Is FGEN a Victim of Market Folly?

First Gen Corporation (the Company, FGEN) is one of the Companies that have a corporate structure that is hard to understand:

FGEN1 FGEN2

FGEN derives significant revenues from the following subsidiaries:

FGEN3

Calculation of FGEN’s EDC and FG Hydro effective interests are presented below:

FGEN4

Below is the simplified ownership structure of FGEN on significant subsidiaries:FGEN5

Four significant negative events happened to FGEN during the year 2013. First, commercial operations of Bacman Geothermal Project of FGEN’s subsidiary, EDC, were delayed due to technical problems.[1] Second, a fire incident happened at the San Lorenzo Power Plant which burnt their 250MW transformer.[2] Third is the Malampaya maintenance shutdown[3] which forced FGEN to minimize electricity sales for a month. And lastly, the significant damage that typhoon Yolanda had brought to FGEN’s subsidiary, EDC.[4]

The most significant blow for FGEN is the damage of that the super typhoon had brought to its subsidiary, EDC. Super typhoon Yolanda had damaged EDC’s whole Leyte operations (Tongonan and Unified Leyte). In order to have an idea of the damage, below is the 2012 revenue contribution of each of EDC’s power generation operations:FGEN6

The whole Leyte operation contributed P14.47 billion or 51% of 2012 revenues which is significant. The cooling towers of the Leyte operations are damaged and will take a year to fully restore typhoon-damaged equipments.[5]

What do the above events mean to FGEN?

A new 250 MW transformer will probably be installed this December as the installation of new transformer was expedited based on a disclosure on November 12, 2013.[6] We may now expect San Lorenzo natural gas power plant to contribute higher revenues in 2014.

EDC’s accounting policy expenses outright any costs incurred on restoring and rehabilitating facilities.[7] Thus, we may expect EDC’s earnings to recognize losses from the damages from typhoon Yolanda confirming a statement on an article that Yolanda damage will wipe out P4.2 billion first half profit of EDC.[8]

In my opinion, EDC facilities are covered by insurance although the details of the coverage were not disclosed in the financial statements. Therefore, we may expect insurance gains on 2014.

Putting It All Together

For the months of July – September, EDC reported earnings of P1.9 billion and P5.3 billion earnings for January to September of 2013. Assuming that EDC first half-earnings were indeed wiped out, it would then be conservative to estimate EDC to recognize earnings of P1.5 billion for 2013. Computation below assumes earnings of other subsidiaries for 2013 will be the same as September 2013 earnings.

FGEN7

Assuming that 2013 earnings will be at $0.031 or P1.364 (0.031 x P44) at a PE ratio of 10x we can value FGEN at P13.64. FGEN’s 2014 prospects remains promising regardless of EDC’s earnings on a slump. FGPC was in major maintenance shutdown from January-May 2013 and will contribute for the full year of 2014. FGP will operate at full capacity in 2014 as the burnt transformer will be replaced. FGPC and FGP’s “normal” annual earnings do not go below US$80,000 and US$45,000.

Currently FGEN is valued as though earning power of the Company is permanently impaired.

 

Sources:

  1. Statement by EDC re: temporary suspension of operations of Bacman
    Geothermal Project, http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-1875_FGEN.pdf
  2. Fire incident at San Lorenzo power plant owned by FGP Corp., http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-4361_FGEN.pdf
  3. Malampaya opts to delay maintenance shutdown, http://www.businessmirror.com.ph/index.php/en/business/companies/22448-malampaya-opts-to-delay-maintenance-shutdown
  4. Findings from assessment of the Unified Leyte facilities due to Super
    Typhoon Yolanda, http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-8352_EDC.pdf
  5. Yolanda-hit Unified Leyte geothermal plant to be restored in a year – EDC official, http://www.gmanetwork.com/news/story/338121/economy/companies/yolanda-hit-unified-leyte-goethermal-plant-to-be-restored-in-a-year-edc-official
  6. Press Release: “FGP Corp. expedites manufacture and delivery of replacement transformer; arrives in Cebu aboard world’s biggest aircraft”, http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-8197_FGEN.pdf
  7. Amended 2012 Annual Report, Note 23, p. 173, http://www.pse.com.ph/resource/corpt/2013/EDC_A17A_Dec2012.pdf
  8. EDC loses ‘billions’ in Leyte devastation; Yolanda damage may wipe out 2013 profit, http://www.interaksyon.com/article/76299/cocktales–edc-loses-billions-in-leyte-devastation–yolanda-damage-may-wipe-out-2013-profit

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

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3 thoughts on “Is FGEN a Victim of Market Folly?

  1. Thanks Bro Renz, It clarifies on what I have in my notebook. I bought FGEN at 12.80 and so far the selling has bottom out. (Even if PSE is selling out) I’m currently waiting for the news for the 250mw San Lorenzo plant.

    I’m holding this one out as I expect everything should be back to normal in a year or two.

    Reply
  2. Pingback: Investing in 2014: How About The Philippines? | Elliott Morss

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