Listed companies take on the power challenge

By Riza T. Olchondra, 08 July 2015
from Philippine Daily Inquirer

Since the power industry deregulation, more listed companies have been venturing into the sector amid growing demand for electricity to support economic activities, experts said.

“Major companies are trying to take advantage of the power shortage across the country. Given the fast growing economy, demand for power will steadily increase in the next few years,” said Lexter Azurin, Unicapital Securities Inc. equity research head, via text message.

Two of the more recent examples are the LT Group Inc. (backdoor listing in 2012), the holding company of liquor and tobacco tycoon Lucio Tan, and Zamora-led Nickel Asia Corp. (listed 2010). Both jumped into the latest trend in the power sector: Renewable energy (RE) generation.

ADI general manager and Tanduay Distillers Inc. (TDI) vice president for distillery operations Gerardo Tee said the project was the LT Group’s first venture into renewable energy.

“This is just the tip of the iceberg. We will build more, but we want to see first how the government manages FIT (Feed-in-Tariff) and what direction it is taking,” he told the Inquirer.

LT Group listed on the Philippine Stock Exchange through TDI in 2012. By then TDI had already acquired controlling interests in Asian Alcohol Corp. (AAC) and ADI—formerly known as Absolut Chemicals Inc.—on June 30, 2005. AAC and ADI supply TDI‘s alcohol requirements.

As for Nickel Asia, it ventured into RE by taking a majority stake in another Zamora-led firm, Emerging Power Inc. In April, Nickel Asia announced it was converting a P446-million loan extended to EPI to a controlling 55- percent stake in the RE firm.
Renewable energy

The purpose of the loan was to finance the drilling of two slim wells and related activities for EPI’s 40-MW geothermal power project in Oriental Mindoro.

Nickel Asia also agreed to infuse additional investment of P474 million into EPI that would be made in stages to increase its stake to 66 percent.

Acquiring EPI was Nickel Asia’s second energy venture which followed its 11-MW bunker-fired power plant project in Surigao City in 2013. Nickel Asia has two mining operations in Surigao del Norte province.

Apart from Montelago, EPI has a number of other RE projects such as a 10-MW solar project in Camarines Sur, a 2.5-MW biogas project in Quezon City, and a 10-MW solar and bunker hybrid project in Northern Palawan.

“It is our intention to grow EPI into a major business unit with exclusive focus on renewable energy,” Nickel Asia chair Manuel B. Zamora Jr. and president/CEO Gerard H. Brimo said in a joint report to stockholders.

Such investments in power generation are seen to help provide a steady income stream as demand for power continues to grow. In contrast, volatile metal prices made it difficult for Nickel Asia to boost earnings from its core business, which is mining.

Nickel Asia, the country’s biggest producer of lateritic nickel ore, operates the Rio Tuba mine (near Palawan), Cagdianao mine (Dinagat Island), Taganaan mine (Hinatuan Island) and Taganito mine (Surigao del Norte).

“Nickel Asia’s diversification into the lucrative power business is a good investment strategy, especially as an early bird among mining companies venturing into RE,” Astro del Castillo, managing director of First Grade Finance Inc., said in a telephone interview.

Given volatile metal prices, Del Castillo said power investments would give Nickel Asia a predictable revenue stream that was guaranteed for the next 20 years.

Sergio Osmena III

RE prices are fixed for a 20-year period under the FIT scheme of the Renewable Energy Act.

There seems to be a global trend of mining companies venturing into renewable energy, not only to secure their power requirements especially in areas where there is no stable grid connection electricity, but also as a long-term investment strategy.

US-based PikeResearch said companies had noticed that technologies and strategies were emerging to better manage energy consumption, costs, supply and risks.

Among the global companies that invested in renewable energy are Anglo American, African Rainbow Metals, AngloGold Ashanti, Areva, Barrick Gold Corp., BHP Billiton, Freeport Morgan, Galaxy Resources, Gold Corp., Gold Fields, JX Nippon Mining and Metals, Kinross Gold Corp., Mitsubishi Materials Group, Minerals and Metals Group, Rio Tinto, Teck Resources Ltd. and Vale S.A.

The PikeResearch report forecasts a substantial investment in energy conservation measures and renewable energy technologies in the next decade.

The report said that with average costs of all forms of energy anticipated to increase by 50 percent over the next 10 years, investments in renewable energy technologies would evolve into a major focus for the mining industry by 2050.

Del Castillo said RE was particularly appealing to those diversifying into power because it  was creating additional shareholder value by enhancing the corporate image as an environmental steward.

Gates to energy, power

Energy and power used to be the state’s domain, but the government has been, for the past decade or so, privatizing existing power plants and enticing investors to build additional ones.

Senator Sergio Osmena III, who heads the Senate’s Energy Committee, said there had been slow progress in privatizing energy and power assets held by the state through National Power Corp.

Napocor’s privatization was supposed to have been completed by 2004, but concrete attempts to privatize state-owned power generation plants started only in 2007 and the whole process has yet to be completed to this day.

“One of our biggest challenges is that the Philippines does not have the expertise needed to run the energy sector efficiently,” Osmena said.

Inefficient state management of its power stations combined with the impact of the Asian financial crisis [which made it harder to subsidize losses and inefficiencies] resulted in lack of generating capacity, insufficient reserve margins, and the resulting spikes in spot prices.

This spurred calls for Philippine companies not only to bid for energy assets being privatized but also to build new ones in purely private sector ventures.

Heeding the call for private sector participation, major companies that had specialized in other industries started learning the ropes and an increasing number of these firms have been going into energy and power.

Big names

Today, the Philippine Stock Exchange lists these companies under the energy and power sectors: Aboitiz Power Corp. (listed in July 2007): Alcantara-led Alsons Consolidated Resources Inc. (listed on April 12, 1993); Lopez-led Energy Development Corp. (December 2006), First Gen Corp. (February 2006) and First Philippine Holdings Corp. (May 1963); Manila Electric Co. (January 1992) of Pangilinan-led Metro Pacific Investments Corp. (December 2006); Petron Corp. (September 1994) of San Miguel Corp. (November 1948); Phoenix Petroleum Philippines Inc. (July 2007); SPC Power Corp. (April 2002); Trans-Asia Oil and Energy Development Corp. (January 1970) of the Phinma Group, and Cebu-based Vivant Corp. (June 1994) of the Garcia-Escano family.

New players have been heeding the call for more power projects, including Global Business Power Corp. of the George Ty-led GT Capital Holdings Inc. (April 2012) via power plants in Visayas; the Consunji family via Sem-Calaca Power Corp. (a unit of DMCI Power Corp.) and coal miner Semirara Mining Corp., both are under DMCI Holdings Inc. (listed March 1995), and Millenium Energy Inc., which acquired the 620-MW Limay coal-fired power plant from listed conglomerate San Miguel in 2011.

Major families in Philippine business, the Ayalas and the Sys, also joined the RE bandwagon via partnerships.

Ayala Corp. (AC), the country’s oldest conglomerate (listed November 1976), started exploring solar energy prospects in 2010 through its joint venture with Mitsubishi and in run-of-the-river hydropower via its joint venture with Sta. Clara Power.

AC formalized its entry into the power generation business in 2011 by buying a 50-percent stake (for P500 million) in NorthWind Power Development Corp. through unit AC Energy Holdings Inc. NorthWind operates the 33-MW wind farm in Bangui Bay in Ilocos Norte.

In November 2014, Sy-led SM Prime Holdings Inc. (listed July 1994) switched on a 1.5-MW rooftop-mounted solar power farm and power station at the multilevel car park building of SM City North Edsa. The project was done in partnership with Solar Philippines.

The SM group is expected to put up more solar rooftops in its malls and other assets.

Some foreign-controlled companies in the Philippines whose parent-firms are listed in their respective countries are also into energy and power projects. These are: American-led firm AES, which won the bid for Masinloc power plant in Zambales, Thai firm EGCO International Co. Ltd. and Japanese firm Team Energy, which has more than 2,000-MW capacity in power projects in the country.

While the Department of Energy said there could be an oversupply of power by 2018, industry observers said power demand could grow faster than supply.

As urbanization spreads to suburbs and even to remote areas such as islands now  served by modern power stations, pent up demand for electricity is seen to skyrocket.

And with the emergence of electric vehicles, smart appliances and smart grids, it will take a lot more megawatts to satisfy the nation’s growing appetite for electricity. It’s up to energy and power services firms to lead the way to power stability, experts said.

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