidential
decree authorizing private investment in the generation sector. Major
investment in IPPs occurred in response to a 1991-93 electricity crisis.
• The Electric Power Crisis Act passed in 1993 authorized negotiating IPP
contracts on a fast track basis.
• In terms of addressing the power shortage, this law was a success—
several thousand megawatts of generating capacity was installed in the
country in the first 18 months.
• Most of the generating capacity built during this time was based on
combustion turbines or diesel systems—the only generation plants that
could be brought to operation within a year—which are characterized by
low initial capital costs, but high operating costs.
• The fast track authority under this law expired in April 1994.
Growth in Electricity Generation from
EIA
Prediction was for
about 9% Growth
Fast Track Contracting
• Because of the power crisis, the government had no
significant leverage in the negotiations. The unstable
political condition created a situation where “economy
risks” required a premium placed on project returns.
• The entry of some IPPs had to be on a “fast-track” basis and
some were contracted through negotiations rather than
competitive bidding.
• In contrast, Thailand bided out its first batch of IPP capacity
during the time when its economic performance was the
envy of all ASEAN. As a result, the offers were very
competitive (some offers took on the FOREX risk) and
represented about ten times more capacity than what
EGAT had asked for.
Three Rounds of Development
•
The IPP sector in the Philippines developed in three main rounds.
– First, the plants contracted in the early 1990s to address the power crisis were
largely oil-fired plants with 5-12 year PPAs. These tended to be expensive
because: (1) the rapid capital recovery period under short PPAs, (2) the
extreme pressure on government negotiators stemming from the grave
electricity crisis, and (3) the high fuel cost oil plants were dispatched as
baseload facilities during the crisis.
– Second, a wave of large baseload coal plants – most importantly Pagbilao
(700MW), Sual (1200MW), and Quezon (originally 440MW, now rated at
460MW). These reached operation between 1996 and 2000 and had longer
PPAs (up to 25 years).
– Third, a round of big hydro/irrigation projects and natural gas plants that
reached aoperation from 1998 to 2002, including Casecnan hydro (140MW),
San Roque hydro (345MW), CBK hydro (640MW), Ilijan natural gas (1200MW),
Santa Rita natural gas (1000MW) and San Lorenzo natural gas (500MW).
Philippines Contracts
Capacity was Added over Many Years
Additions of Capacity by Type
Diesel Added Early/Gas and Hydro
Added Later
Initial Contracts
•
•
•
The country had its first Build-Operate-Transfer contract in 1987, with Hopewell
Holdings Ltd. of Hong Kong tycoon Gordon Wu as the proponent. Hopewell
constructed two 100-megawatt gas turbine plants in Luzon.
The venture was deemed so successful that the government was encouraged to
enter into more BOT power contracts and even enact the BOT law (Republic Act
7718) that would allow Napocor to tap the private sector more effectively. Past
and present government officials agree that the early Hopewell contracts provided
the model for all future power deals with the private sector.
But Napocor soon found itself with more IPP contracts, and more power, than it
could handle, and what was once thought of as a brilliant solution to the country's
power needs have now become problems themselves. At the time it was
accumulating IPP contracts, the government had also let the private Manila
Electric Co. (Meralco) to build its own power plants, which later exacerbated an
energy oversupply.
Summary of Capacity and Costs
• By 1998, foreign owned IPPs accounted for US$6 billion of
investment and 4800 MW of generating capacity. Over 90% of
new capacity installed during the 1990s came from foreign
owned IPPs.
• Average capital cost of $1,250 per kW.
• IPP capacity with PPAs is now 55% of the total capacity.
• The first contract was signed in 1988 and more than forty
projects have been built in total. IPPs in the Philippines have
exhibited a wide variety of characteristics from fuel choice to the
composition of project sponsors and the identity of the offtaker.
IPPs in the Philippines have largely earned healthy returns, even
in the wake of economic crises and a highly visible renegotiation
of most of the PPAs in the sector. From the country perspective,
returns have been mixed. Political instability and poor sector
planning have led to expensive electricity.
Cost of New Plants
Comparative Plant Costs
Cost of Plants per kW
Philippines PPA Features
•
•
•
•
•
Capacity-based formula with take or pay and capacity nominated by the IPP.
Energy-based formula, a percentage is applied on a contracted or
guaranteed annual energy.
Availability fee formula carries both the capacity recovery and the fixed
O&M fees. These fees are payable as long as the facility is available even if
not dispatched.
NPC is responsible for the supply of fuel, with delivery at site. Storage, usage
and management of the fuel are within the control of the IPP. This was
because NPC has tax-exempt privileges with respect to fuel oil purchases
and government-to-government arrangements for coal; making fuel pass
through charges to consumers cheaper.
Fee payments by NPC to the IPPs have large dollar denominated
components. NPC thus bears the currency risk to the extent of the dollar
payments.
Philippines PPA Provisions Continued
• Payments in IPP contracts have both Capacities cost
recovery and O&M component. In turn, the O&M portion is
subject to escalation. In some of the geothermal contracts,
fees are bundled into a single energy charge and escalation
is pegged thereon to as high as 75%.
• Escalation is based on varying factors depending on the
project such as salary adjustment of personnel, movement
of local and foreign consumer price indices, and the pesodollar exchange rate.
• A number of NPC’s obligations are fully backed up by a
government guarantee or performance undertaking. Very
few contracts have only partial government performance
undertaking depending on stipulations regarding payments
of fees, privatization, and foreign exchange convertibility.
BOT and Sovereign Guarantee
• Ownership structure for IPPs in the Philippines is
dominated by the BOT form. The prevalence of
BOT contracts as opposed to other forms results
from the fact that the “transfer” element of the
project makes the project eligible for a sovereign
guarantee. Formally, only solicited projects are
eligible for this guarantee – a rule that invited
substantial controversy in the case of the CBK
hydro project, which although unsolicited,
received a performance undertaking from the
Department of Finance.
List of Projects
and
PPA Terms
Latest Photograph of Plant Under Construction
May 18, 2001Subic Group
22
Case 1: Enron Subic
• Summary
– Financial Close:
– Commercial Operation:
– PPA Agreement:
– Bonds:
•
•
•
•
Maturity
Repayment
Interest Rate
Minimum DSCR
1993 (First Round)
1994
15 Years; Guarantee by Government
$105 Million
15 Years
Level
9.5% (3.68% spread to Treasury)
1.37
– Completion Guarantee/Liquidated Damages
– Capacity Charge
$21.6/kW/Month
BOT/PPA Contract
• 15 year BOT and toll process
• NAPOCOR (government owned generation company) to
supply fuel & take electricity - no fuel availability risk
• Capacity fee $21.6/kW/month on available capacity
• Capacity fee is dollar denominated – no direct foreign
exchange risk, overseas a/c
• O&M fixed fee and energy fee is in Peso - $4.56/kW/Month
• heat rate penalty & bonuses
• buy out rights @ NPV capacity fees- late payment, change
of BOT law, war, etc
Case Study - Funding
Enron - Subic Bay, Philippines
Philippines
Government
Performance
Undertaking
Napocor
Buyout
Rights
•Capacity Charge
•O&M Charge
•Energy Charge
PPA
Equip’t Cos.
Warranties
Fluor Daniel
15-year
BOT
Concession
Supply
Fuel Free
Ground
Lease
Enron Power
Operating Co.
Completion
Guarantee
EPC
Enron Power
Enron
Turnkey
Phils. Op’g Co.
Construction
Corp.
Contract
Enron Subic
O&M
Power Corp
Agreement
113MW
Subic
Power
Corp.
65%
Enron Power
Philippines Corp
35%
Insurances
US$105 million, 15-year Notes
Philippine
Investors
113 MW Diesel Generator Power Station
Subic Bay, Philippines
Sources of Funds:
Notes
Subordinated Note
Contr. Of Shareholders
Working Capital
TOTAL
Uses of Funds:
Turnkey Contractor
Bonus to Turnkey Contractor
Development and other related costs and Fees
Pre operating, Start-up and Commissioning Costs
IDC
Working Capital
TOTAL
$ 105 M
7
28
2
$ 142
$ 112 M
7
14
3
4
2
$ 142
Subic Covenants
•
Financial Covenants
– Debt Service Cover Ratio 1.10
– Debt Service Reserve Account: 6mos debt service deposit
– Debt Payment Account: monthly retention
– Restrictions on
• additional indebtedness other than
»
»
»
»
financing acquisition of Additional Facilities @ max 75%
financing scheduled payments to EPOC
subordinated debt < US$ 25mln
working capital loan
• shareholder payments / repayments
• payments of sub-debt
• investments other than permitted investments
May 18, 2001
27
Conclusion from Investor Perspective
In Conclusion:
– Attractive Return
– Well Structured Deal
– Solid Sponsors (Enron, NAPOCOR and the Philippine
Government)
– Manageable Risks
– Minimum Take: US$ 20 Million
Bond issue under rule 144 A
• BORROWER
• Amount
• Maturity
- Subic Power Corporation
- USD 105 million
- 15 years
• Payments of Principal & Interest are fully guaranteed by Enron Corporation
until the Facility Completion Date.
• Repayment
- equal semi-annual Jun 28/Dec 28.
• Interest is accrued
- 9 1/2 % p.a payable semi annual.
•Interest base and Margin
- US Treasuries 15 Y + 385 bp fixed rate
Key Defaults
• Failure to pay principal/ interest within 15 days after due dates
• Fails to perform following covenants
– maintain DSRA, DPA & Revenue account & payments therein
– amendment of project contracts or merge/ sell assets outside
indenture
– default on other indebtedness over $1 mn. - right of acceleration
not waived
– Ceasure of BOT/ Performance undertaking and/ or reduction
under BOT by over 2% and modification of Performance u’tkg. for
the same
– Enron’s completion guarantee held invalid/ unenforceable
– NAPOCOR’s bankruptcy and Govt.’s non-confirmation of
performance u’tkg.
Completion Guarantee
• Completion Guarantee
• All principal and interest payments on the Notes are guaranteed fully by
Enron Corporation, and severally, in proportion to their ownership interest
in the Company, by House of Investment (HI) and Rizal Commercial
Banking Corporation (RCBC).
• Security:
– Mortgage on all real property and security interest on all substantial tangible
property.
– Security interest in Company’s cash and investment.
– Collateral assignment of:
•
•
•
•
BOT Agreement
Turnkey Construction contract
Performance Undertaking
Other project contracts
EPC Contract
• EPOC wrap- Fluor Daniels assistance & local
contracts
• $112m fixed price
• LDs $6m capacity, $10m heat rate
• $2m scope discrepancy
• bonus payments for $3.6m capacity and $3m
heat rate
• 12-19 month warranty with liquidated damages
per day
Sensitivity Cases
What If
Base Case
Availability = 81%
Operating expenses
are 50% higher/yr
Interest Rate is 12%
Min
DSCR
1.39
1.25
1.19
Min
Interest
Cover
2.01
1.80
1.72
PV Loan
Cover
Ratio
1.53
1.36
1.23
Equity
IRR
(Post Tax)
19%
14%
9%
1.37
1.77
1.40
17%
Adjusted Results
Other Assumptions
Quezon Coal Plant Case
Quezon Case Study
•
•
•
•
Capacity
Cost
Transmission
PPA
440 MW
USD 808.9 Million
230 kV 31 km
– 25 Years
– covered costs as long as as-contracted performance
met
• Offtaker: Meralco (First PPA with Private Utility)
• BOO without government guarantee
Sources and Uses of Funds
Capacity
Construction
Operation
440,000
USD/kW
MW
Percent
Sources of Funds
Eximbank-Supported (Political Risk) Loan Facility
358,894,000
Eximbank Direct Term Loan Facility
391,733,000
606,733,000
890.30
488.64
1,378.94
48%
27%
75%
202,244,000
202,244,000
459.65
25%
776,138,000
808,977,000
1,838.58
100%
Generation Facility
419,560,000
419,560,000
Transmission Line
23,306,000
23,306,000
953.55
52.97
49.72
1,056.24
52%
3%
3%
57%
6%
5%
1%
4%
9%
8%
4%
5%
100%
Senior-secured bonds, due 2017
215.000.000
215,000,000
Total Credit Facilities
573,894,000
Total Equity Contributions
Total Sources
Uses of Funds
VAT, Insurance, Escalation
21,878,000
21,878,000
464,744,000
464,744,000
Start-up and Other Owner Costs
50,487,000
50,487,000
Development Costs
37,885,000
37,885,000
Total EPCM Costs
Interest During Construction
75,038,000
75,038,000
Other Financing Fees
68,425,000
68,425,000
Contingency, budgeted
35,000,000
35,000,000
Other
36,559,000
36,559,000
114.74
86.10
18.18
74.63
170.54
155.51
79.55
83.09
776,138,000
808,977,000
1,838.58
Cost-Overrun Loan Facility (Unsupported)
30,000,000
30,000,000
Contingent Equity Contributions
20.000.000
20.000.000
TotatContingent Commitments
50,000,000
50,000,000
Development Fee
8,000,000
Eximbank Exposure Fee
Total Uses
8,000,000
32,839,000
Contingent Commitments
Construction Period
1996
1997
1998
1999
11,408
170,178
210,784
54,123
559
4,968
13,370
USES DURING CONSTRUCTION
Environmental, Procurement, Contracting
Start-up Costs
Development Costs & Fees
30,098
IDC
8,973
13,000
16,487
32,515
44,648
Financing Costs
Upfront Fees
9,250
2,930
245
5,580
Development Capital & Project Equity
3,250
0
Debt Placement Advisory
3,750
Other Financing Costs
7,300
Commitment Fees
Contingency
45,128
4,689
3,978
7,498
5,473
11,667
11,667
6,552
11,667
8,865
Working Capital
Other
TOTAL USES
8,711
6,596
9,474
10,463
74,571
224,958
289,997
206,318
44,601
192,848
144,435
SOURCES DURING CONSTRUCTION
Debt
Working Capital
Eximbank
Capital Markets Debt
215,000
OPIC Loan
74,573
-74,573
Net Bonds
74,573
140,427
0
0
74,573
185,028
192,848
144,435
InterGen
28,950
70,433
44,864
Ogden
10,981
26,716
17,017
Total Equity
39,931
97,149
61,882
224,959
289,997
206,317
Local Bank Loan
International Banks
Total Debt
Equity
TOTAL SOURCES
74,573
Development Risks
•
•
•
•
Approval and Construction
Financing Risks
Contractual and Operating
Currency/Country
Public Support During Contruction
Quezon EPC Contract
•
•
•
•
•
•
•
Pulverized Coal -- Proven Construction since 1950’s
Bechtel EPC Contractor
LSTK
Liquidated Damage Caps
Meralco Leased Property
Contingency USD 35 Million
Cost Over-run Facility
– Debt
– Contingent Equity
30 Million
20 Million
Sponsors
• Intergen
Contribution
72.5%
Ownership
71.875%
– Bechtel and Shell Joint Venture
• Ogden Enterprises
• Local Developer
27.5%
26.125%
2.000%
Fuel Supply
• Fuel Supply from Indonesia
• Potential and Desire to Use Local
PPA Provisions
• Four Part Tariff
– Capacity Payment for Fixed Charges
– Fixed O&M Charges
– Variable O&M Charges
– Energy Charges
Off-taker
•
•
•
•
•
Meralco is Private Distribution Utility
Currency Risk
Franchise Renewal
Electricity Prices
Bond Rating BB+
O&M Contract
• Ogden was O&M contractor
• Received USD 160,000 per year above costs
• Bonuses
– Achieving high capacity factor
– Costs under budget
• Intergen Management Fee
USD 400,000
Project Debt
• Political Risk Insurance
– Generally not for bonds
– Exim takes insurance, but includes up-front fee
• Treatment of Exim Up-front Fee
S&P Initial Comments on Project
S&P Comments on Quezon Continued
Moody’s Comments
Downgrade of Bonds
Problems with Quezon
Moody’s Comments
S&P Comments on Meralco
Comments on Meralco
Cost Comparison in Case
Project
Location
Capacity
Total Cost
Cost per kW
Operational Date
$812 million
$ 1845.45 per kW
Dec. 1999
InterGen 71.5% Ogden
26.5% PMR 2%
$600 million
$ 779.22 per kW
Jan. 1998
InterGen 100%
$630 million
$ 818.18 per kW
Nov. 1998
InterGen 20%; GE40% El
Paso 30% ICA 10%
$577rnillion
$ 749.35 per kW
March 2000
$212 million
$ 902.13 per kW
Jan. 1999
InterGen 54% Emcali 43%
CFP 3%
$370 million
$ 1027.78 per kW
June 2000
InterGen 100%
InterGen 50% Shell 40%
VBC 10%
Quezon
Philippines
440 MW, Coal-fired
Rocksavage
United
Kingdom
Samalayuca
Mexico
Spalding
United
Kingdom
TermoEmcali
Colombia
Jacui
Brazil
770 MW,
cycle
700 MW,
cycle
770 MW,
cycle
235 MW,
fired
360 MW,
coal fired
Sao Paulo 1 and II
Brazil
900 MW
$510 million
$ 566.67 per kW
June 2001
Coryton
United
Kingdom
750 MW
$660 million
$ 880.00 per kW
March 2001
Meizhou Wan
China
2 x 360 MW, Coalfired
$751 million
$ 1043.06 per kW
Aug. 2000
Mayakan
Mexico
700 km natural gas
pipeline
$260 million
Average
Combined
Combined
Combined
Natural gasPulverized
Sept. 1999
$ 956.87 per kW
Major Owners
InterGen 100%
InterGen 100%
InterGen 40.5% Lippo
Group 49.5% Others 10%
InterGen 32.5%
TransCanada 62.5% Gutsa
Const. 5%
Recent Comparison of Cost of Project
• PAGBILAO, Quezon ,Philippines – Team Energy, a joint undertaking of
Japanese firms Marubeni Corp. and Tokyo Electric and Power Corp., will
start the $700-million expansion of the Pagbilao coal-fired power plant in
this province next year.
• Federico Puno, Team Energy president and chief executive officer, said the
company would finalize the details of the project that would generate
another 400 megawatts of power.
• Puno said talks with another Japanese firm, Mitsubishi, for the
engineering, procurement and construction (EPC) contract of the project
are ongoing.
• “If there is no agreement firmed up within the first half of the year, Team
Energy will bid out the EPC contract to enable them to set up everything
they need in time for the planned groundbreaking in the first quarter of
next year,” he said.
• He said Team Energy is optimistic commercial operations could start in
2015.
Valuation of Plant
•
•
•
•
•
Covanta Holding Corporation (NYSE:CVA) (Covanta), announced that it has agreed to
sell all of its interests in the Quezon coal-fired electric generation facility located in the
Philippines to Electricity Generating PCL (EGCO) for a price of approximately $215
million in cash. EGCO is a current partner in the Quezon project and we expect the
transaction to close in the first quarter of 2011, subject to customary approvals and
closing conditions.
Quezon is a world-class asset and the valuation reflects its strong potential going
forward."
The Quezon assets being sold consist of the Company's entire interest in Covanta
Philippines Operating, Inc., which provides operation and maintenance services to the
facility, as well as its approximately 27% ownership interest in the project company,
Quezon Power, Inc. (QPI). The sale is expected to generate a one-time after tax book
gain of approximately $140 million at closing. For the twelve months ended September
30, 2010, Quezon's contribution to Covanta's consolidated results was: $2.8 million of
revenue, $19.5 million of Adjusted EBITDA, $15.9 million in Free Cash Flow and $0.12 of
diluted earnings per share.
Covanta Completes Sale of its Interest in Quezon Project
March 28, 2011 – Covanta Holding Corporation today announced that it has
completed the sale of its interests in the Quezon coal-fired electric generation facility
located in the Philippines to Electricity Generating PCL (“EGCO”). The purchase price
of $215 million was paid in cash.
Quezon Transactions
• 14 May 2012 (Reuters) - Thailand's second-largest private
power producer, Electricity Generating Pcl (EGCO), said on
Monday it would spend $375 million to buy an additional
45.875 percent stake in Quezon power plant in the
Philippines.
• The transaction, expected to be completed in the second
quarter, will raise EGCO's holding in Quezon Power to 98
percent. Quezon owns and operates a 503 MW coal-fired
power plan.
• The deal would also include a 100 percent stake in
InterGen Management Services (Philippines) Ltd, which
provides project management and administrative services
to Quezon Power,
Philippines Case - Results
Results – Power Outages
• Measured by their ability to reduce power outages, the
BOT programs were undoubtedly a success. Notably, this
increased provision of power came without increased
government debt as most projects were financed on global
capital markets. The BOT and related programs also
significantly increased the scope of private sector
involvement. At the beginning of 1996, 21% of the
country’s installed capacity for power generation was
contracted with the IPPs. Because the IPP schemes also
encouraged private sector operation of government-owned
plants, fully 42% of Philippine generation capacity was
operated by the private sector. 21 The World Bank praised
the BOT programs, calling them a potential model for other
developing economies.
Capacity and Demand
•
•
•
•
By 1998, peak capacity was 11,988 MW while peak demand was 6,421 MW. Demand
projections in the early- and mid-1990s forecast demand growth ranging from 9.5-12% per
year.
A 1994 report by the World Bank already warned implicitly against the risk of overcommitment through the uncoordinated signing of PPAs, which essentially passed demand
risk to the consumer through take-or-pay provisions.
The costs of IPPs were often high because the new capacity was not consistent with the leastcost expansion path and the private sector required high rates of return.
The focus on production rather than efficient distribution put the public sector in the position
of retaining that activity in which it was least effective and restricting the private sector from
performing the customer focused activities (distribution and supply) where it had real
expertise. At the same time, it isolated the private sector from the market through a
combination of regulated pricing and guarantees against commercial risks.
Philippines IPP Contracts
Reserve Margin is
about 155%
Estimated
Growth – 9.2%
Actual
Growth – 3%
PPA Provisions
• The take-or-pay provisions ensure that the IPP
proponents are paid up to the level of the minimum
energy off-take (MEOT) whether the government utility
was able to sell the power or not.
• IPP liabilities estimates up to the remaining terms of
the contracts is in-between $6 - $ 8B in net present
value. The buy-out figure of $11.8 B is gross since the
Government can turn around and sell the capacity to
another party.
• In 1992, the GDP was US$52 billion. PPA buyout in
total would be 21% of GDP.
Effects of PPA Program
• The effects of the PPA capacity charges were
exacerbated by the structure and implementation of
the IPP program. The rapid build-out of IPPs during the
1990s meant that with the impact of the Asian
financial crisis in 1998, the cost of electricity began to
explode dramatically due to a combination of:
– the high fixed cost of the IPPs (capacity payments or
minimum offtake) and
– the escalating foreign exchange liability stemming from
deep reliance on foreign capital.
• The controversial “PPA” pass-through mechanism
began climbing rapidly with the crisis, eventually
becoming larger than the base rate itself.
Exchange Rates
Depreciation in exchange rates
of about 70% caused increases
in capacity charges
Risk Mitigation and Purchasing Power
Parity
• Purchasing Power Parity
– Change in exchange rate (versus USD)
• Current exchange rate x (1+local inflation)/(1+US$ inflation)
– How purchasing power parity mitigates risk
• In theory people in the country are willing to pay higher
nominal prices because of inflation and the net cash flow for
the project should be the same
• For example, if the inflation rate increases to 20%, the
exchange rate should reflect depreciation in the currency of
20%.
– Problems with purchasing power parity assumption
• Large devaluations can occur without inflation rate changes
• For example, the East Asian Crisis of 1997
Example of Purchasing Power Parity
and Inflation
Philippines Exchange Rate and Inflation Rate
60.00%
60.00
50.00%
50.00
40.00%
40.00
30.00%
30.00
Infllation Rate
Exchange Rate
20.00%
20.00
10.00%
10.00
0.00%
0.00
Index of Exchange Rate and Purchasing
Power
Result – High Power Rates
•
•
Exceptionally high power rates were cited as one reason why Intel Philippines, one
of the country's biggest foreign investors and largest employers, with over 5,000
workers, plans to close down its Philippine operations and divert the company's
investments to lower-cost Vietnam and Malaysia. A recent government survey
showed that the high cost of electricity is one of the main reasons why foreign
investors are reluctant to locate their businesses in the Philippines.
According to the Heads of ASEAN Power Utilities/Authorities, a consultative group
attached to the 10-member Association of Southeast Asian Nations, the average
cost of electricity in the Philippines last year was 17.5 US cents per kilowatt-hour
(kWh). That is more than three times the 5.38 per kWh cost in Vietnam, and is
markedly higher then the 6.77 per kWh cost in Indonesia, 7.67 per kWh in
Malaysia and 8.50 per kWh in Thailand. Even high-cost Singapore recorded
cheaper power rates at 13.07 per kWh.
High Power Rates (Excluding Europe)
Price Comparison from Wikipedia
35.00
C
e
n 30.00
t
s
25.00
28.80
p
e 20.00
r
15.31
11.61
10.44
10.15
9.28
7.42
7.11
6.95
Finland
6.18
5.00
0.00
Canada
USA
South Africa
Perú
Iceland
HK - Kolowoon
HK - Island
Singapore
Philippines
U
S
D
11.80
Australia
i
n
12.30
Malaysia
k 15.00
W
h 10.00
Philippines – Contract Review
• The process began with a 2001 electricity sector reform
law (“EPIRA”) that required the appointment of an
inter-agency commission (“IAC”) to review the IPP
contracts, which by 2001 had become politically and
economically vulnerable.
• The law also mandated the unbundling of electricity
rates in consumer bills. This seemingly innocuous
measure allowed Filipino citizens to see for the first
time the precise origins of the costs that created some
of the highest electricity rates in Asia.
– What they saw was that the power purchase adjustment
that financed the state utility’s IPP obligations was almost
equal to the cost of the actual electricity consumed.
Philippines – Review of Contracts
•
•
The IAC Review covered a total of 35 projects—all of Napocor’s operating contracts with IPPs.
Of these, six were cleared, and the other 29 contracts were found to have issues of various
kinds and were targeted for renegotiation.
Upon completing the review, the IAC handed responsibility for implementing its findings to
the Power Sector Assets and Liabilities Management Corporation (“PSALM”).
– First, IPPs would bear cost or fee reductions that were not contrary to the terms of the
original contract—most commonly the project companies made a collateral agreement
not to nominate the full 105% or 110% that the contract allowed, or clarified ambiguous
terms in a manner advantageous to the government.
– Second, PSALM also considered a negotiated buy-out when the sponsor firms were
interested in exiting the project.