Nestor H. Vasay
EDC Chief Financial Officer
“The significant 1,587% leap in our bottom line shows that we are on the right track; we have gained the upper hand in our battle to overcome the difficult challenges that we confronted head on in the previous years.”
I am pleased to report to you that our sustained and determined program to cleanse and strengthen our company’s balance sheet is yielding the desired results. The significant 1,587% leap in our bottom line in 2012 clearly shows that we are on the right track and that we have gained the upper hand in our battle to overcome the difficult challenges that we confronted head on in the previous years. The year 2012 showcased the company’s resilience to these challenges as those short term hits that we had to endure in the past years have now turned into the longer term tangible benefits that we expect to reap from our deliberate strategies.
Our 2012 sales, EBITDA and income are all record highs. Combining perfectly with our zero impairment losses last year, our robust sales resulted in a PhP9.8 billion jump in our consolidated net income that reached PhP10.4 billion. This represents a healthy turnaround from the PhP0.6 billion consolidated net income that we reported the year before and about PhP1.7 billion better than our targeted net income for 2012.
Our EBITDA margin jumped from 52% to 60% in 2012. The company’s recurring net income of PhP9.9 billion translates to a hefty 90% improvement over the PhP5. 2 billion posted in 2011.
Our balance sheet is the strongest it has been in the last 5 years. EDC’s Net Debt to Equity improved from 1.32x in 2011 to 1.06x in 2012 while its Net Debt to EBITDA ratio likewise was better at 2.17x in the current year coming from 2.95x the previous year. These and our other relevant financial ratios keep us fully compliant with our financial covenants to our various creditors.
In terms of our insurance cover, the renewal of our policy in 2012 required an increase of over 30% in our insurance premium. This is attributed mainly on the global industry losses incurred by our insurers in 2011 which also resulted in the moderate hardening of the overall insurance market. The line-up of our local and international insurers however remained intact for this renewal. We view this as an indication of their positive impression on the effectiveness of our investments in both preventive and mitigating measures to avoid the incurrence of loss damage. And despite the passing of destructive typhoons, particularly typhoon Pablo, and the unusually heavy rainfalls that we experienced in our sites last year, we had a zero typhoon-related insurance claim as compared to previous year’s claims of PhP0.512 billion.
EDC NOW POISED FOR TAKE OFF
We continue to utilize and invest the cash that we generate from our operations wisely. Out of the total PhP17.3 billion that we generated last year, PhP5.5 billion was used for debt service while PhP8.4 billion went to the various capital investments and growth projects. We also paid out an aggregate of PhP4.5 billion in dividends to our shareholders. This represents roughly 86% of the previous year’s recurring net income. From a beginning cash balance of PhP12.5 billion, the company’s cash account stood at PhP 11.4 billion as of end-2012.
The investments that we made on the rehabilitation of our acquired assets Green Core Geothermal, Inc. (GCGI) and Bacman Geothermal, Inc. (BGI) — and despite the delay in the completion of our rehabilitation works on the latter — are sound investment decisions that are bearing fruit. GCGI’s sales for one have grown by 29% to PhP10.6 billion as its contracts have repriced to higher levels. The excellent performance of GCGI combined quite well with the absence of attributable financing charges and reduced operating expenses brought about by lower maintenance cost and zero power outages of the assets.
On the other hand, the Bacman plant in 2012 remained cash accretive despite the delays that we encountered in its rehabilitation. To service the supply contracts signed earlier for Bacman, the plant’s limited output last year was supplemented with replacement power sourced from other suppliers that include the Wholesale Electricity Spot Market (WESM), FG Hydro, GCGI as well as other third party providers. All told, Bacman generated a total of PhP3.8 billion in blended revenues, of which, PhP3.5 billion was used to cover for power that we purchased from other electricity sources and retaining PhP0.3 billion as net cash generated from its combined limited runs. And as we all await for that longanticipated full commercial operations of the plant, I can only reiterate President Tantoco’s message that “We shall address the issues of Bacman with both vigor and urgency and constantly communicate our progress to our stakeholders.”
On this note, we are committed to be transparent and accessible. We visited a total of 62 investors over the course of the year, spending time as well on new potential investor markets to tell the EDC story. Our investor relations team addresses questions and inquiries within our self-imposed “within the hour” limit as we welcome keen interest in our business from our investing stakeholders.
CAPITALIZING ON FAVORABLE FINANCIAL MARKETS
On the financing front, we continue to take advantage of the prevailing tail winds in both the domestic and international financial markets. In April of 2012, we successfully concluded the refinancing of our PhP7.0 billion fixed rate corporate notes (FXCN). Arranged by SB Capital and RCBC Capital, the refinancing resulted in the extension of the average life of the facility by eight years and a reduction in interest rate by approximately 2%.
Adding this to the other refinancing programs that we completed earlier on, the term of our overall loan mix has now been lengthened from 4.5 years in 2010, prior to the refinancing of the USD club loan in 2011 and fixed rate corporate notes in 2012, to about 5.5 years today. Our average interest rates have also gone down from 7.4% in 2011 to 7.1% in 2012.
We are managing both currency and interest risk and volatility actively. The favorable trend in the financial markets allowed us to protect the company from the effects of future currency and interest rate movements as we contracted currency and interest rate swaps for the remaining portion of our unhedged US Dollar exposures. In 2012, the company entered into a total of USD65 million of cross currency swaps at an average peso interest rate of 4.57% and fixed foreign exchange rate of PhP42.13, effectively converting a portion of our floating US Dollar exposure to fixed Peso. These swaps will help in mitigating the impact of both foreign exchange and interest rate volatility. We are combining the swap arrangements with the natural hedge provided under EDC’s existing contracts as a protection to its foreign currency obligations.
And with more tangible benefits coming our way from continuously-improving financial markets, we will definitely remain on the lookout for every available opportunity to further strengthen the financial footing of EDC.
TAKING THAT BIG LEAP TO PROGRESS
We continue to implement better ways to make our business more sustainable, to effectively manage our risks and to fuel growth in areas where we operate to achieve our corporate goals each day.
Bigger steps have been taken in 2012 to strengthen our processes by utilizing a world-class unified business information and processing system for the company. Spearheaded by our Finance and Supply Chain Management Sectors, this Enterprise Resource Planning initiative which we named Project Optima seeks to integrate all of our processing and reporting systems, standardize data and processes that will facilitate and enhance decision-support functionality beginning in 2013. This will cover everything from materials planning to ordering to inventory to payment, processing and recording. With this change, a number of disparate and sometimes even manual systems will be integrated and will result in more streamlined back office operations, improved cycle times and even more accurate reporting.
We are focused on our goal of growing globally as domestic opportunities of a material size become more difficult to find. So far we have focused our efforts on acquiring concession areas in Chile, Peru and Indonesia. We have built partnerships with Hot Rock Limited (HRL), an Australia based publicly listed company, and Alterra Power, another publicly listed company based in Canada. EDC acquired 70% interest in each of the projects covered by these partnerships.
Locally, the impending commercial operations of our Bacman asset should just be one among the series of positive turnarounds for us in 2013. Our other projects to look forward to include the construction of our 87MW wind farm in Burgos Ilocos Norte, the financing arrangements of which are being finalized, and the transfer of the previously written-off 49MW Northern Negros Power Plant from its former location in Bago City, Negros Occidental to Valencia in Negros Oriental where we can fully utilize our excess steam capacity.
And with all our geothermal facilities remaining in good working condition today, we are optimistic to not only achieve our financial targets but may even outdo our accomplishments in 2012. We anticipate more opportunities to help in building our nation as we energize more homes and industries and empower more of our partners in progress.
Energy Development Corporation (EDC) issued the Notice to Proceed (NTP) to its wind farm contractor, Vestas, on June 21, 2013, marking the start of actual construction works at site for the initial 87 MW of what is intended to become a 150 MW wind farm. Since the project’s groundbreaking ceremony last April 19, 2013, certain preparatory early works had been undertaken at the site, but now, following the issuance of NTP, the full construction effort will immediately get under way, at the 600 hectare site covering three barangays, namely, Saoit, Poblacion and Nagsurot, in Burgos, Ilocos Norte.
Vestas of Denmark, the leading wind turbine manufacturer in the world, will construct the 87-MW wind farm and ancillary equipment and facilities under a full turnkey engineering, procurement and construction (EPC) contract. Vestas will install 29 units of its V90-3.0MW turbines. Burgos Wind Project also signed a 10-year Operations and Maintenance Agreement with Vestas, which features an energy-based availability guarantee.
The Department of Energy (DOE) granted BWP its Certificate of Confirmation of Commerciality last May 16, 2013. “The BWP is a major pillar of our Php32 Billion investment plan this year. We are proceeding as planned given our fully funded business plan and the proven Vestas technology. We are pleased to announce that the construction of the BWP will now commence and we are confident that BWP will be the first to achieve commercial operations by 2014,” EDC President and COO Richard Tantoco said.
The total estimated investment cost for the project is $300 million. EDC recently closed an US$80 Million club loan facility and Php7.0 Billion fixed rate bonds to boost its significant cash reserves. “It is deliberate that our Php7 Billion fixed rate bond is a single purpose facility meant solely for the funding of the BWP as this readily covers the spend on BWP this 2013,” Tantoco added.
The Burgos Wind Project marks EDC’s decisive foray into the wind energy business and once completed will be the largest wind farm in the Philippines. ”EDC is focused on clean energy. We have geothermal and hydro generation and with Burgos, the three technology platform will be complete. Now that we have honed our skills to develop a viable wind project, we intend to add an additional 21 units of 3 MW wind turbine generators to bring Burgos Wind Project’s capacity up to
150 MW,” Tantoco added.
The BWP is one of the largest investments to date in Ilocos Norte. Once operational, the BWP is expected to generate about 233 gWh of electricity a year, enough to power more than a million households and augment the Luzon grid’s dependable capacity, which needs an additional 4,200MW in the next ten years.
EDC named one of the best in CSR by Finance Asia. For the second year in a row, geothermal leader Energy Development Corporation (EDC) was named by Finance Asia as one of the best in corporate social responsibility (CSR). The selection of best managed companies is done by investors and analysts across the region. Photo shows from left to right: Maybank ATR Kim Eng Securities President Lorenzo Roxas, EDC Corporate Social Responsibility Manager Reinero Medrano, Maybank ATR Kim Eng Financial Corp. Chairman Ramon Arnaiz, EDC CSR officer Emiliano Saceda, EDC CSR Deputy Manager Teresa Peralta, and Maybank ATR Kim Eng Capital Partners President Manuel Tordesillas.
The Oscar M. Lopez Center for Climate Change Adaptation and Disaster Risk Management Foundation, Inc. (The OML Center) has awarded research grants to seven projects aimed at mitigating climate change. University of the Philippines, Ateneo de Manila University, and De La Salle University received a total of P13 million in funding for their project proposals.
The University of the Philippines has three projects which were combined into one program creatively called WHATSUP. It aims to develop weather and hazard alert and tracking system for urban areas in the Philippines through the use of mobile applications. With these proposals, practically everyone who owns a cellphone will be able to forecast and monitor local weather, assess disaster risks, and provide feedback to reduce forecasting errors.
The De La Salle University, likewise, has three proposals granted funding. DLSU will put up a flood detector system in their three chosen areas and develop a guidebook which will contain impacts of climate change adaptation and mitigation measures that are applicable to the agriculture sector. Another notable proposal involves the design of a car floatation system that will enable cars to float when floods strike. Their third proposal involves the design of a mathematical model that can predict the economic consequences of man-made and natural disasters. The model which they intend to be made available online can be used by any government agency, NGOs or private firms in developing policies and measures to mitigate risks.
The project of the Ateneo de Manila University, meanwhile, aims to reduce risks through the development and set up of an evidence and space-based decision support for Climate Change Adaptation-Disaster Risk Reduction Management.
“The OML Center aims to be a leading catalyst for generating science-based solutions to climate-related risks and disasters in the developing world. While billions of resources are being allocated to build the resilience of communities to climate related risks, there is less support for generating scientific information that could lead to long-term, practical and sustainable solutions to climate change. We will support applied research with practical outcomes to help the most vulnerable deal with the impacts of climate change and natural disasters,” OML Center Chairman Federico Lopez explained.
“Aside from awarding research grants, the OML Center will build network and partnerships with regional and international research institutions; foster capacity building and communications among a wide range of stakeholders; strengthen linkages with the national and local governments for the wide spread deployment of risk mitigation solutions; and provision of professorial chairs and other forms of incentives for outstanding achievements by scientists,” Dr. Rodel Lasco, OML Center Scientific Director, added.
About the OML Center
The OML Center for Climate Change Adaptation and Disaster Risk Management Foundation, Inc. (The OML Center) is the result of the twin advocacy of the Lopez family for environmental protection and public service. It shall play a pivotal role in helping reduce the risks and manage the impacts of climate-related hazards in disaster prone areas in the country. To achieve this role, the Center will strive to create a “Center of Excellence” by generating scicence-based solutions in the area of climate change adaptation and disaster risk management. Over time, it hopes to attain an international reputation for showcasing Filipino ingenuity in this area.
Initial funds to put up the Center were released through the First Philippine Holdings Corporation, a Lopez Group company managing businesses in energy, real estate, manufacturing, construction, and energy services.
Energy Development Corporation (EDC) has been granted the Certificate of Confirmation of Commerciality by the Department of Energy (DOE) for its 87-MW Burgos Wind Project (BWP) in Ilocos Norte. The Certificate of Confirmation WCC-2013-04-001, which is the first to be issued by the DOE for a wind project in accordance with Section 6 of DOE Circular DC 2009-07-0011, confirms the Declaration of Commerciality for EDC Burgos Wind Power Corporation (EBWPC) to develop, construct, operate and maintain the wind power project. The certification converts BWP’s Wind Energy Service Contract No. 2009-09-004 from exploration/pre-development stage to the development/commercial stage.
“This milestone affirms our efforts to pursue and fast track the project in order to be the first to achieve commercial operations by 2014. Our recently closed US$80M club loan plus Php7B we raised brings our total cash to Php19B. We have, without a doubt, a fully funded business plan,” EDC President and COO Richard B. Tantoco said.
The $300M Burgos Wind Project, EDC’s first foray into the wind energy business, will be one of the largest investments to date in the Province of Ilocos Norte. EDC broke ground for the project last April 19 after signing an EPC contract with Vestas, the world’s leading wind turbine manufacturer, on March 1. The Burgos Wind Project will utilize the proven Vestas V90-3.0 MW wind turbines.
“We have the distinction of having over seven years of accurate wind data so we are absolutely certain of our site and the wind resource. Because of this, we are rapidly taking all necessary steps to increase the capacity of the Burgos Wind Project from 87MW to 150MW,” Tantoco added.
BWP will be the largest wind farm in the Philippines. Aside from the wind farm, the BWP is also comprised of a 115 kV transmission line that will connect the wind farm to the Laoag substation of the National Grid Corporation of the Philippines (NGCP) and of a substation and interconnection works package.
BWP is expected to generate approximately 233 GWh annually, enough to supply the energy demand for over a million households. It will augment the Luzon grid’s dependable capacity which needs an additional 4,200 MW in the next ten years. It will also displace 129,000 tons of carbon emissions that will mitigate the effects of climate change.