This article aims to provide a forecast of potential future cash flow of Jaks resources from its Vietnam IPP through the tariff payments received by Mong Duong II since its commercial operation in April 2015.
As there is only limited information provided in pieces through its holding company AES Corporation’s Annual Reports, certain analysis which are deemed highly probable are not conclusive. Readers’ discretion is therefore necessary.
Why compare with Mong Duong II ?
Mong Duong II is a very close model for the Jaks Hai Duong power plant because;
- Both were award by the Vietnam Government in 2011
- Both are Coal fired power plants costing around US$1.9b
- Both are located in northern Vietnam
- Both around 1,200MW capacity
- Both using domestic anthracite coal
- Both are 100% foreign owned
- Both under 25 years Build-Operate-Transfer (BOT) scheme
- Both are guaranteed by Vietnam Government
- Both Power purchase agreements signed with EVN
- Both coal supply agreements signed with Vinacomin
- Both under 75:25 debt to equity financing
- Both under max 18 years loan tenure allowed by Vietnam government
Brief Description of Mong Duong II
Mong Duong II is Vietnam’s first and biggest coal-fired BOT project and is also the biggest private sector power project undertaken in the country. The US$1.95bn project was developed with 100% foreign direct investment. Ownership will be transferred to the government of Vietnam after 25 years of operation.
The Mong Duong II power project is a 1,240 MW gross coal-fired plant located in Quang Ninh Province of Vietnam and was constructed under a BOT contract. AES-VCM Mong Duong Power Company Limited ("the BOT Company") is a limited liability joint venture owned by affiliates of AES (51%), Posco Energy Corporation (30%) and China Investment Corporation (19%). This is the first and largest coal-fired BOT project using pulverized coal fired boiler technology in Vietnam. The BOT Company has entered a PPA with EVN, the national utility, and a Coal Supply Agreement ("CSA") with Vinacomin, a state owned entity, both with a 25 year term starting from Commercial Operation Date.
Since April 22, 2015, both units of the Power Facility have been in commercial operations, six months earlier than the committed schedule with the Vietnamese government. The BOT Company makes available the dependable capacity and delivers electrical energy to EVN and, in return, EVN makes payments to the BOT Company.
Accounting Treatment of Tariff payments
"Capacity Payments and Contract Sales — Most of our contract sales include a capacity payment that covers projected fixed costs of the plant, including fixed O&M expenses and a return on capital invested. In addition, most of our contracts require that the majority of the capacity payment be denominated in the currency matching our fixed costs, including debt and return on capital invested. Although our project debt may consist of both fixed and floating rate debt, we typically hedge a significant portion of our exposure to variable interest rates. For foreign exchange, we generally structure the revenue of the business to match the currency of the debt and fixed costs. Some of our contracted businesses also receive a regulated market based capacity payment, which is discussed in more detail in the Capacity Payments and Short-Term Sales section below.
Thus, these contracts, or other related commercial arrangements, significantly mitigate our exposure to changes in power and fuel prices, currency fluctuations and changes in interest rates. In addition, these contracts generally provide for a recovery of our fixed operating expenses and a return on our investment, as long as we operate the plant to the reliability and efficiency standards required in the contract.“
From 2015 to 2017
The total construction cost was placed under service concession assets and amortized(AMO) over the life of the power plant. Tariff payments(TP) were partially recognized as revenues(REV) and interest income(INT).
The interest income was computed at an effective interest rate based on the credit standing of the customer.
TP = INT + REV
Earnings = REV + INT - AMO - Interest Expense - Fuel Costs - O&M costs
Effective from 1st January 2018, a new accounting standard was adopted,
“A loan receivable was recognized for the future expected payments for the construction performance obligation. As the payments for the construction performance obligation occur over a 25-year term, a significant financing element was determined to exist which is accounted for under the effective interest rate method. As payments are collected from the customer over the term of the contract, consideration related to the construction performance obligation is bifurcated between the principal repayment of the long-term receivable and the related interest income. The other performance obligation to operate and maintain the facility is measured based on the capacity made available. “
Without using complicated accounting terminology, I simplified the accounting treatment of Tariff payments (TP) received as follows;
- The balance of construction costs is placed under a receivable asset as “Loan receivable”(LR) and is gradually collected over the 25 years period through Tariff payments.
- The company has determined that a portion of the tariff payments is in effect considered “interest income”(INT) at an effective interest rate based on the credit standing of the customer.
- Balance tariff payments is recognized as “Revenue”(REV).
TP = LR + INT + REV
Earnings = REV + INT - Interest Expense - Fuel Costs - O&M costs
How was Mong Duong II performing ?
|
|
2016 |
2017 |
|
Gross Energy Output (MWh) |
6,394,476 |
3,780,403 |
|
Net Energy output (MWh) |
5,695,113 |
3,398,354 |
|
Capacity Utilisation (%) |
59 |
35 |
|
Coal Consumed (in tons) |
2,924,237 |
1,754,852 |
|
Estimated Average Coal price per ton (US$) |
62.5 |
87.5 |
|
Total Coal Cost (US$) |
182,764,812 |
153,549,550 |
|
Consumption of Coal per MWh (tons) |
0.51346 |
0.51638 |
|
Average Btu Per Ton Coal |
21,834,359 |
21,639,516 |
|
Actual Heat Rate (Btu/Kwh) |
9,985 |
10,045 |
|
Plant Efficiency (%) |
34.17 |
33.96 |
Note : In 2017, Mong Duong II was on reserve shutdown for 5 months at the request of Electricity of Vietnam, given that the hydropower plants were running at high capacity due to unusually heavier rainfall.
Information obtained from AES Corporation’s Annual Reports
|
Amount in US$ millions |
2015
|
2016
|
2017
|
2018
|
|
Revenue |
233
|
340
|
278
|
245
|
|
Interest Income |
114
|
133
|
133
|
191
|
|
Loan Receivable |
0
|
0
|
0
|
67
|
|
Total Tariff Payments |
347
|
473
|
411
|
503
|
|
Total Distribution To Shareholders |
|
90.2
|
100
|
88.23
|
Observations
The Mong Duong II PPA;
- Includes a capacity payment that covers projected fixed costs of the plant, including fixed O&M expenses and a return on capital invested.
- pays its capacity payment in USD for its USD borrowings and Equity Capital as well all costs which are denominated in USD.
- mitigate its exposure to changes in power and fuel prices, currency fluctuations and changes in interest rates.
Year 2017 was exceptional. Mong Duong II was on reserve shutdown for 5 months at the request of Electricity of Vietnam, given that the hydropower plants were running at high capacity due to unusually heavier rainfall. Yet it still received US$411m in tariff payment with majority consisted of capacity payment as the plant has only 35% utilization rate in the year.
Year 2018 recorded higher interest income from the higher financing component of contract consideration as a result of adoption of the new revenue recognition standard in 2018. The new standard required the future expected payments for the construction obligation to be recorded as “loan receivable” instead of service concession. Hence, a portion of the tariff payment was used to settle the receivable. Therefore, lower portion of the tariff payment was recognized as operation revenue. However, change in accounting policy is not expected to impact the net earnings from Mong Duong II.
In 2018, Interest income increased by US$58m to US$191m. The loan receivable was reduced by RM67m. Together, they made up a total of US$258m in “loan and interest repayment” from EVN. An asset can only be classified as a “loan receivable” if payments are fixed or determinable and unconditional and the only substantial risk of non-recovery of the initial investment is credit deterioration of the counterparty. Therefore, this payment qualifies to be the capacity payment for 2018.
Analysis
Assuming a constant US$258m capacity payment for 25 years, the IRR will be around 12.5% which is in line with the projection by Jaks’ management
Earnings based solely on the capacity payment;
Earnings = Capacity Payment – Loan receivable repayment – Interest Expense
= US$258m – US$67m – US$1,287m x 6% (Est)
= US$114m
This earnings calculation is in line with the distribution by Mong Duong II to shareholders for the prior 3 years.
This earnings projection is also in line with Kenanga Research's earnings forecast of US$120m for Jaks Hai Duong Power Plant.
Sensitivity Analysis
A sensitivity analysis was carried to project future potential when capacity is ramped up to 90%. Profit Margin before O&M per Kwh calculation is based on operation data of 2016 as 2017 an exceptional year of operation. Assuming higher plant efficiency is achieved at higher plant load factors above 60%.
Operating Revenue = Total tariff payment – Capacity payment
US$473m – US$258m = US$215m
Less : Cost of Coal (Est US$62.5 / tons) of US$183m = US$32m
Profit Margin before O&M per Kwh = US$32m/5,695,113,000Kwh = US$0.00562/Kwh
|
Capacity Utilisation (%) |
Net Output (Kwh) |
Efficiency (%) |
Tariff Payment Excluding Coal Cost (USD’m) |
|
60 |
5.810b |
34 |
290 |
|
65 |
6.294b |
35 |
300 |
|
75 |
7.262b |
36 |
315 |
|
80 |
7.746b |
37 |
328 |
|
85 |
8.230b |
38 |
341 |
|
90 |
8.714b |
38 |
346 |
Caution : To only based on one year of operation data to carry out sensitivity analysis is highly questionable. The results of analysis can vary substantially from actual operating results.
Conclusion:
This article confirms the followings;
- Capacity payment of PPA guarantees a return on investment.
- Capacity payment is fixed and unconditional.
- 2017 remained profitable despite shut down for 5 months due to unusually heavy rainfall.
- The PPA payment is relatively unaffected by changes in power and fuel prices, currency fluctuations and changes in interest rates.
- Around US$90m in annual distribution for the last 3 years despite less than optimal operation.
DK66
PS : Please press "like" if you concur with my peer analysis using Mong Duong II.
References
- Revenue from Contracts with Customers (Topic 606)
- https://asc.fasb.org/imageRoot/32/79982032.pdf
- IFRIC 12 Service concession arrangements
- https://www.iasplus.com/de/binary/dttpubs/1102ifric12guide.pdf
- Financial Reporting Brief: Roadmap to Understanding the New Revenue Recognition Standards
- https://www.aicpa.org/interestareas/frc/accountingfinancialreporting/revenuerecognition/downloadabledocuments/frc_brief_revenue_recognition.pdf
- AES-sustainability-report-2016-2017
- http://aesvcmmongduongpower.com.vn/AES-sustainability-report-2016-2017...
- AES Corporation Investor Presentation 2016
- https://s2.q4cdn.com/825052743/files/doc_presentations/2016/AES-Q4-FY-...
- AES Corporation Investor Presentation 2017
- https://s2.q4cdn.com/825052743/files/doc_financials/quarterly/2017/q4/...
- AES Corporation Investor Presentation 2018
- https://s2.q4cdn.com/825052743/files/doc_financials/quarterly/2018/q4/...
- AES Corporation Annual Report 2015
- https://s2.q4cdn.com/825052743/files/doc_financials/annual/2016/2015-AR-10-K-FINAL.pdf
- AES Corporation Annual Report 2016
- https://s2.q4cdn.com/825052743/files/doc_financials/annual/2017/2016-10-K-Wrap.pdf
- AES Corporation Annual Report 2017
- https://s2.q4cdn.com/825052743/files/doc_financials/annual/2017/81970_FINAL_JL_rev2.pdf
- AES Corporation Annual Report 2018
- https://s2.q4cdn.com/825052743/files/doc_financials/annual/2018/2018-AR-10-K.PDF
https://klse.i3investor.com/blogs/Jaks%20resources/204451.jsp
