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Saturday, December 22, 2012

Energy Development Corporation

Company Profile

Energy Development Corporation (PSE:EDC) was incorporated and registered with the Securities and Exchange Commission (SEC) on March 5, 1976 to primarily engage in the business of exploring, developing and operating geothermal energy projects in the Philippines. It began commercial operations with the commissioning of its first steamfield in 1983, and expanded to provide geothermal drilling and consultancy services. EDC became a subsidiary of Red Vulcan Holdings Corporation on November 29, 2007. 

EDC operates 12 geothermal steamfields in five geothermal service contract areas where it is principally involved in the production of geothermal steam for sale to the National Power Corporation (NPC), privately-owned distribution utilities, large industrial customers, pursuant to power purchase agreements and power supply agreements. EDC also has drilling activities in Papua New Guinea. The Company is also into hydro power generation through its 60% equity interest in FG Hydro which operates the Pantabangan and Masiway Hydroelectric Power Plants in Nueva Ecija. The Company likewise provides drilling services to the Lihir Gold Limited in Papua New Guinea.

In September 2011, the SEC approved the incorporation of Bac-man Energy Development Corporation and Kayabon Geothermal, Inc. as wholly-owned subsidiaries of EDC Geothermal Corporation, to carry on the general business of generating, transmitting, and/or distributing energy derived from any and all forms, types and kinds of energy sources for lighting and power purposes and whole-selling the electric power to power corporations, public electric utilities and electric cooperatives.

Income and Operations

EDC's sales volume are primarily derived from Leyte, Mindanao, Tongonan I, and Palinpinon geothermal power plants and Pantabangan-Masiway hydro power plants. Their main customers are the National Power Corporation, electric cooperatives and industrial customers in the Visayas region and the Wholesale Electricity Spot Market. The electricity generated by the Company’s geothermal power plants is transmitted to customers i.e., distribution utilities, electric cooperatives or bulk power customers by the NGCP through its high voltage backbone system.

On May 5, 2010, BGI, the Company’s wholly-owned subsidiary through EDC Geothermal Corporation, submitted the winning bid of US$28.25 million for PSALM’s auction of the 150 MW Bac-Man Geothermal Power Plants located in the towns of Bacon, Sorsogon Province and Manito, Albay Province. The power plants were turned over to BGI in September 2010, and are currently under rehabilitation to restore capacity and reliability.

Stocks Valuation

EDC currently trades at 16.6x PE. The stock has had unsteady price movements, which primarily depended on news on its Bacman plant rehabilitation.

What's to Like?

For awhile it looked as if EDC was solely dependent on its Bacman plant to drive future sales growth. A closer look on their financials gives us other projects that can potentially make up for the delay in rehabilitation of Bacma plant. The Nasulo steam field has an available capacity of 20MW and is expected to be operational by 2Q14. The there is also the 86MW Burgos Wind project located in Norther Luzon.

Why Get Cautious?

Delays in the rehabilitation of Bacman power plant raises questions on the ability of management's commitment to address the issue. Barring further delays, the plant is now expected to be fully operational by 2Q13, one quarter later than the original target.

Update: In January, 2013, EDC resumed commercial operations in Bacman unit 1 and 2. By the end of February, the two units had to be shut down again after a turbine blade was sheared of at the second unit, prompting EDC to take precautionary measures. At April 5, EDC disclosed that Unit 1 of Bacman power plant is up and running at 55-megawatt capacity. The company did not mention when the unit 2 operations will resume.    

Buffett Recommends...

EDC is a pure play on renewable energy since all of its power plants are renewable energy plants, making the company a major beneficiary of rising coal and oil prices. It does not offer a huge upside if Bacman plant encounters further delays. It would be more prudent to wait awhile until stock prices have substantially decreased or Bacman becomes fully operational before committing to invest long term.

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