In my first post on FGEN, I used my own calculation of **economic interest** in forecasting FGEN earnings. I find it confusing why FGEN’s annual reports would say that they have 49.50%^{[1]} economic interest in EDC while you would arrive at different percentages when you calculate the economic interest based on the corporate structure provided in their SEC filings.^{[2] }Below is my calculation on how the Company arrive at their figures:

The major difference between the calculation above and my calculation is the assigning of 100% economic interest in **Prime Terracota Holdings Corp**. As shown below, FGEN has only 45% economic interest in Prime Terracota Holdings Corp.

Probably the economic interests in the corporate structure provided in the SEC filings were not updated. We will use what the Company provided.

Below is the breakdown of FGEN’s earnings in 2012: (in thousands)

Below is the breakdown of FGEN’s earnings in September 2013:

The part that made computing for FGEN’s forecasted earnings difficult is the “Others” column since the details are not disclosed and we will have no idea what drives profit and losses of “Others” column.

Another issue for the “Others” column is the economic interest of FGEN the companies included in the “Others” column. I get through this hurdle by assigning 30% economic interest which yields close to actual figures in 2010 and 2011. I did not work back earnings in 2012 because it’s complicated by changes in percentage ownerships. Below is the chart comparing **approximate earnings using 30% economic interest** and **actual profit**:

As shown in the chart above, approximate earnings never go beyond actual earnings. The approximation may not be accurate but it does provide a valid margin of safety in forecasting FGEN earnings.

Estimating for the “Others” column profit or loss for 2014 and beyond is the weakness of the FGEN earnings forecast. To make matters worse, figures prior to 2012 could not be used for trending because of accounting treatment changes which leaves us with 2012 and 2013 quarters available for analysis. Sadly, the two years quarterly data does not give much insight without the full year figures.

To provide margin of safety in the forecast, doubling the losses in September 2013 may be a safe estimation of losses for 2014. Therefore, surprises will present itself should losses in the “Others” column exceed **$240 million. **Would losses exceed $240 million? Probably not, probably yes but with the public information available to us we can only assign a value pessimistic enough to provide margin of safety in our analysis.

With the hard part in the forecasting out, let’s focus on the more predictable business segments of FGEN: First Gas Philippine Corporation (FGPC), FGP Corporation (FGP), EDC, and FG Hyrdo. Below is a presentation of the profit or losses of FGEN’s business segments from 2008 to 2012: (in thousands)

At first glance, obtaining the average profit or loss figures on each business segments would make sense however there are events to be considered between 2008 and 2012 where we can conclude that assigning a profit or loss on the business segment to be assumed for the next 10 years is more reasonable than averaging the profit or loss in the past five years.

Profit or loss figures to be assumed in the next 10 years are as follows:

Putting all together the information presented above, computation of forecasted annual earnings will be the following:

**Comments:**

With forecasted annual earnings of $129,320 when FGEN’s business operations normalize or **P1.538** earnings per shares (EPS) (using a forex rate of **P40/$** and assuming that FGEN outstanding shares remains at **3.3 billion**) FGEN should be valued at **P15.38 **using a PE multiple of 10x. What if “Others” column of FGEN will report a breakeven operations or no profit nor any losses? Then FGEN’s EPS will jump to **P2.394 **or a valuation for FGEN of **P23.94**.

Among all the power companies, FGEN is the cheapest in terms of Book Value multiple:

Assuming that FGEN will trade at a multiple similar to GTCAP, FGEN should be valued at **P36.02 (P18.98 x 1.90).**

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**Source/Note:**

- FGEN 2012 Annual Report, p. 3, http://www.firstgen.com.ph/uploads/files/blurb-39_file-855_fgen2012ar_051513.pdf
- FGEN SEC 17-Q September 2013 filings, p. 30 – 31, https://www.pse.com.ph/resource/corpt/2013/FGEN_17Q_Sep2013.pdf
- FGEN SEC 17-A 2012 filings, p. 9, https://www.pse.com.ph/resource/corpt/2013/FGEN_17A_Dec2012.pdf
- FGEN SEC 17-A 2012 filings, p. 126, https://www.pse.com.ph/resource/corpt/2013/FGEN_17A_Dec2012.pdf
- Computation of approximate earnings:

**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.

**Disclosure:** I own FGEN shares