MARKET TESTING
ON THE PROPOSED SUBSCRIPTION BY MERALCO POWERGEN CORPORATION AND THERMA NATGAS POWER INC. OF
67% EQUITY INTEREST IN EACH OF SOUTH PREMIERE POWER CORP., EXCELLENT ENERGY RESOURCES, INC., AND
ILIJAN PRIMELINE INDUSTRIAL ESTATE CORP. AND THE PROPOSED ACQUISITION OF SHARES BY
MERALCO POWERGEN CORPORATION AND THERMA NATGAS POWER INC, AND
SAN MIGUEL GLOBAL POWER HOLDINGS CORP. IN LINSEED FIELD CORPORATION.
(M-2024-006 / M-2024-007)

 

Stakeholders and interested parties in the market are invited to submit feedback on the suitability and effectiveness of the proposed voluntary commitments regarding the (i) proposed subscription by Meralco PowerGen Corporation (“MGen”) and Therma Natgas Power Inc. (“Therma”) of 67% equity interest in each of South Premiere Power Corp. (“South Premiere”), Excellent Energy Resources, Inc. (“Excellent Energy”), and Ilijan Primeline Industrial Estate Corp (“Ilijan Primeline”) (referred to as the “Acquisition of Power Plants”) and the (ii) proposed acquisition of shares by MGen, Therma, and San Miguel Global Power Holdings Corp. (“San Miguel Power”) in Linseed Field Corporation (“LFC”) (referred to as the “Acquisition of LNG Terminal Facility”, collectively “Acquisitions”) which is currently under review by the Philippine Competition Commission’s (“Commission” or “PCC”) Mergers and Acquisitions Office (“MAO”).

Parties to the Transaction

MGen is a domestic company and a subsidiary of Manila Electric Company (MERALCO), engaged in the power generation business.[1] MGen’s ultimate parent entity (“UPE”) is Pilipinas Enterprise Management Holdings, Inc (“PEMHI”).

Therma is a domestic company and a subsidiary of Aboitiz Power Corporation through Therma Power Inc., which manages investments and interests in various non-renewable energy projects.[2] Therma’s UPE is Aboitiz & Co. Inc. (“ACO”).

San Miguel Global Power is a domestic power company and a subsidiary of San Miguel Corporation.[3] Its subsidiaries include: South Premiere, which owns and operates the 1278 combine cycle power plant located in Brgy. Ilijan, Batangas City; Excellent Energy, which owns and operates the 1320 MW combined cycle power plant located in Brgys. Ilijan and Dela Paz Proper, Batangas City; and Ilijan Primeline, which owns parcels of land leased to Excellent Energy for its power plant and to LFC for the Liquefied Natural Gas (“LNG”) terminal facility.[4] The UPE of San Miguel Power, South Premiere, Excellent Energy, and Ilijan Primeline is Top Frontier Investment Holdings, Inc. (“Top Frontier”).

LFC is a domestic company that owns and operates the LNG Terminal.[5] LFC’s UPE is Blossompine Holdings Inc. (“Blossompine”).

Collectively, the PEMHI as the UPE of MGen, Top Frontier as UPE of San Miguel Power., South Premiere, Excellent Energy, and Ilijan Primeline, ACO as UPE of Therma Natgas, and Blossompine as UPE of LFC shall be referred to as the “Notifying Parties”.

MGen and Therma shall acquire South Premiere, Excellent Energy, Ilijan Primeline, and LFC (referred to as “Acquired Entities”) through Chromite Gas Holdings, Inc. (“Chromite“), a special purpose domestic holding corporation. Chromite was incorporated to hold the shares in the Acquired Entities on behalf of MGen and Therma. It has no other operations or investments at present.[6] Currently, MGen beneficially owns 60% of Chromite, while Therma owns the remaining 40%.[7]

Abstract of the Transaction

In the Acquisition of Power Plants, MGen and Therma, through Chromite, will acquire 67% interest in each of South Premiere, Excellent Energy, and Ilijan Primeline.[8]

In the Acquisition of LNG Terminal, MGen and Therma, through Chromite, and San Miguel Power will acquire approximately 100% of LFC.[9]

Post-Acquisitions, MGen and Therma will own 67% of the South Premiere, Excellent Energy, Illijan Primeline, and LFC through Chromite, in which MGen and Therma have a 60% and 40% stake, respectively, while San Miguel Power will retain the remaining 33% share in South Premiere, Excellent Energy, and Ilijan Primeline, and acquire a 33% share in LFC.[10]

Review of the Transaction and Proposed Voluntary Commitments

The MAO is currently reviewing the interrelated Acquisitions and assessing how they could potentially impact various aspects of the energy sector. More particularly, the review aims to look closely into how these Acquisitions might impact market competition, energy security, pricing, and other potential effects in the relevant markets identified.

During the course of the review, the Notifying Parties proposed commitments which aim to address the following potential competition concerns, specifically their ability and incentive to:

• Exercise unilateral market power and increase the likelihood of coordination due to changes in market conditions in the national conventional power generation; and
• Increase likelihood of input and customer foreclosure strategies in the conduct of Competitive Selection Process (“CSP”) for the supply of conventional energy to distribution utilities (“DU”).

The Notifying Parties also recognize that PCC needs to monitor their participation in the nationwide electricity distribution through retail electricity suppliers (“RES”).

In order to address the competition concerns, the Notifying Parties have offered several commitments for a period of five (5) years from the consummation of the proposed Acquisitions.

In relation to the exercise of unilateral market power, the Notifying Groups[11] shall submit to the MAO an outage report on any unplanned or unscheduled outage of a generating facility utilizing conventional energy, in the same format and with the same contents as submitted to the Department of Energy (“DOE”), of each Generation Companies (“GenCo”) within seven (7) days from the submission of the same report to the DOE.

To address the likelihood of coordination in the national conventional power generation, each of the DU of the Notifying Groups shall provide the MAO a copy of any Terms of Reference (“TOR”) for a CSP at least seven (7) days prior to its submission to the DOE, and further advise the MAO once such TOR has been submitted, in accordance with the applicable regulatory requirements of the DOE and Energy Regulatory Commission (“ERC”).

Furthermore, the DUs shall provide the MAO a copy of the TOR after DOE approval to enable a MAO representative to attend and observe the pre-qualification conferences, pre-bid conferences, bid opening, and awarding ceremonies. This allows the MAO sufficient opportunity to review and provide inputs while maintaining the primary mandate of the DOE and ERC in regulating CSPs.

In connection with this, the DUs shall submit various documents within fifteen (15) days from receipt of the Notice of Virtual Hearing from the ERC, including:

1. Power Supply Agreement (“PSA”);
2. DOE Certificate of Conformity, Letters, Comments and relevant communications received from the DOE or ERC;
3. Invitation to Bid, approved or cleared by the DOE or ERC;
4. Results of Bidding, approved or cleared by the DOE or ERC;
5. Copies of the workbooks of the participating bidders to the MAO, when required;
6. Minutes of the meetings of the Bids and Awards Committee; and
7. Information on PSAs procured through direct negotiations, as applicable.

Additionally, the DUs conducting CSPs shall establish a separate working group for determining the Reserve Price relative to a CSP and adopt guidelines or processes to ensure that the Reserve Price is kept strictly confidential, including minimizing the period between the determination of the Reserve Price and opening of the financial proposals/bids. Further, the DU shall update the Abstract of Bids on their official website and ensure that the information remains updated and accessible. Accordingly, the DUs, shall incorporate a provision in the draft PSAs for CSPs requiring compliance with the Philippine Competition Act (“PCA”), its implementing rules and regulations, and other PCC regulations, particularly those concerning anti-competitive behavior, discriminatory conduct, and exclusionary behavior.

The Acquired Entities shall: (i) maintain a separate IT systems, platforms, and servers from any DU or GenCo of their respective Notifying Groups; (ii) ensure sufficient digital safeguards to prevent dissemination of competitive information; (iii) maintain separate physical offices in Batangas, with possible satellite office in Metro Manila; and (iv) complete the transition to separate offices and digital safeguards within one year from closing of the proposed Acquisitions. To ensure compliance, the Notifying Groups shall provide to the MAO:

1. Detailed plan to implement the transition to separate offices and putting up separate digital safeguards within sixty (60) days from the consummation of the proposed Acquisition;
2. Written updates to be submitted within fifteen (15) days from the end of each calendar quarter regarding the status of implementation until the transition is completed following the consummation of the proposed Acquisition;
3. Written notice to the MAO that the transition has been completed, accompanied by a report from a reputable auditing firm, confirming that the IT Systems of the Target Companies are physically separate from the systems of the DUs and GenCos of the Notifying Groups within thirty (30) days from the completion of the transition;
4. An opportunity to inspect the offices and the IT Systems of the Acquired Entities during reasonable hours on business days, subject to at least a seven (7)-day prior written notice; and
5. Written compliance reports prepared by each of the Acquired Entities, to be submitted within thirty (30) days from each anniversary of the completion of the transition, confirming that the IT Systems of the Acquired Entities remain physically separate from the systems of the DUs and GenCos of the Notifying Groups.

In addition to digital and physical safeguards, the Notifying Parties have committed that there shall be no overlap in key management personnel between the Acquired Entities and the DUs, GenCos, and RES entities of the Notifying Groups to ensure that no single entity will be able to control the business operations of the Acquired Entities, specifically for the positions of (i) President / Chief Executive Officer, (ii) Chief Operating Officer, (iii) Chief Financial Officer, (iv) Chief Commercial Officer, (v) Corporate Secretary, and (vi) Assistant Corporate Secretary (“Principal Officers”). To ensure compliance, the Notifying Parties shall provide the MAO a copy of the annual General Information Sheet that is submitted by the Acquired Entities within seven (7) days from its filing with the Securities and Exchange Commission and a written notice within seven (7) days in case there is any change in the Principal Officers.

For the operation of South Premiere and Excellent Energy, both entities shall have their own separate internal trading units, independent from the trading units of the GenCos and DUs of the Notifying Groups, within sixty (60) days from consummation of the proposed Acquisition. To ensure compliance, the Notifying Groups shall submit to the MAO, within seven (7) days of either: (i) engagement of the third-party company or (ii) decision to utilize an internal trading unit, written notification with documentation demonstrating the independence of either entity.

To enable the PCC to monitor the participation of the Notifying Parties in the nationwide electricity distribution through RES, the Notifying Groups shall submit an annual report regarding the PSAs entered into by the GenCos of a Notifying Group with the RES Entities of the other Notifying Groups, indicating the identity of the parties, the date of execution, the contract capacity, term of the PSA, and type of price structure, whether fixed v. indexed, and provide to the MAO copies of the Competitive Retail Electricity Market reports submitted by its RES Entities to the ERC, within fifteen (15) days from the end of each calendar quarter.

Finally, the Notifying Groups undertake to: (1) continue compliance with all applicable laws and regulations relating to electric power industry, including but not limited to the PCA, its implementing rules and regulations and relevant PCC regulations, Electric Power Industry Reform Act of 2001, Wholesale Electricity Spot Market rules, and other DOE and ERC regulations covering anti-competitive behavior; and (2) provide written notice to the MAO in case it has signed any definitive agreement relating to any merger or acquisition, including a lease over a conventional energy generation facility that would lead to an increase in the installed generation capacity attributable to the relevant Notifying Group, within thirty (30) days from the signing of the definitive agreement, indicating the parties and the nature of the transaction.

To monitor the compliance of the Voluntary Commitments and maintain relevant corporate records related to the Voluntary Commitments, each of the Notifying Groups shall appoint a Competition Compliance Officer. Also, a third-party monitor shall be appointed to independently assess and report on the adherence to these commitments.

If the PCC identifies any material and substantiated deviation, it shall provide written notice with supporting documents to the non-compliant Party, allowing them to explain their position. Should the explanation be deemed insufficient, the Commission may require implementation of Remedial Measures within a reasonable period, subject to the Party’s right to seek reconsideration under applicable law.

In case of non-compliance with any of the Voluntary Commitments, the Notifying Group shall be subject to penalties under Section 29(b), (c) or (d)^[12] of the PCA and relevant PCC rules regarding fines and penalties and Section 11.4.1^[13] of the PCC’s Rules on Merger Procedure.

Submission of Comments

Stakeholders’ comments on these voluntary commitments are critical to the MAO’s ongoing assessment. Comments may be submitted until 06 December 2024 via e-mail to mergers@phcc.gov.ph with subject title “Comments on MGen-Therma-San Miguel Power-LFC Acquisitions VC” or via mail to Philippine Competition Commission located at 25^th floor, Tower 1, Vertis North Corporate Center, North Avenue, Quezon City 1105.

[1] MGen Company Overview. Accessed at https://meralcopowergen.com.ph/about/.

[2] Aboitiz Power’s Securities and Exchange Commission (“SEC”) Disclosure. Accessed at https://aboitizpower.com/uploads/media/AP-17C-Disclosure-030124-Therma-NatGas-Signs-Agreement-for-the-Acquisition-of-Stake-in-Chromite-Gas.pdf.

[3] San Miguel Business Profile – Power. Accessed at https://www.sanmiguel.com.ph/our-story/our-businesses/power.

[4] Aboitiz Power Letter to Philippine Stock Exchange, Inc. (“PSE”) Accessed at https://aboitizpower.com/uploads/media/AP-LETTER-030824-PSE-re-Response-to-Exchange%27s-Query.pdf; San Miguel Global Power Holdings Corp.’s Annual Report submitted to SEC. Accessed at https://www.smcglobalpower.com.ph/storage/files/reports/17-A/San%20Miguel%20Global%20Power%20Holdings%20Corp.%20SEC%20Form%2017-A%20(2023%20Annual%20Report)_15%20April%202024.pdf.

[5] Aboitiz Power Letter to PSE Accessed at https://aboitizpower.com/uploads/media/AP-LETTER-030824-PSE-re-Response-to-Exchange%27s-Query.pdf; San Miguel Global Power Holdings Corp.’s Annual Report submitted to SEC. Accessed at https://www.smcglobalpower.com.ph/storage/files/reports/17-A/San%20Miguel%20Global%20Power%20Holdings%20Corp.%20SEC%20Form%2017-A%20(2023%20Annual%20Report)_15%20April%202024.pdf.

[6] Manila Electric Company’s PSE Disclosure. Accessed at https://www.pds.com.ph/wp-content/uploads/2024/03/Disclosure-No.-754-2024-Material-InformationTransactionsCorporate-Actions-Amended-1.pdf.

[7] Joint Development of Integrated LNG Facility in the Philippines. Accessed at https://www.firstpacific.com/media/normal/16945_2024030400449.pdf.

[8] Id.

[9] Id.

[10] Manila Electric Company’s SEC Disclosure. Accessed at https://edge.pse.com.ph/downloadHtml.do?file_id=1449066

[11] Notifying Groups shall be refer only to PEMHI, Top Frontier, and ACO.

[12] PCA. Section 29. Administrative Penalties xxx

(b) Failure to Comply With an Order of the Commission. – An entity which fails or refuses to comply with a ruling, order or decision issued by the Commission shall pay a penalty of not less than fifty thousand pesos (P50,000.00) up to two million pesos (P2,000,000.00) for each violation and a similar amount of penalty for each day thereafter until the said entity fully complies. Provided that these fines shall only accrue daily beginning forty-five (45) days from the time that the said decision, order or ruling was received.

(c) Supply of Incorrect or Misleading Information. – The Commission may likewise impose upon any entity fines of up to one million pesos (PI,000,000.00) where, intentionally or negligently, they supply incorrect or misleading information in any document, application or other paper filed with or submitted to the Commission or supply incorrect or misleading information in an application for a binding ruling, a proposal for a consent judgment, proceedings relating to a show cause order, or application for modification of the Commission’s ruling, order or approval, as the case may be.

(d) Any other violations not specifically penalized under the relevant provisions of this Act shall be penalized by a fine of not less than fifty thousand pesos (P50,000.00) up to two million pesos (P2,000,000.00).

[13] Section 11.4.1. In the event that parties fail to abide by their commitment, the PCC may impose fines, additional remedies, and such other measures as it may deem necessary, including nullifying the commitment decision.

 

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