RISK MANAGEMENT

OVERALL RISK MANAGEMENT PHILOSOPHY OF THE COMPANY

EDC’s risk management system is embedded in its strategic planning and budgeting processes, as part of its strategy execution process. Furthermore, risk management activities are being done annually at the project, operational and strategic levels of the organization.

 

Directors’ review of the effectiveness and adequacy of EDC’s risk management system, and frequency of review

The directors’ review of the risk management system’s effectiveness and adequacy is reflected in the following duties and responsibilities of the Risk Management Committee of the Board, as stated in their charter:

 

  1. “Conduct a yearly evaluation of the Company’s risk assessment and risk management program and ensure that appropriate controls are in place.”
  2. “Recommend to the Board the Company’s strategic risks, including the risk mitigation and control measures that require immediate or urgent implementation.”
  3. “Meet periodically with the Audit and Governance Committee, key management, and internal and external auditors to understand and discuss the control environment.”
  4. “Review the Company’s risk tolerance, financial exposures, and investment guidelines, including the mitigating strategies, insurance, and other risk financing schemes being undertaken.”
  5. “Review periodically the security, safety, physical loss control measures, and the specific Emergency Response Plan adopted by the Company to ensure that all risks are adequately covered.”

 

The whole year’s activities, as well as the following year’s activities, are covered by the risk management review which is conducted annually. In addition, the Risk Management Committee conducts a meeting on a quarterly basis to monitor the effectiveness of EDC’s risk management system. With this, risk assessments are conducted to identify the top priority risks at the different levels of the organization (i.e. project, operational and strategic levels). Correspondingly, mitigating measures are formulated and implemented to manage the top risks.

 

Risk Policy of EDC

Below is the general description of the company’s risk management policy, setting out and assessing the corporate-level risk/s covered by the system, ranked according to priority, along with the objective behind the policy for each kind of risk:

Risk Exposure

Risk Management Policy

Objective

1. Competition Risk EDC continues to expand its operations and strives to improve its systems and processes to be able to offer competitively priced power supply to the market. To be the global leader in geothermal energy.
2. Regulatory Risk EDC proactively manages its exposures from changing laws and regulations to ensure continuous operations and timely project implementations. To comply with the applicable laws and regulations.
3. Credit Risk EDC manages its exposures from NPC, a single off taker from which a substantial portion of the company’s revenues are attributed. To ensure timely collection from NPC.
4. Legal Risk EDC operates its business in such a way that it complies with all applicable legal requirements. To comply with all applicable laws and regulations.
5. Foreign Currency Risk EDC espouses the judicious management of its financial resources. To minimize exposure to foreign exchange rate volatility.
6. Interest Rate Risk EDC espouses the judicious management of its financial resources. To minimize interest expense.
7. Electric Cooperative Credit Risk EDC manages its exposures to its customers, the electric cooperatives, with regard to credit default risk. The objective is to be able to partner with electric cooperatives with healthy financial condition and creditworthiness.
8. Liquidity Risk EDC espouses the judicious management of its financial resources. To maintain a balance between continuity of funding and sourcing flexibility through the use of available financial instruments.

 

Risk Policy of the Group

Below is the general description of the group’s risk management policy, setting out and assessing the Strategic Business Unit (SBU)-Level risk/s covered by the system, ranked according to priority, along with the objective behind the policy for each kind of risk:

Risk Exposure

Risk Management Policy

Objective

1. Exploration Risk Exploration risk is an inherent risk in EDC’s operations as the company continues to explore, develop and produce geothermal energy. To minimize exploration-related costs while sustainably operating the geothermal resources.
2. Disaster Avoidance & Recovery Risk EDC proactively manages its exposures to man-made & natural hazards to ensure business continuity and the safety of its employees, contractors, and other stakeholders. The objective is to ensure that the company has a resilient process for business continuity and recovery in the event of a disaster.
3. Business Interruption Risk EDC proactively manages the reliability and availability of its steam fields and power plants to ensure continuous operations. To increase the effectiveness and efficiency of the different processes for operational excellence.
4. Safety Risk It is the policy of EDC to provide safe and healthful working environment for all its employees, contractors, and various stakeholders while protecting and preserving its assets. To prevent occupational accidents and injuries at all times.
5. Environmental Risk EDC places a strong commitment to be a good steward of the environment.  
  • Comply with all applicable legal requirements & other requirements related to our environmental aspects
  • Exert best effort to prevent the emission, or discharge of any type of pollutant to the environment & protect the local ecosystem
  • Use natural resources as efficiently as possible, & conserve water, energy & other material resources
  • Pursue reduction of wastes by employing source reduction, reuse & recycling methods
  • Establish a framework for setting environmental objectives & targets, & achieve continual improvement through our environmental performance evaluation
  • Provide a healthful & safe workplace for our people & promote their physical well-being

 

Minority Shareholders

The principal risk to minority shareholders of the exercise of controlling shareholders’ voting power, is the minimal control over corporate direction. However, in the case of EDC, such risk is mitigated with the provision in our By-Laws, to wit:

Article II MEETING OF STOCKHOLDERS

QUORUM. xxx In all cases where the law requires a two-thirds vote of the outstanding capital stock, the majority vote of the minority shareholders present shall likewise be required for validity of decisions in Stockholders’ Meetings xxx”

 


Control System Set Up

(a) Company

Briefly describe the control systems set up to assess, manage and control the main issue/s faced by the company:

Note: For this section, we are referring to the EDC corporate level risks.

Risk Exposure

Risk Assessment

(Monitoring and Measurement Process)

Risk Management and Control

(Structures, Procedures, Actions Taken)

Competition Risk Annual risk identification, evaluation, and monitoring
  • Competitively-priced power
  • Reliability of power plants
  • Use of clean and renewable energy
  • Expertise & experience in power supply contracting and trading
Regulatory Risk Annual risk identification, evaluation, and monitoring
  • Close monitoring of relevant proposed legislation
  • Key personnel are kept updated with the latest laws & regulations
  • Close coordination with relevant regulatory agencies
Credit Risk Annual risk identification, evaluation, and monitoring
  • Close monitoring of collections from NPC
  • Receivable balances are monitored on an ongoing basis to ensure that EDC’s exposure to bad debts is not significant
Legal Risk Annual risk identification, evaluation, and monitoring
  • Continuous action on existing legal cases
  • Collaboration and coordination with parent company’s lawyers
Foreign Currency Risk Annual risk identification, evaluation, and monitoring
  • Mitigated through existing provisions in the company’s GRESCs, SSAs, and PPAs.
  • Prepayment, refinancing, or hedging of foreign currency-denominated loans, whenever deemed feasible
Interest Rate Risk Annual risk identification, evaluation, and monitoring
  • Interest rates of some of the company’s long-term borrowings are fixed at the inception of the loan agreement
  • Prepayment, refinancing, or hedging when deemed feasible and advantageous
Electric Cooperative Credit Risk Annual risk identification, evaluation, and monitoring
  • Annual credit risk portfolio analysis
Liquidity Risk Annual risk identification, evaluation, and monitoring
  • Regular evaluation and consideration of the maturity of the company’s financial investments & financial assets
  • Maintenance of credit lines with banks on a continuing basis


(b)
Group

Briefly describe the control systems set up to assess, manage and control the main issue/s faced by the company:

Note: For this section, we are referring to the Strategic Business Unit (SBU) level risks.

Risk Exposure

Risk Assessment

(Monitoring and Measurement Process)

Risk Management and Control

(Structures, Procedures, Actions Taken)

Exploration Risk Annual risk identification, evaluation, and monitoring
  • Conduct of various studies
  • Implementation of various innovation programs
Disaster Avoidance & Recovery Risk Annual risk identification, evaluation, and monitoring
  • Business Continuity Management Program
  • Conduct of regular drills
  • Establishment of Barangay Emergency Response Teams (BERT)
Business Interruption Risk Annual risk identification, evaluation, and monitoring
  • Power plant rehabilitations
  • Process improvements
  • Business Continuity Management Program
  • Preventive Maintenance Program
Safety Risk Annual risk identification, evaluation, and monitoring
  • Contractor Safety Management Program
  • Road Transport Safety Program
  • Fire & Electrical Safety Audit
  • Establishment of the Project Safety & Health Committee (PROSHCOM) and the Plant Health, Environment and Safety Committee (PESHCOM)
  • Conduct of various safety trainings covering emergency management, safe work practices, NFPA technical trainings, etc.
Environmental Risk Annual risk identification, evaluation, and monitoring
  • Programmed launch of the Environmental Management System in the SBUs
  • Continuous monitoring of environmental parameters in all SBUs


(c)
Committee

Identify the committee or any other body of corporate governance in charge of laying down and supervising these control mechanisms, and give details of its functions:

Committee/Unit

Control Mechanism

Details of its Functions

RISK OWNERS The responsibility of managing the different risks as well as mitigating them. The risk identification and evaluation are done as part of their planning activities and the risk mitigating measures are part of their work programs and budgets.
RISK MANAGEMENT DEPARTMENT provides the framework and process, and helps in facilitating the conduct of the annual risk assessment. Prepares and presents a quarterly risk management report to the Risk Management Committee of the Board.
RISK MANAGEMENT COMMITTEE OF THE BOARD has oversight responsibility over management’s activities in managing risks