Energy Development Corporation: Energy

THE COMPANY: Energy Development Corporation (EDC) is a pioneer in the geothermal energy industry, focusing on developing and commercialising renewable energy for the past 30 years. At present, EDC has about 1400 MW of investments in its green energy portfolio. The company has also been diversifying its business, with investments in hydroelectric and wind power projects. EDC currently provides such services as exploration and assessment of geothermal fields, technological development training and field development. EDC has four geothermal plants, the largest of which is the Leyte geothermal production field, with a plant capacity of over 700 MW.

The company also has a number of projects in the pipeline. The Bac-Man geothermal plant in Albay, south of Manila, is expected to provide up to 150 MW of power, while a second plant in Cotabato in Mindanao is expected to produce 40 MW of power. EDC also supplies 112.5 MW of hydro power through its Pantabangan-Masiway plant in Nueva Ecija, located north of Manila. A new wind power plant is also scheduled to be built in the medium term.

BUSINESS PERFORMANCE: EDC had a net income of P1.81bn ($41.09m), which was enough to reduce its year-to-date net loss to P488m ($11.08m). The loss for the year is largely attributable to a non-cash, non-recurring full impairment charge of P5.1bn ($115.77m) in June due to the shutdown of its 49-MW Northern Negros geothermal power plant. The stock, however, is up 8.2% year-to-date, higher than the 4% year-to-date return of the Philippine Stock Exchange index. The main reason for the stock’s resilience, despite the recent soft earnings, is due to strong expectations that the company would return to profitability by the second half of 2011 or at least by 2012. The eventual full commercial operations of the Bac-Man plant is expected to provide a much-welcomed earnings boost for the company. Furthermore, higher tariffs placed on Green Core Geothermal, a subsidiary of EDC’s First Luzon Geothermal Energy operating plants, are now feeding through, with full-year effects to be felt in 2012.

Revenues from ancillary services, such as hydro, provide a potential upside as well. In fact, the Energy Regulatory Commission approved, on a provisional basis, the ancillary services procurement between FG Hydro and the National Grid Corporation of the Philippines in July 2011. This development may generate up to P1.5bn ($34.05m) in additional revenue each year. The contract would also provide fixed returns, unlike the erratic movements in the spot market.

Meanwhile, the company said that it remains committed to its overseas expansion initiatives. EDC has applied for more than 10 concession areas in Chile and the results of these applications will be known within the year. If approved by the Chilean government, these overseas expansion plans would prove to be beneficial for the company over the long term.

EDC’s bright growth prospects in 2012 are accompanied by attractive valuations as well. The stock’s forecast price-to-earnings (P/E) ratio of 21.23x for 2012 is lower than the country’s respective 2012 forecast P/E of 12.52x and its industry’s trailing 12-month P/E of 20.35x. As a result, the stock is considered to be cheap relative to its peers, and there is potential upside from its current level.

A major competitive advantage that EDC has over other local generating companies is that it is a pure renewable energy company, possessing interests in geothermal energy and hydro power. This insulates the company from volatile movements in commodity prices, such as coal and fuel.

OUTLOOK: Overall, EDC’s stock has strong growth prospects for 2012, resulting from a possible recovery in spot market prices, the permanent earnings boost from ancillary services and attractive valuations against industry peers. EDC’s growing cash position may also support its plans to bid for the government’s remaining power generating assets, providing yet another possible avenue for growth in the future.


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