Report of the Chief Financial Officer


Nestor H. Vasay
EDC Chief Financial Officer

“The year 2016 saw the company still firmly ahead as the dominant player in the renewable energy space.”


Dear Stakeholders,


The weakness in coal prices in 2016, which hit a low of sub US$50/metric ton, resulted in the continuation of the challenges that we have been confronting head-on during the last three years. As a result, spot market prices of electricity have hit its lowest average levels in five years at sub PHP3.00 per kilowatt-hour (kWh), a reduction of 22 percent from the 2015 weighted average price. This has obviously exposed our uncontracted capacity to weaker margins. And to protect the company from the potential downside of depressed Wholesale Electricity Spot Market (WESM) prices, we have entered into a number of short- to mediumterm electricity sales contracts and effectively reduced our uncontracted posture to a more manageable level.


Given this situation combined with challenging greenfield development project economics, our focus shifted heavily on the company’s asset reliability program as we selectively postponed some items in our growth agenda. With a clear key performance indicator to reduce unplanned outages to below 5 percent levels, our company executed two major initiatives to address fleet wide life cycle issues. Following the successful rehabilitation of the two units in BacMan — that have since been operating at very high reliability levels — our team started control system upgrades in Malitbog and major plant rehabilitation and upgrade works in Tongonan. These works are continuing in 2017 with the installation of brand new Upper Mahiao turbine rotors with improved metallurgy, as well as the upgrades of the remaining two units of Tongonan. As we invest sequentially on other operating units as part of our long-term plans, we expect higher levels of generation in the years to come.


Against that background, I now report to you the financial results of our operations in 2016.


Financial Highlights and Lowlights

In 2016, Earnings Before Interest Taxes Depreciation and Amortization improved by 11 percent to PHP20.7 billion while net income rose 24 percent to PHP9.7 billion from PHP7.9 billion last year. Correspondingly, consolidated recurring net income attributable to the parent that reached PHP9.2 billion in 2016 was 4 percent better than 2015 despite the slight decrease in revenues brought about by the record low WESM prices.


There were four major factors that influenced the financial results in 2016:

  1. The decline in revenues of PHP800 million due to the drop in average selling prices. This was partially offset by higher volumes from the Palinpinon and Tongonan plants, FG Hydro, and Burgos Wind which generated an additional PHP680 million in revenues;
  2. The reduction in operating expenses (OPEX) mainly due to the deferment and rationalization of schedules on drilling and well workovers, and lower typhoon-proofing costs, along with the curtailments imposed on business meetings as well as foreign and domestic travel expenses;
  3. The higher-than-last-year’s collection of insurance proceeds, particularly the final settlement of the claims on BacMan Unit 2 relating to its machinery breakdown loss. Insurance claims proceeds in 2016 amounted to PHP1.5 billion versus PHP1.2billion in 2015; and
  4. The collection of an arbitral award from a contractor that yielded a net amount of PHP0.12 billion while PHP0.05 billion were also collected as reimbursement of legal expenses.


The recorded 0.4 percent decline in revenues is a combination of the exposure to the spot market of the uncontracted portion of the BacMan plants, which led to a 27 percent reduction or PHP1.1 billion in its revenues. This is attributed mainly to the weakening of BacMan’s average selling price per kilowatt hour from PHP4.06/kWh to PHP2.95/kWh. The Nasulo power plant, whose capacity was also exposed to the WESM was similarly situated as its average selling price likewise went down to PHP2.83/kWh from PHP3.77/kWh. This resulted to a decline in its revenues by PHP0.36 billion. Partially negating these revenue upsets are strong performances from FG Hydro with a 21 percent or PHP0.40 billion revenue improvement over last year’s. The Green Core plants, consisting of Palinpinon and Tongonan upped their combined revenues by PHP0.29 billion on account of the upward adjustment of 4 percent to PHP5.31/kWh of average selling price even as sales volume went down by 1.2 percent to 2,016 gigawatt-hours (GWh), while the Mt. Apo power plants, composed of Mindanao 1 and 2, maintained a steady performance that contributed 6 percent or PHP0.15 billion improvement in its revenues in 2016. The Burgos Wind project was another positive contributor as it increased its revenues by 16 percent or PHP0.38 billion on account of better wind regime towards the latter part of the year. Lastly, Unified Leyte, despite a decrease in its sales volume by 3 percent to 3,081 GWh (excluding ULGEI’s portion of strips of energy), still managed to show a slight improvement in its revenues by 1.1 percent or PHP0.11 billion due to the increase of its average selling price by 4 percent to PHP3.36/kWh.


In terms of the company’s operating expenses, we managed to minimize the relevant costs in 2016 by 8 percent or a net reduction of PHP1.7 billion with the following major contributors:

  1. PHP1.6 billion reduction on purchased services relating to civil works, typhoon related expenses, operations and maintenance on our fluid collection and recycling system, and lower cost of well workovers;
  2. PHP0.4 billion reduction on business and related expenses that came mainly from the reduction of expenses on business-related meetings, as well as foreign travel expenses; and
  3. PHP0.6 billion on other expenses, mainly on the issuance of parts and supplies.


The above reduction was partially offset by higher depreciation, insurance, and taxes amounting to PHP0.9 billion.


Our consolidated recurring net income improved by 6 percent or PHP0.5 billion over that of 2015. Major contributor to this is the higher recurring income from the Palinpinon and Tongonan plants at PHP1.2 billion and FG Hydro at PHP0.4 billion. Partially offsetting these is the lower contribution from our WESM exposed power plants like BacMan, which had an opportunity loss of about PHP1.0 billion and Nasulo at PHP0.4 billion.


In terms of cash flows, our company generated a total cash of PHP17.4 billion during the year. Bulk of these generated cash were applied to debt service at PHP10.9 billion, maintenance capital expenditure (CAPEX) of PHP8.0 billion and payment of cash dividends amounting to PHP5.2 billion. The company ended the year with a cash balance of PHP 10.6 billion, roughly PHP7.0 billion lower than last year’s.


Other positive developments on the finance front include the following:

  • The completion of the functional currency conversion from Philippine Peso to US Dollars of the Burgos Wind Project, which will now allow the project to reflect majority of its transactions and its financials in their natural currency;
  • The full and final settlement of our insurance claim on BacMan that resulted to a net collection of PHP1.5 billion from our insurers;
  • On value added tax (VAT) matters, the company successfully refunded PHP0.5 billion of its excess input VATs, monetized PHP0.6 billion worth of tax credit certificates and utilized a total of PHP0.3 billion of tax credit certificates for the payment of the company’s various tax obligations; and
  • Availment of about PHP0.08 billion worth of import duty privileges. This represents a doubling of duty-free availments compared to 2015.


Financial Risk Management

We continued pursuing our financial risks management program in 2016 which is directed towards addressing our financial vulnerability with respect to currency as well as interest rate volatilities and the various risks associated with our refinancing initiatives.


In mitigating the company’s risk on currency volatility, we have entered into derivative contracts where as of end-2016, our US Dollar denominated principal and interest that are falling due in 2017 and 2018 are hedged at 71 percent and 63 percent, respectively. These contracts have now provided the company with a partial cushion from a visibly weakening Philippine Peso. We will continue with our hedging exercise in order to augment the dollar-linked revenues under our offtake contracts with the National Power Corporation.


We are pursuing a number of initiatives aimed at protecting the company from both interest rate and refinancing related risks. One of the programs is taking advantage of the prevailing strong liquidity in the local debt market and bringing the debts down to the subsidiaries level. Another program is the refinancing/replacement of more expensive loans by taking advantage of the low interest rate environment and converting certain loans with bullet maturities into amortizing loans. The PHP3.5 billion EDC peso bond that matured in December 2016 was partly refinanced by a PHP2.5 billion amortizing bilateral loan that carried a lower interest rate by 390 bps compared to the 9.33 percent interest on the bonds. The balance of PHP1.0 billion was repaid with internally generated funds. Combined with all the previous initiatives of the company, the weighted average borrowing costs which reached its high point of 8.9 percent in 2011 has been brought down to 6.24 percent in 2016. This likewise increased the level of the company’s amortizing repayments from 51 percent in 2014 to about 68 percent at end-2016.



The year 2016 saw the company still firmly ahead as the dominant player in the renewable energy space. Despite the multiple business challenges associated with the introduction of disruptive technologies, EDC remained unfazed as it continued to maintain its position as the leading clean and renewable power company in the country.


As mentioned above, the combination of low WESM prices and the unscheduled outages of our aging plants had affected our revenues in 2016. It is for this reason, as well as the challenging economics of growth projects, that we focused intensely on reducing our OPEX and the completion of our upgrade CAPEX program to enhance our generation and neutralize the unfavorable effects of low prices. On the contracting side, we managed to close the contracts that we have been working on diligently, thus effectively minimizing our company’s continued exposure to the volatile prices in the spot market.


On the finance front, we have capitalized on the very liquid domestic financial market and successfully replaced our more expensive loans with cheaper Peso liabilities, thus reducing our effective loan interest rates. This financial exercise also resulted in the extension of our maturities and converting the company’s bullet repayments into amortizing loans.

As usual, the execution of our various finance initiatives could not have been possible without the strong support of our stakeholders. And as we continue to rely heavily on your support, our efforts on this front will remain equally unrelenting. On behalf of our management team and our hardworking employees, we thank you, our stakeholders, for your continuing trust.