Report of the Chief Financial Officer
Nestor H. Vasay
EDC Chief Financial Officer
“We continue to witness the fruits of the investments that we made in recent times that were aimed at enhancing the resiliency and reliability of our existing assets.”
I can characterize the year 2015 as a year when our company’s core business was faced with threatening challenges brought about by unusual developments in the global markets. I am particularly referring to the downward trajectory of commodity prices which continued to drag both oil and coal prices with it. This situation created an unfavourable picture for domestic geothermal. With coal being its closest competing technology, the plummeting of coal prices in the world market has threatened geothermal in a manner that was never seen in recent years. Our company had to take a defensive pose not only to quickly arrest and shield the business from the damaging effects of this rapidly developing event, but also to maintain and fortify our existing market position. Following this, we immediately shifted to offense mode where all efforts were geared toward maintaining a tight grip on our existing supply contracts and protecting the same from the visibly aggressive poaching initiatives of competing business.
It is against that background that I report to you the financial results of our operations in 2015.
2015 Financial Highlights and Lowlights
Looking at the overall 2015 financial performance of our company, we managed to grow our consolidated revenues by 11 percent to PHP34.4 billion this year, from PHP30.9 billion in 2014. This is largely on account of the full year’s performance of the new projects that came on stream: the Burgos Wind Project, Unit II of BacMan which completed its three-unit operations and the recently inaugurated Nasulo power plant. Contributing further to our improved revenues is our contracted strips of energy in Leyte that contributed PHP1.5 billion in additional revenues and the PHP0.3 billion increased revenues from FG Hydro. Our Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) showed a more modest 4 percent improvement to PHP18.7 billion, coming from PHP17.9 billion the year before.
The PHP 3.5 Billion increase in revenues, however, was offset by a PHP4.0 billion jump in our total operating expenses brought about mainly by the increased operating and maintenance (O & M) costs of our new projects, the costs associated with the steamfields in Leyte as well as the tailend of our typhoon related expenses. Likewise, our net income attributable to equity holders of the Parent went down by 35 percent to PHP7.6 billion due to higher depreciation and interest expense that are directly attributable to the Burgos Wind Project, foreign exchange losses and the absence of last year’s reversal of impairment losses in connection with the Northern Negros project. Excluding the non-recurring items, EDC’s consolidated net income attributable to equity holders of the Parent amounted to PHP8.8 billion, marginally down by 4 percent when compared with the PHP9.2 billion in 2014.
2015 was also a period of mixed highlights and lowlights for our generating units. The respective operations of these different units can be summarized as follows:
1. BacMan proved to be the brightest star for EDC in 2015. Despite the reduction in average tariff to PHP4.04 per kilowatt-hour (kWh) from PHP4.47/kWh in 2014, this was more than offset by higher sales volume of 1,034 gigawatt-hours (GWh) that brought revenues up by 38 percent to PHP4.2 billion. Net income likewise improved by PHP0.9 billion to PHP1.2 billion;
2. Another bright star in our 2015 operations with its full year run is the Nasulo plant that contributed PHP1.3 billion to the year’s revenues with its higher sales volume combining with a 5 percent improvement on its average tariff served as primary catalyst to an increase in its revenues. Net income improved by 49 percent to PHP0.8 billion driven by higher revenues which was partially brought down by an increase in depreciation of the new plant as well as the increase in O&M costs;
3. The Mt. Apo Business Unit improved its revenues generation mainly due to higher average tariff that went up by 13 percent to PHP3.0/kWh coming from PHP2.91/kWh the year before. This, however, was offset by a reduction in sales volume of around 18 GWh resulting from the failure of the Mindanao I generator that happened during the third quarter and remained for about a month. The business unit still managed to end the year with a 45 percent increase in its net income due mainly to the implementation of tighter control over its operating expenses and interest charges that combined very well with the absence well workover activity.
4. The operations of our FG Hydro power plants resulted to an increase of 16 percent in revenues to PHP1.9 billion mainly on account of the downward adjustment of the Wholesale Electricity Spot Market (WESM) prices that was recorded during the first quarter of 2014. While average volume increased by 0.7 percent, average blended tariff decreased slightly by 0.2 percent to PHP4.40/kWh. And with the expiration of FG Hydro’s income tax holiday in April 2014, net income registered flat with higher revenues being offset by higher provision for income taxes;
5. The first full year of operations of the Burgos Wind Project also contributed to the jump in revenues with its PHP2.4 billion sales in 2015 with volume of 253 GWh. The significant improvement in revenues served as cushion to the higher operating expenses, interest expense and foreign exchange losses. The reckoning of all of the above yielded a marginal loss of PHP0.04 billion for the Burgos Wind Project;
6. On the other hand, revenues from our Unified Leyte plants went down by PHP0.8 billion resulting mainly from lower net sales volume. The same lower revenues and higher O&M largely identified with the maintenance of the Mahanagdong and Malitbog turbines were responsible for the reduction of Unified Leyte’s net income by PHP0.8 billion;
7. In Tongonan, revenues were also down by 16 percent or about PHP0.7 billion mainly on account of the combined effect of lower sales volume and average tariff. Sales volume went down by 9 percent due to the unplanned outages of unit 2 while the re-pricing of the Green Core Geothermal, Inc (GCGI) contracts in the latter part of 2014 resulted in the 8 percent reduction of its average tariff from PHP5.58/kWh to PHP5.13/kWh. The lower WESM prices also contributed to the reduction in revenues in 2015 as those unplanned outages compelled GCGI to source its replacement power from the WESM in order to service its existing contracts. On the cost side, the same unplanned outages that brought about higher operating expenses as well as the interest cost for Tongonan brought down its net income by about PHP0.9 billion; and
8. Similarly, revenues of the Palinpinon power plant went down by PHP0.7 billion to PHP6.6 billion in 2015, with the same re-pricing of the GCGI contracts contributing mainly to its weakened revenues. Average tariffs went down by 7 percent to PHP5.09/kWh coming from PHP5.49/kWh in 2014. Sales volume also declined by 2 percent or about 31 GWh. In terms of cost, the Palinpinon plant was also hit with higher operating expenses mainly attributable to the Okoy 5 generator system, drilling cost associated with well work over and interest costs and foreign exchange losses. All of the above resulted to a 42 percent reduction in net income of the Palinpinon power plant.
All of the above translated to a reduction in EDC’s consolidated recurring net income by 3 percent or PHP0.3 billion to PHP9.0 billion in 2015.
In terms of cash flows, the company’s cash position at end-2015 remains quite robust at PHP17.6 billion or PHP3.6 billion better than our beginning cash balance of PHP14.0 billion. Net cash from operations amounted to PHP22.0 billion, supplemented during the year by our net loan drawdowns of PHP6.2 billion representing the final proceeds from our Burgos Wind project financing, as well as the availment of BGI’s term loan. Cash were utilized for debt servicing amounted to PHP7.2 billion while PHP6.3 billion was spent for our maintenance capital expenditure (CAPEX), PHP4.8 billion on growth CAPEX and PHP4.1 billion on cash dividends.
Other financial developments in 2015 include our collection of PHP1.2 billion of partial insurance proceeds from claims related to damages inflicted by Typhoon Yolanda. Added to this is our successful availment of duty free privileges that saved the company from import duties amounting to PHP0.06 billion.
In 2015 we continued our financial risks management initiatives to address currency volatility, increasing interest rates, and refinancing risk.
To address currency volatility, we have entered into derivative transactions where, as of end-2015, hedged about 49 percent of our US Dollar denominated principal and interest falling due in 2016, 2017, and 2018. These contracts
partly shielded the company from the weakening of the Philippine Peso versus the US Dollar. Going forward, we will continue to look for hedging opportunities to augment the dollar-linked revenues that we have under the National Power Corporation (NPC) offtake contracts.
To address interest rate and refinancing risks, the company has focused on three themes namely: pushing down the debt at the subsidiaries level and take advantage of the liquidity in the local debt market; amending some loans to take advantage of the low interest rate environment; and converting some of the bullet maturities into amortizing loans. The PHP8.5 billion EDC peso bond that matured in June 2015 which initially funded the acquisition of the Palinpinon and Tongonan plants in 2009 was refinanced at the Green Core Geothermal, Inc. level. We also entered into an amendment on one of our Fixed Rate Corporate Notes which had the effect of lowering the interest payments. As a result, our weighted average borrowing costs which came from a high of 8.90 percent in 2011 is now down to 6.33 percent for 2015. This also increased the level of our amortizing repayments from 51 percent in 2014 to 66 percent by end of 2015.
In terms of new growth projects that started with the Burgos Wind, funding will be undertaken through project financing arrangements where new projects are assessed on their own credit worthiness and cash flow merits and with limited liability being imposed on the parent company.
The year 2015 was definitely not an easy year for your company. The rapid progression of both internal and external events that disrupt the stability of our business have made us more mindful of and focused on our concerted efforts to protect our gains and strengthen the market position that we have painstakingly built through the years.
We continue to witness the fruits of the investments that we made in recent times that were aimed at enhancing the resiliency and reliability of our existing assets. The steady performances of our newly rehabilitated plants such as Nasulo and BacMan and our relatively low insurance claims in 2015 are very strong and positive indicators of those investments. And as we become smarter and more deliberate in the execution of our growth projects, we will continue to rely on the solid and unwavering support of our various stakeholders; the investors, our banks, our insurers and of course, our customers.
In behalf of our management team and our employees we sincerely thank our stakeholders for their trust and continuing support