Philippine geothermal unit set to price IPO at top

Strong demand from international investors allows the government to trim its stake below 65% in the country's first privatisation in 12 years.

PNOC Energy Development (PNOC-EDC) is poised to price its initial public offering at the top end of the range at Ps3.20 per share after receiving strong demand for the 70% of the deal that was targeted at international investors, sources said over the weekend.

The CLSA-led offering, which is the first privatisation in the Philippines in 12 years, attracted more than 150 foreign investors and was “very well subscribed”, they said. This allowed the wholly-owned government subsidiary to sell the maximum number of shares it targeted for a total deal size of Ps16.6 billion ($333 million). Already the second largest IPO in the Philippines after conglomerate SM Investment Corp’s $528 million offering in March 2005, total proceeds could increase further to $383 million if the 15% greenshoe is exercised in full.

Being the largest producer of geothermal energy in the Philippines, contributing 70% of the country’s total capacity of this environmentally friendly power source, PNOC-EDC drew demand from a wide range of energy and alternative energy funds, including the “green” portion of some large global funds.

Long-only funds were said to have contributed two-thirds of the demand while the remainder came from hedge funds.

The sale will comprise 5.2 billion shares, of which 50% will be secondary shares sold by the government whose stake will fall to 64.3%, or to 60% if the greenshoe is used in full. The other half is new shares sold by the company to raise money for new drilling equipment and to upgrade its existing equipment.

The company was initially offering between 4.2 billion and 5.2 billion shares at a price between Ps2.50 and Ps3.20.

At the final price, the shares are valued at 7.5 times its estimated 2007 earnings, which compares with about 11 times for First Generation, which did an IPO in the Philippines in February this year.

PNOC-EDC’s focus on renewable geothermal power puts it in a fairly unique position among the country’s power producers, however.

The company produces geothermal steam which it sells to National Power Corporation (Napocor) and to independent power producers who use it to produce electricity under a build-operate-transfer scheme. The amount of energy it produces is enough for the production of 1,149MW of electricity. The company currently contributes 18% of the country’s total power production.

At the start of the roadshow, it was believed that PNOC-EDC would see a boost to its bottom line as a result of it taking over the electricity production plants now operated by the BOT contractors. Electricity production has better margins than the sale of steam energy as the cost of operating the plants is lower than the current fees paid to the BOT contractors and by the end of 2009 the company will have taken over about 500MW worth of electricity production capacity.

However, during the marketing of the IPO investors became aware that under Philippine regulations PNOC will eventually have to sell these BOT plants. Consequently, the benefits won’t be as great as initially expected, one observer says, noting that this likely had an impact on the overall demand for the offering.

The Philippines is the biggest producer of geothermal power after the US. It is also a country where the government is trying to encourage the development of environmentally and economically friendly energy resources to meet an increasing demand for power and to reduce the dependence on imported energy sources. This includes PNOC-EDC’s geothermal plants, which have a lower operating cost per megawatt of installed capacity than most of the country’s fossil fuel plants.

Analysts forecast that demand for power in the Philippines will grow by 4%-6% per year depending on the region and the Department of Energy projects peak power demand to increase by a CAGR of 8.4% from 8,525MW in 2004 to 19,064MW in 2014.

The 30% of the IPO not sold internationally, will be offered to domestic investors with the help of BDO Capital & Investment Corp, Development Bank of the Philippines, ING Bank and Land Bank of the Philippines. This portion of the deal will open today (December 4) and will run until December 8.

The shares are due to start trading on the Philippine Stock Exchange on December 13.

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