Jan. 18 (Bloomberg) -- Manila Electric Co., the Philippines largest power retailer, will return to generation after a four-decade hiatus with plans to build plants to supply as much as 30 percent of the main island of Luzon’s demand.
The company, known as Meralco, will build 2,700 megawatts of coal- and gas-fired plants in Luzon in seven years, President Oscar Reyes said in an interview in Makati City yesterday. A government law prohibits a single company from supplying more than 30 percent of installed generating capacity in each of the country’s three grids. Meralco is also planning a 300-megawatt coal-fired plant in Mindanao, the nation’s second-biggest island that suffers from daily outages, he said.
Producing its own power will reduce Meralco’s dependence on generators and secure electricity supply in a nation where sales rose 7.1 percent last year. Meralco sells electricity to the capital and nearby provinces, which together account for half of the Philippines’ $225 billion economy. Sales may increase 3.5 percent this year, Reyes said.
“The expansion into power generation will significantly boost profitability,” said George Ching, a Manila-based analyst at COL Financial Group Inc., who rates the stock a buy. “A power plant’s profitability can be higher than power distribution because there is a cap on returns from distribution. The power plant won’t have merchant risk because the electricity will be sold to its own franchise area.”
Meralco buys most of its electricity from producers such as First Gen Corp., Aboitiz Power Corp. and San Miguel Corp.
“Rather than being a pure price taker, without any leverage, we felt it was necessary to re-enter the generation business,” Reyes said.
Meralco rose 2.3 percent to 279.60 pesos yesterday. The shares have risen 7.3 percent this year, compared with the benchmark stock index’s 4.5 percent gain.
The power retailer is building a $1.2-billion, 600-megawatt, coal-fired plant in Zambales, a province north of Manila, with Aboitiz Power and Taiwan Cogeneration Corp. that will start in 2016, Reyes said. A feasibility study is being conducted for a 1,500 megawatt to 1,700 megawatt gas plant in southern Luzon. An additional 600-megawatt coal plant in the island is also planned, he said.
Electricity supply in Luzon will become “increasingly tight” because some of the plants in the island are old and susceptible to outages, Reyes said.
Meralco will build a 300-megawatt coal plant in the southern island of Mindanao with a partner, Reyes said.
“We want to replicate our services in areas that are not adequately served,” he said.
To contact the reporter on this story: Cecilia Yap in Manila at firstname.lastname@example.org