President’s Report

 

Dear Stakeholders,

United Nations Secretary-General António Guterres began his opening remark in the UN COP24 meeting held in Katowice, Poland in December 2018 with a stern warning: “Dear Friends, We are in trouble. We are in deep trouble with climate change. Climate change is running faster than we are and we must catch up sooner rather than later before it is too late. For many people, regions, even countries, this is already a matter of life or death. It is hard to overstate the urgency of our situation. We are still not doing enough, not moving fast enough to prevent irreversible and catastrophic climate disruption.”

The UN Intergovernmental Panel on Climate Change (IPCC) in its October 2018 report said that in a little over a decade, the world will fully feel the irreversible effects of climate change. The world could hit 1.5 degrees Celsius warmer as soon as 12 years from now in 2030 with devastating impact. Already, we experience the effects through the frequency and intensity of natural calamities. Locally, typhoons, drought, heat waves, earthquakes, and landslides have resulted in hundreds of casualties and billions in economic losses. And yet, it has been difficult to raise awareness and come up with a clear plan of action.

Last year’s annual report theme of “We Are Running Out of Time” cannot be overstated. This is certainly not the kind of legacy we want to leave for our future generation. What do we have to do to make life better for our children and grandchildren? That’s what we all have to think about.

Every little effort to reduce the global temperature counts. This is a responsibility for all, but more so for today’s leaders in Government and in industries who contribute the most to global warming to meet the energy requirements of an ever growing population. We need to act now and act fast—otherwise, it will only get worse.

CLEAN ENERGY CHOICE

At First Gen, we have dared to initiate the change in mindset that needs to happen. Our deep concern over climate change and global warming has led us to make thoughtful and conscious strategic decisions that have led to our choice to focus on clean and renewable energies, such as natural gas, geothermal, hydroelectric, solar, and wind. Moreover, they were developed with cost- competitiveness as a priority with the Filipino consumers in mind. This is what makes us unique and distinguishable vis à- vis our competition.

At the First Gen Clean Energy Complex in Batangas, we have developed flexible and reliable natural gas-fired power plants, which are still the best complement to address the intermittency of renewable energy. Our geothermal platform, on the other hand, is the only source of 24/7 baseload renewable energy among all renewable energy technologies. Without sacrificing the ability to provide energy for the demands of today, we are doing all that we can to secure our future by maintaining a low carbon footprint with the least impact on the environment.

At First Gen, the amount of carbon emissions our total installed capacity of 3,500 MW emits is equivalent to the emissions of a 1,000-MW conventional coal-fired plant. This means that the Company produces over three and a half times the power for the same amount of carbon emissions. Moreover, producing power using our clean energy plants has avoided the release of approximately 15.0 million tons of carbon emissions, equivalent to removing approximately 3.0 million vehicles from the road.

BIG BETS, BIGGER PAYOFFS

The year 2018 marked significant progress in our operations where in we achieved transformative milestones. Through the steadfast work of our people and our partners, we made substantial headway in our long-term goals.

San Gabriel’s stellar performance

Last June 26, we clinched a six-year Power Supply Agreement (PSA) that contracted the full capacity of our 420-MW San Gabriel plant to Meralco. The San Gabriel PSA underwent a competitive selection process and was provisionally approved by the Energy Regulatory Commission (ERC) in June 2018, further demonstrating the cost competitiveness of this modern gas-fired power plant and its distinct flexible operating capabilities that have proven vital to the grid.

With the PSA in place starting in the second half of 2018, San Gabriel’s earnings capability was protected from seasonally low spot prices usually experienced in the second half of the year, and has added to Santa Rita and San Lorenzo in delivering stable earnings to First Gen. Consequently, First Gen’s contracted capacity increased to 90.1 percent by the end of 2018.

LNG Terminal on track

First Gen has made a breakthrough in the ongoing development of the country’s first LNG terminal. On December 5, 2018, the company signed a JDA with Tokyo Gas for the latter’s 20.0 percent participating interest in the LNG project. Tokyo Gas is a global leader and one of the largest LNG buyers in the world.

Last March 7, 2019, our LNG terminal project was granted a notice to proceed (NTP) by the Department of Energy (DOE), affirming that the work we have done on our planned LNG terminal is thorough and comprehensive. Furthermore, strong interest in the project from local and international players validate the vital role of LNG in the country to ensure the continuous operations of our existing natural gas plants and their importance in the transition to a clean energy future.

Going forward, we aim to finalize the financing for the project, execute key project agreements including LNG supply, and firm up our strategic partners for the project. We are also focused on working to achieve a Final Investment Decision (FID) by early 2020 for the LNG terminal.

Successful delisting of EDC

EDC concluded its PHP 14.6 billion tender offer last November 2018, which reduced its public float from 10.9 percent to just 0.2 percent. The tender offer was done at PHP 7.25 per share—the same price as the 2017 tender offer of Philippines Renewable Energy Holdings Corporation. This allowed minority shareholders to exit and realize their investment at a 46.5 percent premium to the closing share price the day prior to the announcement. Today, First Gen holds a 45.7 percent economic stake and a 65.0 percent voting stake in EDC.

By taking EDC private, First Gen has become a more attractive investment option for investors looking to seek value in clean, low-carbon energy in the Philippines. Moreover, the delisting of EDC is expected to bring greater flexibility around EDC’s dividend policy and leverage to enable its long-gestation growth initiatives. First Gen will continue to enhance its investment in EDC and take advantage of the strategic partnership with MIRA and the GIC of Singapore.

Typhoon-hit plants now operational

The Leyte plants were beleaguered by two natural calamities in 2017. The first was a 6.5 magnitude earthquake in July 2017 that damaged our Unified Leyte and Tongonan power plants (collectively, the Leyte plants), which resulted in 540 MW of capacity going offline. The rest of the year was spent working on restoring operations that enabled EDC to bring back 463 MW of its Leyte capacity by early December 2017. It was on track to reach its pre-earthquake capacity by early January 2018 when it suffered a second setback. Typhoon Urduja made landfall in December 2017. This typhoon poured 15 days’ worth of rainfall over a period of 24 hours. The typhoon did not inflict significant damage on the Leyte plants thanks to previous typhoon- proofing efforts, but it caused landslides that damaged pipelines, which brought down the capacity of the plants to just 207 MW by the end of 2017.

Much of 2018 was spent tirelessly restoring the damaged plants. All this hard work and persistence paid off. By the third quarter of 2018, the Leyte plants were back to their pre-earthquake level, ahead of schedule.

Improved capital structure

First Gen has been successful in its deleveraging initiatives in order to improve the Company’s capital structure. On July 25, 2018, First Gen prepaid its outstanding USD 119.1 million (PHP 6.3 billion) Series F Preferred Shares. In the same year, First Gen also paid down the remaining USD 91.7 million of its USD 300.0 million Bond. First Gen Hydro Power Corporation (FG Hydro) also became debt-free in 2018 as it prepaid its remaining loan amounting to PHP 980.7 million. Moreover, in line with EDC’s initiative to manage its foreign exchange exposure, the company paid down its USD 80.0 million syndicated term loan facility in June 2018 and replaced this with three-year Philippine Peso- denominated floating loans it executed with various banks.

With this initiative, First Gen’s consolidated debt at the end of 2018 was at USD 2.2 billion, lower than the high of USD 3.0 billion in 2015 and USD 2.5 billion in 2017. As a result, total interest expenses and preferred share dividends booked by First Gen in 2018 declined by 22.5 percent to USD 157.5 million in 2018 from USD 203.2 million in 2017.

FINANCIAL PERFORMANCE

Revenues

The positive developments in 2018 enabled First Gen to deliver a record- performance. First Gen’s consolidated revenues from electricity sales increased to USD 2.0 billion for 2018, marking a 15.8 percent increase from USD 1.7 billion in 2017. The natural gas platform’s revenue contribution increased by 19.7 percent mainly due to San Gabriel’s impressive spot market sales during the first half of 2018, along with the beginning of its PSA with Meralco in June. This was further supplemented by improved reliability of the 1,500-MW Santa Rita and San Lorenzo natural gas- fired power plants. EDC also reported higher revenues primarily driven by the higher sales volume and higher average selling prices of its geothermal plants.

Recurring Net Income

Our recurring net income reached an all-time high of USD 243.0 million, which grew by 50.8 percent from USD 161.2 million in 2017. The natural gas platform’s higher revenues and lower interest expenses from our deleveraging efforts further contributed to the strong increase. The surge in our recurring net income was partially offset by EDC’s lower contribution mainly from the reduced economic stake of First Gen in EDC following the Company’s participation in the tender offer for EDC shares in September 2017.

OPERATIONAL PERFORMANCE

Natural Gas

The 1,500-MW Santa Rita and San Lorenzo natural gas-fired power plants collectively booked an 11.2 percent increase in revenues to USD 1.0 billion due to their higher combined net dependable capacity (NDC) at 1,654 MW compared to 1,618 MW in 2017. The plants’ lower interest and general and administrative (G&A) expenses contributed to an increase in their net income contribution by 10.0 percent to USD 144.3 million in 2018, compared to USD 131.2 million in 2017.

San Gabriel’s revenues ended at USD 199.4 million in 2018, a 102.2 percent increase from USD 98.6 million in 2017. This increase is mainly due to high spot prices during the first five months of 2018 and revenues from its Meralco PSA in the second half. As a result, San Gabriel booked a positive reversal from a net loss of USD 7.9 million in 2017 to a USD 35.2 million income in 2018.

Avion, on the other hand, booked lower revenues in 2018 largely due to the unfavorable movement of the foreign exchange rates which was used to translate its Philippine Peso-denominated financials to U.S. Dollars. The lower revenues were tempered by lower cost of sales and G&A expenses paid during the year, resulting in a lower net loss of USD 1.9 million in 2018, a 47.2 percent improvement from the USD 3.7 million net loss in 2017.

Hydro

The Hydro platform’s revenue increased to PHP 1.9 billion for 2018 compared to PHP 1.7 billion in 2017. The increase was mainly due to FG Hydro’s higher WESM sales volume and higher average WESM selling prices in 2018.

However, the platform’s net income declined by 8.8 percent or PHP 49.4 million to PHP 514.9 million due to the absence of FG Hydro’s ancillary service revenues in the first quarter of 2018 following the Ancillary Services Procurement Agreement (ASPA) expiration in February 2017. This was partially offset by the increased water inflow in Pantabangan following the rainfalls during the summer monsoon and Typhoon Mangkhut (Ompong) in the fourth quarter of 2018. With the Pantabangan reservoir starting the year 2019 with its highest recorded water level since 2012, our hydro plants are expected to take advantage of higher generation and higher spot prices in the coming year, especially during peak hours.

Geothermal

Despite the outages brought about by the natural calamities in 2017, the volume sales of EDC’s plants increased by 12.3 percent to 8.1 gigawatt hours (GWh) in 2018 from 7.2 GWh in 2017, mainly attributable to the swift completion of key activities and the faster-than- expected recovery of the Leyte plants in 2018. Moreover, planned outages in 2018 were shorter as most major and minor preventive maintenance activities were completed ahead of schedule.

EDC’s geothermal plants likewise benefited from higher average selling prices in 2018. As a result, the platform’s revenue contribution increased by 15.9 percent to PHP 32.8 billion in 2018, while net income improved by 20.9 percent to PHP 8.2 billion in 2018 from PHP 6.8 billion in 2017.

EDC’s cost optimization efforts have likewise been paying off. This is most evident in the company’s cost of drilling its wells, which decreased by approximately 30.0 percent. Moreover, most of EDC’s planned maintenance activities were completed well before their deadlines in 2018, a considerable improvement from the previous track record of 50.0 to 60.0 percent additional work-days. This allowed for greater savings and higher power generation.

In 2019, we can expect normal geothermal plant operations after the full restoration of the Leyte plants. EDC has likewise invested in various resiliency programs to better mitigate the company’s vulnerability to natural calamities and quickly recover from their effects.

Wind and Solar

For 2018, the Burgos Wind Power Project (Burgos Wind) in Ilocos Norte had an increase in generated revenues of about 1.1 percent to PHP 3.2 billion. Its net income likewise increased to PHP 990.5 million from PHP 870.3 million, a 13.8 percent increase from 2017.

The Burgos Wind generated its highest recorded electricity generation to-date at 376.1 GWh for 2018. This can be attributed to stronger winds and an improvement in internal capability in inspecting the wind turbines and substation components.

EDC’s solar rooftop plants benefited from the full year operations of its four solar rooftop projects which were commissioned in the latter part of 2017. In 2018, EDC added three new solar rooftop projects totaling 1.5 MW. These are the 547-kilowatt (kW) Ormoc, 547-kW Sogod, and 443-kW Sorsogon. As of December 2018, the platform’s total installed capacity is at 5.2 MW.

BUSINESS DEVELOPMENT

The shift to natural gas-fired power plants is the first step toward a cleaner energy future. Our partnership with Tokyo Gas brings much to the table, as knowledge sharing will play a huge part in our venture. Furthermore, their vast experience in the development, financing, construction and operations of LNG storage and regasification facilities makes them an ideal partner. Enabling LNG development will also have the benefit of unlocking more flexible gas- fired power generating plants to meet the market requirement for cost-competitive electricity in our growing economy.

Our aim to champion low-carbon development requires us to expand our renewable platforms. This is completely aligned with our vision of a clean and renewable energy future. Through EDC, we continue to explore growth in places such as Indonesia, Chile, Peru, and other countries in the Asia-Pacific and Latin America regions.

SUSTAINABILITY

First Gen initiates and actively participates in activities that are beneficial to the environment and the communities we operate in. Our employees actively participate in the conservation and protection of marine-protected areas, and saving and propagating the country’s native endangered trees through the BINHI program.

As natural calamities get stronger by the year, it is best to be prepared on all fronts. For 2018, First Gen prioritized our host communities ability to respond to natural calamities, while encouraging them to think of initiatives that can promote sustainability. This is how we initiated the Sikat Impact Challenge, and the emergency response program called Project Batangueños Assistance and Social Involvement during Calamities (BASIC).

Should calamities strike, local communities in Batangas are now prepared to manage and respond in times of disaster through Project BASIC. For 2018, volunteers from the three barangays we serve, and from 150 churches in the archdiocese of Lipa, were given Basic Fire Fighting, Rescue, and First Aid training. In the same year, the Batangas Advanced Local Emergency Response Team (ALERT) was also operationalized as the primary responder in Batangas City, in times of emergency.

The Sikat Impact Challenge is geared towards empowering youth advocates of environmental change. This 10-month incubation program supports the development of grassroots renewable energy initiatives that aim to bring meaningful impact to rural communities. The challenge is to collaborate, create, and implement a needs-based and sustainable project bridging available renewable energy technologies with their partner rural communities.

IN CLOSING

We saw the opportunity to focus our portfolio toward clean natural gas and renewable energy. Furthermore, seeing and experiencing the drastic effects of natural disasters merely validates that this shift was necessary, and is worth the effort.

We gained recognition last 2017 as the Green Company of the Year at the Asia CEO Awards. We are grateful for the recognition. What is more important, however, is that we inspire and encourage the Government and other stakeholders to follow suit. If we continue with the business-as-usual mentality, I am certain that our current situation will only get worse. We need the collective effort of the community as well as businesses. There is more to do, and EVERYONE SHOULD BE INVOLVED.

We are more aware of the world’s continuing deterioration than ever. This awareness has sparked young minds like Greta Thunberg—a 16-year-old Swedish schoolgirl and climate activist—who gained media attention recently by articulating her opinion on the world leaders’ lack of action towards climate change issues. She consequently went on a school strike and protested in front of the Swedish parliament every Friday. It is from individuals like Ms. Thunberg that First Gen draws the inspiration to work toward our goal of a carbon-free world.

As this year’s annual report points out, we should not wait for the time when the seas become our parking space due to sea level rise. The shift towards renewable energy and the shift towards sustainable practices should be done now, in order to sustain our way of life, and so that future generations can inherit a world they can live and thrive in.

Thank you for your unwavering and continued support.