Cash flow problems

The good news last week was the inauguration and commercial energization of the P52-billion Mindanao-Visayas Interconnection Project (MVIP). Now, the power grids in Luzon, Visayas and Mindanao are interconnected and should be able to help each other when power supply in one grid is short. How this works out in real life is something else.

Big Boy Sy, the principal investor at NGCP was initially not enthusiastic with the Mindanao-Visayas interconnection project. I recall him telling me that it was too expensive and it is cheaper to put up power plants on the islands that require power. But he didn’t see the big picture.

When I was still at the then Ministry of Energy in the 80s, we wanted to interconnect Mindanao to the national grid. But the politicians in Mindanao refused because they said the cheap Agus-Pulangi River hydro power was theirs and they were not willing to share its cheap power with the rest of the country. And then a drought hit Mindanao and their attitude changed.

Because of the power crisis in Mindanao caused by a drought, there was a rush in constructing coal power plants to the point that they ended with excess capacity, with potential production that had nowhere to go. Citing 2022 data from the Department of Energy, the ERC Chair said Mindanao is the only island that has excess capacity, with peak demand at 2,167 megawatts (MW) and installed capacity at 4,570 MW.

If the interconnection was available earlier, power outages in Luzon and Panay could have been avoided, as Energy Secretary Popo Lotilla pointed out. And instead of the power plants in Mindanao idled, they could have sold power to the rest of the country. The country also benefits from a multiplicity of power sources. That’s the national benefit Big Boy Sy failed to see.

The new transmission facility has a transfer capacity of 450 megawatts (MW) and can be expanded to as much as 900MW.

The submarine cable from Sorsogon to Leyte can transfer 440 MW that will be upgraded to double the capacity.

President BBM said incidents like the three-day blackout in Panay Island during the first week of January that caused P3.8 billion in economic losses will no longer occur again.

Hmmm… not too fast. NGCP must still complete CebuNegros-Panay Backbone Project Stage 3 by March 2024 and part of that, the Panay-Guimaras 138-kilovolt (kV) interconnection project has hit a snag due to a TRO preventing NGCP from completing a crucial component of the project.

I was wondering some years ago why Big Boy Sy had to be ordered by the government to undertake the MindanaoVisayas interconnection project. Now I see it. It costs a lot of money. Even if NGCP will eventually be reimbursed by power users once the project is completed, the big bucks will have to be initially provided by the investors at NGCP. That means no big profit dividends and they may also have to borrow.

Last week, financial analyst Eric Jurado wrote in his blog, The International Investor that is published in substack.com, that future bright prospects at SGP (the listed holding company of the Chinoy investors at NGCP) is dimmed by the reality that NGCP, its only source of income, is currently suffering serious negative cash flow due to its heavy capital investments.

“Despite its robust earnings performance, SGP (NGCP?) faced a challenge as it (NGCP?) generated negative free cash flow amounting to P -16.6 billion in the most recent 12-month period.

“This was primarily attributed to a substantial net amount of P43.1 billion in capital expenditures that were required to build the nation’s power grid infrastructure, which outpaced its cash inflows, leaving the company with insufficient free cash flow to distribute as dividends to shareholders or effectively reduce its debt. (Actually, the insufficient free cash flow didn’t deter NGCP from declaring substantial dividends to SGP, as a Senate hearing found out).

“Since 2019, SGP has predominantly generated negative free cash flows, primarily attributed to substantial (but required) capital expenditures:

• 2019: P -6.0 billion

• 2020: P +2.5 billion

• 2021: P -10.4 billion

• 2022: P -20.0 billion

• September 2023 (12 Months): P -16.6 billion

• Total (4.75 years): P -46.4 billion “Consequently, SGP (NGCP?) had to continually resort to debt financing to bridge the gap.”

In a Senate hearing last year, Sen Tulfo managed to get an admission from NGCP officials that most of its income in 2014, 2015, 2017 and 2019 went to dividends for its shareholders. For 2014, the NGCP officials said that its dividends even exceeded its net income with P24 billion being handed to shareholders even if it only earned P22 billion.

NGCP has been delivering on the average, P20 billion a year to its shareholders over the last 12 years.

NGCP generated enough profits to finance their capex requirements but prioritized shareholder dividends instead of reinvesting profits. It chose to borrow heavily instead, adding to the costs that power consumers must eventually pay for. It is beginning to look like this experiment in privatizing the national power grid is a failure because the private investors looked after their profits first, neglecting the fast modernization of the grid which was why it was privatized in the first place.

There had been talk about Maharlika investing in NGCP to offset the Chinese government presence and prioritize our national interest in modernizing the country’s power grid requirements.

I asked Jurado if he thinks SGP or NGCP is a good investment for Maharlika and he said it is a good long term buy.

‘Yes, it’s worthy of investment by Maharlika. They could consider providing expertise in financial restructuring to optimize capital allocation and improve cash flow management. Collaborating with SGP’s management to streamline operational efficiency and reduce unnecessary expenditures could contribute to a more sustainable financial position. Furthermore, Maharlika could assist in refining SGP’s communication strategy to the market, ensuring transparency and clarity in conveying the company’s long-term growth plans.”

As for power consumers nationwide, we just want our power infrastructure built as scheduled at the least cost to us. That’s where the government (DOE, ERC and Maharlika?) comes in to make sure that happens.

Boo Chanco’s email address is bchanco@gmail.com. Follow him on X or Twitter @boochanco