Aboitiz Power seeks overseas expansion

The Philippine electricity generator and distributor is eyeing investment opportunities in Papua New Guinea, says CFO Iker Aboitiz.
Aboitiz Power's Pagbilao coal-fired thermal power plant in Quezon
Aboitiz Power's Pagbilao coal-fired thermal power plant in Quezon

Aboitiz Power of the Philippines is taking its electricity generation and distribution expertise overseas and is investigating possible investments in Papua New Guinea.

In an interview with FinanceAsia, chief financial officer Iker Aboitiz said the company was now ready to expand its portfolio of assets by looking for opportunities in Asia and the Pacific.

“Three or four years ago we wouldn’t have considered such a proposition,” he said. “We were still building our local business and we were cautious not to over-extend. But now we believe we have gained the operational and management expertise to acquire overseas assets.”

The decision to take its business regional comes as Aboitiz Power consolidates its position as one of the largest electricity producers in the Philippines.

Back in the early-2000s, the company was quick to see the windfall presented by the government’s decision to privatise the assets of state-run power company Napocor.

Aboitiz picked its targets carefully, focusing first on hydro plants and then adding geothermal and coal plants to its portfolio. When the Aboitiz group spun off its power unit in a separate listing on the Philippine stock exchange in 2007, the asset acquisition process gathered pace.

Aboitiz Power now owns nearly 1,600MW in generation capacity and has approximately 770,000 customers connected to its electricity distribution business – making it a viable player and a company ready for regional expansion.

The strategy is to focus on developing markets where the dynamics are similar to the Philippines’ emerging status, Aboitiz told FinanceAsia.

“We can’t compete in developed countries and there is no real growth in these markets anyway,” he said. “The biggest opportunities are in countries where there is a shortage of electricity and a potential to build supply over time.”

Papua New Guinea might seem like an unusual first destination, but the Aboitiz group has previous experience in PNG having chartered one of its SuperFerry vessels to Peninsula Shipping Lines in 2006. The transport business which ran the SuperFerries was then sold by Aboitiz in 2010.

The power business is now the jewel in the crown of the family-run Aboitiz group, recording sky-high growth over the past few years.

The company’s operating revenues have increased from Ps23 million in 2009 to Ps62 million in 2012, while its share price on the Philippine stock exchange has risen from around Ps28 per share in March 2011 to Ps40 today.

Sustaining such a high level of performance has its challenges, however, and in its latest earnings announcement, made on Friday last week, the company reported a 24% year-on-year drop in profit to Ps18.6 billion for 2013.

Aboitiz said the performance was in line with expectations and could be attributed to lower margins at some plants, higher fuel costs and foreign exchange adjustments.

“We are still working towards our goal of shifting the bulk of our contracts from energy-based to capacity-based or take-or-pay contracts, meaning our customers pay a fixed fee for their power,” said Aboitiz.

“The new contracts allow us to pass-through all fuel costs – which make up 50% of our operating costs – and include provisions for inflation-related adjustments.”

He said approximately 70% of the company’s electricity capacity is now sold through these contracts. “This compares with 25% of all contracts in 2012. We have had a lot of success with the strategy.”

Aboitiz said the shift to take-or-pay contracts has significantly improved the company’s cash flow.

“In many ways we are willing to take a lower return in order to ensure our cash flows are stable,” he said.

“Stable cash flows increase our ability to apply some financial engineering to the business. And they improve our credit standing with the banks, making it easier to raise finance.”

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