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.
The Energy Development Corporation (EDC) is a pioneer in generating 100% clean, renewable, and reliable power as an electricity supplier in the Philippines for over 40 years. With power plants all over Visayas and Mindanao, the company is one of the biggest producers of geothermal energy in Asia and is expanding its reach in the international market, allowing it to offer customers affordable energy rates. EDC also strives to provide the best customer service it can to all its clients by having helpful salespeople and easy to understand contracts. Because of all of this, it is poised to become the premier supplier of electricity for the Philippines’ Green Energy Option Program. EDC takes its mission as a renewable energy provider seriously and goes beyond sustainability by investing in programs that enhance the environment and empower its partner communities, thereby fostering regenerative development. The company has also been working toward being carbon-neutral by improving its energy efficiency, as well as implementing various greening projects to ensure that its mission to provide future generations with a better life remains intact.