This article was published on Dec. 19, 2024, at 2:40 p.m. on the Chosun Biz Money Move (MM) site.
Korea Midland Power is pushing for the sale of its management rights equity stake in Sangong Energy, a renewable energy generation subsidiary. This move is interpreted as an effort to sell non-core assets due to the worsening cumulative losses of its parent company, Korea Electric Power Corporation and five major power generation firms. The government is demanding state-owned enterprises to sell assets as part of a financial normalization plan.
According to investment bank (IB) industry sources on the 19th, Korea Midland Power has decided to sell its management rights equity stake in Sangong Energy and is in the process of selecting an advisory firm. A restricted competitive bidding process for choosing the advisory firm is expected to be completed soon, with plans to begin full-scale sales operations in early to mid-next year.
The sale target includes a total of 99.3% equity ownership in Sangong Energy, held by Korea Midland Power and Credit Energy First Special Purpose Company (FI), which owns 85% and 14.3%, respectively. Korea Midland Power plans to directly acquire the equity stake from Credit First and then proceed with the accompanying sale. The acquisition price for Korea Midland Power's equity stake in Sangong Energy is around 63.6 billion won. After including the FI stake and adding a management rights premium, the sale price is expected to be set around 100 billion won.
Credit Energy First is a special purpose company (SPC) established for the equity investment in Sangong Energy. Initially, the equity stake in Sangong Energy, previously owned by Hana Power Co., was acquired by ABFT Infrastructure Development, established by Kyobo Securities in 2015, and Credit Energy First later purchased this stake back for about 22.3 billion won. Kyobo Securities is the task manager for Credit First, while Bookuk Securities serves as the asset manager. At that time, Korea Midland Power guaranteed a compound annual yield of 4.5% to ABFT Infrastructure Development, and as Credit First acquired the equity, the guaranteed yield was amended to approximately 4.8% according to the shareholders' agreement.
Sangong Energy is a district energy company established in 2007 in Iksan, Jeollabuk-do, to produce and sell electricity and steam, primarily using renewable energy, such as refuse-derived fuel (RDF). At that time, member corporations of the Iksan Chamber of Commerce, including Mando and LG Chem, participated in the investment, supplying electricity and steam to companies located within the Iksan 2nd Industrial Complex. Currently, in addition to Iksan, they have established operations in Sejong and Wonju and are engaged in various activities, including operating an RDF cogeneration plant, power generation, heat supply, and maintenance and operation of power plants.
Recently, while power generation companies are making strides in renewable energy-related businesses, Korea Midland Power appears to have classified Sangong Energy's persistent losses as a non-core asset and is moving toward a sale. Sangong Energy recorded sales of 33 billion won and an operating loss of 1.5 billion won last year, and as of the third quarter of this year, it has reported 27.6 billion won in sales and an operating loss of 1.2 billion won. The background of Sangong Energy's continued losses is said to be attributed to the high cost of RDF and the discounted sales of electricity and steam to affiliated power trading companies and industrial complex firms. Additionally, annual interest expenses of around 1 billion won are also cited as a reason for the losses.
In addition to Sangong Energy, Korea Midland Power plans to sell equity stakes in European renewable energy companies starting next year. Earlier this year, it sold a 30% stake in the U.S. solar power project Boulder Solar 3 to Hanwha Energy.