“The rating for First Gen Corporation’s (First Gen) proposed P3 billion bonds is PRS Aaa,” PhilRatings announced. The PRS Aaa means that the: “…issue has the smallest degree of investment risk as interest payments are protected by a large or by an exceptionally stable margin, and principal is secured. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.” PRS Aaa is the highest possible credit rating on PhilRatings’ national or domestic rating scale.
First Gen’s rating reflects the company’s favorable and tested performance of its power plants, namely: Sta. Rita (1000MW), San Lorenzo (500 MW), and Bauang (225 MW), giving assurance of the group’s ability to deliver contracted power, in turn generating stable earnings and sufficient cash flows. In reinforcing manner, the take-or-pay power purchase contracts assure the predictability of earnings and stream of dividends to service its debts. Although the plants’ offtakers, National Power Corporation (Napocor) and Meralco both face serious financial challenges at present, such conditions are not expected to negatively impact their capabilities to meet their obligations to First Gen. Napocor’s obligations under the Build-Operate-Transfer (BOT) Agreement with First Gen’s Bauang Private Power Corporation are fully guaranteed by the Republic of the Philippines. Meralco’s obligations under its power purchase agreements with First Gas Power Corporation and FGP Corp. (for Sta. Rita and San Lorenzo), on the other hand, constitute a cost that is passed on to electricity consumers and is not likely to be constrained even amidst current financial difficulties.
PhilRatings notes that the take-or-pay arrangements provide assurance of stable revenues despite an oversupply in domestic power generation in the near-term. The group’s expansion plans in the face of an anticipated electricity supply shortfall in the medium-term will provide opportunities for earnings growth and diversification although how this process is managed and the quality of investments made will have to be monitored closely. PhilRatings recognizes that the present management team and shareholders have demonstrated their competence in running power generation operations, even in a less-than-ideal regulatory environment which continues to be in transition. The on-going power sector restructuring likewise gives rise to uncertainties, particularly as competition is introduced in a traditionally monopolistic industry. Nevertheless, PhilRatings views regulation on the power distribution and transmission subsectors as having limited effect on the deregulated power generation business, and expectations of power supply shortfall will also negate increased competition risk. Developments regarding the VAT Law as it applies to power producers will also be watched closely.
First Gen is a significant player in the domestic power generation sector, accounting for about 12% of the total installed generating capacity in the Philippines. Its principal stakeholder is First Philippine Holdings Corporation (with an 88.4% ownership stake). Remaining shares are held by AIDEC FG Power Corporation Limited and Summit Global Management II B.V., a subsidiary of Sumitomo Holdings Corporation. Audited results for 2004 placed revenues at P 37.0 billion and net income of about P5.0 billion. First Gen, as parent company, has zero debt at present.