Share analysis: Panama Power Holdings – renewable energy

The Company

Panama Power Holdings is a holding company that is traded on the Panama Stock Exchange (Bolsa de Valores de Panamá, BVP) under ticker symbol PPHO. Through its subsidiaries, the company operates and develops renewable energy generation projects. Its primary focus is run-of-the-river hydroelectric power stations.

Panama Power Holdings operates four hydroelectric power plants; Hydro Caisán, with 72 MW installed capacity; Generadora Pedregalito, with 20 MW; Generadora Alto Valle, with 15.7 MW; and Generadora Rio Chico, with 12.5 MW. The company also owns 65% of Inversiones La Manguera, a hydroelectric power plant located in Costa Rica.

Growth Strategy

In addition to its established hydroelectric power generation projects, Panama Power Holdings is looking into new development opportunities in other kinds of renewable energy generation, such as wind and solar power. The company is particularly interested in projects that will allow it to supply energy through long-term power purchase agreements (PPAs). Thermal generation is currently next in line for PPA contracts to be auctioned for interested generators in Panama.

Energy Market Dynamics

Panama Power Holdings’ four hydroelectric plants sell the energy they generate to both the national grid and two distributing companies through different PPAs and the spot market. In the spot market, average energy prices have increased significantly in the past 10 years, from $55 per MWh to a record high of $292 per MWh in March 2014; this has since dropped, to around $128 per MWh as of December 2014.

The decline in spot market energy prices in Panama was primarily due to lower global fuel prices. Looking ahead, future spot market prices will likely be determined by a mixture of energy sector regulation, growing domestic energy demand, the addition of new installed capacity in terms of energy supply and the price of fossil fuels for thermal plants.

The energy generation market already has more than 2768 MW of installed capacity throughout the country, with a firm capacity of some 2062 MW. Hydroelectric power plants accounted for 57% of the total consumed energy in the country in 2014. Demand in Panama has been increasing at a steady pace since 2007-08, providing an opportunity for new investors to enter the market.

Company Performance

As of the end of FY 2013/14, Panama Power Holdings had $373.2m in property, plant and equipment, representing 89.8% of the company’s total assets. Some $357m of this came from generation plants, another $1.3m in administrative offices, and $14m from the land owned by the company’s subsidiaries. Panama Power Holdings’ assets totalled $415.7m at year-end, representing a 9.4% year-on-year increase.

Panama Power Holdings generated $39.7m in total energy sales in FY 2013/14, up 68.3% over the previous year. This income corresponds to the energy sales of the company’s four operating subsidiaries – Generadora Pedregalito, Generadora Alto Valle, Generadora Rio Chico and Hydro Caisán.

Generadora Pedregalito generated $10.1m in energy sales, or 25.4% of the group total, while Generadora Alto Valle posted sales of $6.2m, or 15.6% of the total. For its part, Generadora Rio Chico recorded $6.6m in energy sales, or 16.6% of the group total, while Hydro Caisán accounted for the largest share with $16.8m, or 42.3%. Meanwhile, group energy costs totalled $9.4m, while operating costs came to $15.7m and financial costs stood at $10.9m, netting the company $2.2m in income for the year.

In terms of market performance, Panama Power Holdings’ share price finished the year trading at $15.40 per share, for a market capitalisation of $255.6m. This was equivalent to a price-to-earnings ratio of 118.9x. The company’s stock was trading close to its 12-month low and was outperformed by the BVP index by 2.8% over the course of the year.