First Gen Corp., the Philippines’s best-performing stock this year, is developing gas and renewable energy to boost capacity by about 30 percent, as growing demand threatens power shortages next summer.
The pace of economic expansion in Southeast Asia’s fastest-growing nation is in jeopardy if it fails to add enough generating capacity and replace expiring gas reserves with imports. President Aquino earlier this month sought emergency powers to bolster electricity supplies to avert shortages, after plant shutdowns and power failures earlier in the year. First Gen’s contribution is a $1.38-billion expansion that will start delivering power from the end of 2014.
“The stars are really aligned for the Philippines, presuming we can solve our short-term problems,” First Gen Chairman Federico Lopez said in an interview last week. “Power reserves are getting thin and plants are getting old. The outages seem to be increasing.”
The spending by First Gen, the Philippines’s second-largest electricity producer, and its renewable unit Energy Development Corp., will add 839 megawatts of capacity to their existing 2,800 MW. The expansion includes 325 MW of wind and geothermal this year, 100 MW of gas-fired power by April 2015, and 414 MW from the San Gabriel gas-fired plant by March 2016.
First Gen could add a further 100 MW of gas-fired capacity by October 2015 and another 414-MW gas plant in 2017, President Giles Puno said in the interview at the company’s headquarters in Manila.
The additions will depend on demand, the pace of wider industry expansion and the state of some of the nation’s older power plants, he said.
Market positioning
“We are preparing and positioning so that in case of a market opening we can accelerate these projects,” Puno said. “We are trying to build more gas-fired power plants.
The complicated part is that we have to make sure there’s enough supply of gas.”
First Gen owns two of three power plants supplied by Malampaya, the nation’s biggest gas field, which runs dry in 2024. The plants supplied by Malampaya hold 2,700 megawatts of capacity, or almost half the needs of the main island of Luzon, where the capital, Manila, is located. Luzon accounts for almost three-quarters of the nation’s economy. First Gen is studying the construction by 2020 of a $1.1-billion liquefied natural gas terminal that would import fuel and keep the plants operating when Malampaya expires, Puno said.
Economic growth
Philippine economic growth is expected at 6.2 percent this year and 6.4 percent next, according to the Asian Development Bank, the highest of the six nations in Southeast Asia. Electricity consumption, meanwhile, has jumped 50 percent in the 10 years to 2012, outpacing the 16-percent growth rate in generating capacity in the same period, according to government data. Bloomberg News
President Aquino’s call was for an extra 600 megawatts of capacity to avoid the summer shortage. By 2030, the government says the nation needs to add more than 13,000 megawatts—an 80 percent increase on current levels—to meet peak power demand, which it forecasts will grow 4 percent a year. About 1,800 megawatts of new capacity has been committed so far.
First Gen is among those companies poised to benefit, according to Steve Sevidal, chief investment officer at United Coconut Planters Bank in Manila, who is overweight on the power industry.
“The power sector promises plenty of upside because of the expansion being pursued by companies,” he said. “Existing capacities are also being improved. It will be a power play for 2015.”
Less Polluting
A unit of San Miguel Corp. is the nation’s largest power producer. It will build two power plants with a combined capacity of 900 megawatts by 2016, part of a plan to expand total capacity by 3,000 megawatts.
Cheaper to run and more efficient than oil-fired plants, and less polluting than coal, First Gen hopes its gas plants will give it an advantage when its supply contracts with Manila Electric Co., the nation’s largest power retailer, come due for renewal beginning in 2025, said Lopez.
First Gen’s planned capacity isn’t yet reflected in its shares, according to Puno.
“The market has to start taking into consideration the imminent nature of this new capacity and its impact,” he said. “The market is very short-term oriented, and until you have a power plant up and running and proving its reliability that’s the only time the market will reflect value.”
Shares Rally
First Gen shares have more than doubled this year, while Energy Development has climbed around 50 percent, rallying after aging plants and facilities damaged by last year’s Super Typhoon Haiyan were restored ahead of expectations. The Philippine Stock Exchange Index is up less than a quarter. Both stocks had plunged in 2013 in the aftermath of the typhoon and because of delays to the restart of one of Energy Development’s facilities.
“The shares have recovered from last year, when investors sold down the stocks because of the series of bad luck that hit the group,” said George Ching, an analyst at COL Financial Group Inc. in Manila. “Investors are just assuming that everything is working again. I don’t think they have fully priced in yet the impact of their expansion.”
Ian Sayson & Cecilia Yap | Bloomberg