The Energy Market Authority (EMA) of Singapore really screwed up big time in my opinion. In order to built a power plant, one has to apply for an Electricity licence from EMA. This is a highly regulated industry. It is very ridiculous that the Electricity Reserve Margin can reach above 80% in 2017.
The electricity Reserve Margin is calculated according to the formula as follows:
The % of reserve margin is already based on the system peak demand which means:
"Peak demand is the largest instance of power usage in a given time frame"
"Peak demand can represent a spike in power usage..."
"A period in which electrical power is expected to be provided for a sustained period at a significantly higher than average supply level...."
This means having any buffer above the System Peak Demand is already very conservative. But guess what happened, above 80 % reserve margin in 2017 and 2018.
How can EMA not be able to regulate carefully the supply of electricity since it is the only entity giving out licences?
Why Salim- Medco may be interested in Tuaspring?
Demand side
Below pictures are based on the Singapore Electricity Market Outlook (SEMO) newsletter in 2016,2017 and 2018.
| SEMO 2018 |
| SEMO 2017 |
| SEMO 2016 |
Supply side
Olivia Lum did mention that the expensive "take or pay" contract which they were locked in will be expiring somewhere in the early 2020s. This would mean that Tuaspring would be able to use other sources of gas (assuming the regulators don't restrict where they get the gas from like they did
before ).
before ).
Medco who is partnering Salim in the Hyflux bid owns a gas pipeline to Singapore. If they are able to use gas from this pipeline, they will be able to lower the cost of gas to Tuaspring.
My Opinions
Salim- Medco ain't "white knights", they are corporate raiders who want assets as cheap as possible to eliminate their downside risk. The 50 000 perpetuals, preference and ordinary shareholders are thus sacrificed the most to cushion the downside risk of the Indonesian tycoons.
Besides, the West Natuna pipeline is already a sunk cost for Salim- Medco ( actually Medco actually). Gaining Tuaspring would also increase the demand for gas through the West Natuna pipeline and this is vital because pipeline gas no longer hold a monopoly advantage in Singapore like in the past after the LNG terminal has been set up.
Why i am voting NO
Assuming the restructuring succeeds in 2019, Salim-Medco could be enjoying a Tuaspring which is no longer bleeding since the electricity reserve margin has fallen from 80% in 2016 to about 50% in 2019. It is forecasted to get lower along the years.
Will Salim-Medco then package the Tuaspring to sell it away at a good price then?
Would they share the rewards with ordinary shareholders?
Anyway, the recovery amount for the Perps and prefs has been so drastic, any future upside, even if Salim is willing to share is immaterial. Further more, as i have written in the past, perps and prefs holder bought such securities exactly because they are more risk averse than those who bought the ordinary shares and so wouldn't put much weight to the 7.6% recovery amount in shares. To them, only 3% in cash is the actual recovery.
Salim Medco may actually need Tuaspring more than we think. Based on the screenshot below from EMA website, new generation companies are not allowed to import (use?) pipeline gas. I suspect Tuaspring would not fall under this restriction since she did not sign any LNG Vesting contract , a contract which provided a certainty in electricity revenue to the generator, when they use LNG gas instead . But funnily, Hyflux still killed herself by using LNG gas under the expensive" take or pay" contract even though she didn't benefit from this certainty in electricity revenue . It is stated that a review will be done in 2018 and i am not sure if this restriction for new generation capacity is still in place.
Besides, the West Natuna pipeline is already a sunk cost for Salim- Medco ( actually Medco actually). Gaining Tuaspring would also increase the demand for gas through the West Natuna pipeline and this is vital because pipeline gas no longer hold a monopoly advantage in Singapore like in the past after the LNG terminal has been set up.
Why i am voting NO
Assuming the restructuring succeeds in 2019, Salim-Medco could be enjoying a Tuaspring which is no longer bleeding since the electricity reserve margin has fallen from 80% in 2016 to about 50% in 2019. It is forecasted to get lower along the years.
Will Salim-Medco then package the Tuaspring to sell it away at a good price then?
Would they share the rewards with ordinary shareholders?
Anyway, the recovery amount for the Perps and prefs has been so drastic, any future upside, even if Salim is willing to share is immaterial. Further more, as i have written in the past, perps and prefs holder bought such securities exactly because they are more risk averse than those who bought the ordinary shares and so wouldn't put much weight to the 7.6% recovery amount in shares. To them, only 3% in cash is the actual recovery.
Salim Medco may actually need Tuaspring more than we think. Based on the screenshot below from EMA website, new generation companies are not allowed to import (use?) pipeline gas. I suspect Tuaspring would not fall under this restriction since she did not sign any LNG Vesting contract , a contract which provided a certainty in electricity revenue to the generator, when they use LNG gas instead . But funnily, Hyflux still killed herself by using LNG gas under the expensive" take or pay" contract even though she didn't benefit from this certainty in electricity revenue . It is stated that a review will be done in 2018 and i am not sure if this restriction for new generation capacity is still in place.
This post first appeared on The Simplified Resource For Investing, please read the originial post: here
