If First Gen loses EDC, what’s left for Piki Lopez?

Notes on the beat

MANILA, Philippines — First Gen Corp. has defied odds and stayed resilient even after losing control of its natural gas business. But if another crown jewel slips away, billionaire Federico “Piki” Lopez may have to rewrite the group’s clean energy story.

First Gen, the power arm of the Lopez Group, has found itself at the center of a $5-billion takeover bid from Indonesia’s PT Barito Renewables TBK (BREN) for Energy Development Corp. (EDC), the Philippines’ largest geothermal power producer.

Since the government’s full exit in 2007, EDC has become deeply tied to First Gen’s identity and has served as one of the strongest pillars of its clean energy strategy.

The offer could hand First Gen a significant windfall. But selling EDC could also mean giving up a business that has been a stable force behind the group’s earnings.

“EDC is not simply another subsidiary but one of the principal contributors to First Gen’s recurring earnings and strategic identity,” Globalinks Securities and Stocks Inc. head of sales trading Toby Allan Arce told The STAR.

EDC and its subsidiaries currently own and operate geothermal, wind and solar power plants with a combined installed capacity of more than 1,400 megawatts (MW).

In the first quarter, EDC was First Gen’s primary revenue contributor, accounting for 88 percent of the company’s topline.

Its attributable recurring income during the period reached P1.4 billion, reflecting a 16-percent increase from the previous year’s P1.2 billion.

With one of the world’s largest vertically integrated geothermal portfolios, EDC is generally less exposed to commodity price volatility.

“Divesting EDC would therefore remove a high-quality recurring earnings stream that has historically provided stability to First Gen’s overall financial performance,” Arce said.

Without EDC, Piki and First Gen would be left with at least three hydro assets totaling 299.4 MW in Nueva Ecija and Bukidnon.

The company may also continue to rely on its 40-percent stake in the gas portfolio now controlled by tycoon Enrique Razon Jr.’s Prime Infra, as well as its retail electricity supply business.

Still, questions remain on whether these assets would be enough to drive First Gen’s long-term growth.

For China Bank Capital Corp. managing director Juan Paolo Colet, First Gen should seriously consider monetizing its geothermal business.

Colet noted that First Gen’s 45.8 percent economic stake in EDC could translate into proceeds of roughly $2.29 billion. Based on current foreign exchange rates, this presents the company a one-time gain of around P141 billion.

Arce, however, stressed that the success of any potential transaction would depend on First Gen management’s ability to redeploy the proceeds into new assets and businesses that can replace the steady income currently generated by EDC.

“Unless management has a compelling long-term reinvestment strategy, investors may ultimately conclude that retaining a world-class renewable platform creates greater shareholder value than monetizing it, even at an attractive valuation,” he said.

Even if no agreement is reached, Arce said BREN’s non-binding offer has already underscored the strategic value and strong market interest surrounding EDC’s portfolio.

On a broader scale, Rizal Commercial Banking Corp. chief economist Michael Ricafort said a potential deal between First Gen and BREN could be a win for the country.

“More foreign investments in the local renewable energy (sector) would increase local power supply, help reduce electricity prices and also reduce reliance on imported fuels,” Ricafort told The STAR.

For First Gen, the real test is not losing EDC; it is proving what comes next. The market now awaits Piki’s next move and, hopefully, First Gen’s disclosure.