June 29, 2015

MER's Subic coal-fired power project to be scaled down

BusinessWorld today reported that Redondo Pensisula Energy Inc (RP Energy) may have to reduce the capacity of its planned 600 MW coal-fired power plant in Subic due to transmission line issues. RP Energy is a consortium among Manila Electric Co (MER) wholly-owned subsidiary MERALCO PowerGen Corp (MGEN, 47%), Aboitiz Power Corp (AP, 25%), Taiwan Cogeneration International Corp (25%) and MERALCO Pension Fund (3%).

The MER chairman was quoted as saying the transmission line from the power plant to the grid will have to go through areas occupied by indigenous people and reserved areas, and are thus protected by law. As a result, the company said it may reduce the capacity of the Subic project by half to 300 MW from 600 MW originally if the transmission issue is unresolved. There is no clear indication yet if the project will be expanded to its original capacity pending talks with the National Grid Corporation of the Phils (NGCP).

Our take: We ran a sensitivity analysis on the possible impact of any capacity reduction by RP Energry. Cutting the capacity of its Subic coal-fired power plant by half will reduce our sum-of-parts based fair value estimate for MER by 3% to P318/sh from P328/sh at present. This assumes maintaining the fair value estimate on MER’s core power distribution business at P274/sh but reducing the value of MER’s power generation business by 17% to P45/sh from P54/sh previously as a result of the capacity cut. This will lead to a target price of P287/sh from P295/sh at present if we factor in a 10% discount to MER’s fair value.

However, our HOLD rating on MER shares will be maintained given the slight 2% premium to the potentially lower target price. We will finalize our estimates pending the results the company’s proposed talks with the NGCP. – WealthSec