First Gen – Power generation

THE COMPANY: Incorporated in 1998, First Gen Corporation (First Gen) has a portfolio of 18 power generation plants, which are predominantly contracted for sale under long-term power purchase agreements or other energy sales agreements. First Gen's power generation portfolio primarily relies on indigenous fuels or clean and renewable energy like natural gas, water, geothermal steam and wind.

The company is currently the leading clean and renewable energy company in the Philippines, with an installed capacity of 2948 MW. As of 2013, First Gen accounted for about 17% of the total installed capacity in the Philippines. Furthermore, according to BusinessWorld’s list of the top-1000 companies in the Philippines in 2014, First Gen ranked 28th in terms of gross revenue and 36th in net income.

PERFORMANCE: While revenues from the sale of electricity in the first half of 2014 declined by 5% year-on-year (y-o-y) to $935.47m, net income saw robust growth of 32% y-o-y, to $102.59bn. The decrease in revenues was mainly due to the lower dispatch of the company’s gas plants, a decline in gas prices and reduced electricity generation following the temporary shutdown of Santa Rita’s Unit 40.

First Gen’s strong profit growth is largely thanks to the higher income contribution from Energy Development Corporation, FGP Corp and First Gas Power Corporation, in addition to lower expenses of Red Vulcan. This was partly countered by higher expenses incurred by First Gen coming from the interest expense on its $300m fixed-rate bond issuance, as well as the $7m expense on its various subsidiaries due to the development of several projects.

After a challenging year in 2013, First Gen has been in recovery in 2014, which will likely continue in 2015. The company’s weaker performance in 2013 was further aggravated by the impact of Typhoon Hayain, which damaged some of the company’s assets. Over the medium term, First Gen’s share price is likely to appreciate, driven by earnings growth from new plant developments, which will add more than 1300 MW in capacity over the next five years.

GROWTH DRIVERS: First Gen is continuing to pursue gas and renewable energy activities to boost its capacity by around 30% in an effort to meet the growing demand for power and expectations of tight power supply in the country.

Investments to be made by First Gen and its renewable unit Energy Development Corporation (EDC) will add 1342 MW of capacity by 2019, to bring the capacity of the company’s gas-fired facilities to 3000 MW. The expansion will include the 325-MW wind and geothermal plants, the construction of the 100-MW Avion plant in 2015, and the construction of the 414-MW San Gabriel gas-fired plant by 2016. There are also plans to add another 100 MW of gas-fired capacity by October 2015 and another 414-MW gas-fired power plant in 2017.

These additions will largely depend on the level of demand in the market, as well as the pace of industry expansion. According to statements made by the company’s CEO, Federico Lopez, the Luzon grid is expected to need another 600 MW of capacity to avoid a power shortage in 2016.

Apart from the power plants, First Gen is also planning to develop a liquefied natural gas (LNG) import terminal valued at $1bn in the vicinity of its three gas-fired power plants in Batangas province. Slated to start operations in 2018 or 2019, the LNG terminal will have an initial capacity of 1.5m tonnes per annum, which will help supply the company’s portfolio of gas-fired power plants.

LOOKING AHEAD: Utility companies in the Philippines are highly vulnerable to regulatory changes and face the risk that the regulators could prevent a rate hike or impose a price ceiling for their services. In addition, any delays in the completion of the company’s planned projects could mean that First Gen would realise projected earnings at a later date, which could in turn negatively affect its share price.

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The Report: The Philippines 2015

Capital Markets chapter from The Report: The Philippines 2015

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