Frank Thiel, Quezon Power EGCO, Philippines
Frank Thiel of Quezon Power EGCO, Philippines, talks about how the Philippines has achieved significant economic growth in the last three years, growing at better than seven percent GDP, and how the power sector is a major driver for creating and supporting further economic growth.
What was the reasoning behind EGCO’s 2012 decision to acquire Quezon?
The Quezon Power project had been in operation for the past 13 years. The original owners of the project, back when it began around 1995, were three American companies and a local Filipino company. The local Filipino company was PMR, represented by Dan Chambers (now of GN Power). Dan was the original developer. He located the site, secured all the permits and most importantly, he secured the power purchase agreement. At that time, he began looking for partners, and managed to secure three. One of which was General Electric (GE), which served as a partner in the project but also provided some of the main equipment. Another was Intergen, an international IPP company based in Boston, US; and the third was Covanta energy.
The way the partners split the project was very interesting. Intergen took on the role of project manager, becoming the management services agreement provider; Covanta took the operation and maintenance, providing all the operators and maintenance personnel, while GE was primarily an equity investor. All the equipment for the power plant came through Bechtel, the architect engineer for the plant.
Around five years ago, GE announced that they wanted to exit from the project. They had held the asset for a period of time and they wanted to exit as part of their asset rotational program. It was at this point that EGCO came in and acquired the shares of GE. They came in as an equity investor, taking on the shares and responsibilities of GE. A couple of years later, Covanta announced that they too wanted to exit from the project. EGCO made then an offer and acquired their shares as well. Finally, last year in April, Intergen exited from the company. EGCO, again, saw an opportunity to step right in, acquiring the shares that used to belong to Intergen. As of May 2012, EGCO then held 98 percent of the ownership of the project, while the other two percent remained with PMR.
EGCO saw the Filipino market as a very attractive place to invest. They actually came into the Philippines long before, through a minority ownership of the Conal plants with the Alcantara Group, which they recently divested. Today, they are very focused on the Philippines market and actively looking for various opportunities.
That is the history of the project, who the shareholders were, and where we are today. EGCO is an affiliate of the Electricity Generating Authority of Thailand (EGAT), and was established primarily to develop projects inside and outside Thailand. They have a portfolio of over 5,000 MW including the Philippines, across many different power sources. In addition to the asset here, they have a presence in Laos and a recently acquired a wind farm in Australia. As you can see, EGCO is pretty active in the region and they are looking for expansion opportunities in Indonesia, Vietnam, as well as other potential opportunities in the Philippines.
What are the company’s main priorities today?
Our priorities remain the same as when we started this project back in 1996. The main objective is to provide reliable power. We have a commercial agreement with an off-taker, Meralco, which is the largest distribution utility in the country. In terms of the commercial side and the agreements that we have, our main commitment is to provide reliable, cost effective power. At the same time, we have to respect the environment; we have to follow the Rule of Law, and we have to work with the communities we serve. Today, the area where we operate continues to be mainly an agriculture area, so one of our major priorities is to try and improve the conditions of the community in our area.
Reliable power that is cost efficient, respect for the environment and the community, and working with the community to try to upgrade the wellbeing of the township are some of our mandates today.
What are the competitive advantages of the energy sector that EGCO identified in the Philippines versus other ASEAN markets?
EGCO sees that, especially in Luzon, it is a regulated competitive market. It offers a lot of incentives for potential investors to come in. A lot of the other markets are pretty closed, meaning that they don’t really accept foreign investment readily. There are only a few markets that actually allow foreign investors to enter, and the Philippines happens to be one of them. Indeed, the Philippines tries to actively encourage Foreign Direct Investment by providing a sustainable regulatory environment. As an investor, you are looking to come into a market that has potential for increased demand of power. Also, the Philippines has achieved significant economic growth in the last three years, growing at better than 7.0 percent GDP. Obviously, you need to have power to support that economic growth, and I believe everyone agrees that power is a major driver for creating/supporting economic growth.
Under EGCO, Quezon Power will be undergoing a 500 MW expansion. Could you share your expectations for the expansion and how it will help reduce future power shortages in Luzon?
We have been working on the development of the second unit since approximately seven years ago. In terms of challenges, probably the most difficult thing that we faced back then was trying to arrange for an off-take agreement, which was paramount for us to be able to secure the project’s financing. We had a lot of dialogue with potential off-takers at the time, but we never actually signed an agreement for the plant. Right when we were having those discussions is when the then Shareholders began to think about exiting from the project, which complicated matters.
When EGCO came in and acquired 98 percent of the project, it was very interested in growing in the Philippines market. Last year, they asked us to refresh the development activities. We went out and studied the system again, and refreshed the environmental compliance certificate that we had.
Today, we are working on the development of the second unit with some of the same challenges that we had before. Among them: we have to secure an off-take agreement. The key for us is to secure a long-term off-take agreement in order to bring the project to the banks and say, “we are ready to go”.
Of course, collaborating with local partners is one of the most important factors for successful operations in Asia. How does EGCO plan to secure critical partnerships, given the steep competition from other Asian companies, particularly other Asian power investors?
In any country in the world, it is very difficult to develop a project without a local partner. Finding the right partner is always critical. EGCO has very high standards, particularly when it comes to legal/commercial/environmental standards. Making sure that we have partners that can align themselves with us is very important. In MeralcoGen, EGCO believes it has found the right partner. It is definitely important to partner right to make a project successful. On the other hand, what makes EGCO desirable for local partners is that it has a lot of expertise in project development, financing, plant operations and maintenance, and a very strong balance sheet.
Does EGCO plan to diversify its energy portfolio in the Philippines?
If we can find the right opportunity, then yes. One of the mandates that we have is to try to find opportunities and we are always looking, especially in Luzon. But we will also happily consider investing in other islands as well. EGCO is unique in that it favors all technologies and all sizes, unlike others companies that tend to be very prescriptive in this regard. EGCO’s focus is on finding the right opportunity, which can be coupled with the right partner. That gives us much more flexibility.
“Energy for life” is EGCO’s brand vision, reflecting its aspiration and commitment to produce clean energy. Both Quezon Power and EGCO have won multiple awards for environmental Excellence and Efficiency. Do you believe that similar corporate culture fostered this success?
As you just mentioned, both companies have won a lot of awards. Quezon Power has received awards for environment excellence and best operation and maintenance plant, among many others. We truly believe in our CSR programs. It is great to have that kind of recognition, but we don’t do those programs thinking about the option of getting an award afterwards. We do it because we believe in them. We believe that we have to protect the environment, and that we have to work with our community to try to help them as much as possible. Getting the recognition is a plus. At the end of the day, we are in a community that is hosting us, and we have to adapt to them. This is the right thing to do, and what we will continue to do.
We also have a training program with the local community. We provide them with micro finance; we do medical missions and dental missions on a regular basis. We support an elementary school for the children. We are feeding breakfast and lunch to more than 300 children every day, and we employ about 300 plus people from the local community to help us with many activities at the site. We have been doing this and other programs now for several years. To summarize, we have a lot of commitment to the Philippines. We do this with the support from EGCO from the first day they came to the Philippines. EGCO believes just like we do, that you have to work with the community, respect the environment and give back to the community. We believe that by practicing that approach, the community supports us and sees us as a good neighbor.
Where would you like to see Quezon Power and EGCO 10 years from today?
Speaking about Quezon Power, apart from insuring that our current plant continues to deliver reliable power, I would like to have a second unit that is fully operational, and that brings along with it the best available technology. Actually, we expect to have the new unit online by late 2017. With that, in 10 years, I would like to see Quezon Power delivering very cost efficient power, and with the same standards that we have had all along in terms of protecting the environment, respecting our communities and treating people fairly. We want people to feel good about us being there. And from an EGCO perspective, we basically want to keep expanding our operations around the ASEAN markets, always following our business philosophy.
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