To our dear stakeholders,

 

While we will remember 2020 as a bizarre and tumultuous year because of COVID-19 and the underlying global crisis it represents, at the FPH Group, it was the period that we crystallized our definitive roles in the transition to a decarbonized and regenerative future. Our updated mission statement is a short yet powerful phrase that’s now at the center of everything we do. It’s founded on principles that have been guiding our actions in the past and is now shaping the way we reimagine and redesign our businesses for the future.

Central to our new mission is the stakeholder pentad framework. This powerful lens captures a lot of our essence and how we want to move forward. Applying this mindset means all decisions should revolve around balancing the needs of all five stakeholders, in a specific sequence: first, your customers; then, your co-creators, which are your employees, suppliers, contractors; then, the Earth; then, the communities; and, finally, your investors. The pentad necessitates that we think in systemic wholes and not in fragmented parts. Reversing the sequence, which unfortunately has permeated the thinking of most businesses in the past, just doesn’t work when your primary goal of maximizing shareholder value leaves little room to benefit anything else.

We’ve breached most of our planet’s safe environment limits in the mindless pursuit of growth and prosperity for just a few. This has set us on a trajectory of 3-4° Celsius of warming by 2100—that will clearly be an unlivable planet. In January 2021, results of the UNDP-Oxford University “Peoples’ Climate Vote”—the biggest global survey on climate change among a million people across 50 countries—showed that 64% of the participants believe that climate change is an emergency that requires urgent responses from countries. (It’s interesting to note that almost half of the poll participants were between 14 to 18 years old).

I can’t even begin to imagine the changes that are about to take place in consumer buying habits, supply chains, the rewiring of finance, and even social norms—just to name a few, as these beliefs progress and mature. Every single industry today will be affected by the need to reduce carbon dioxide emissions. Taking the necessary actions that prepare ourselves and the country for these massive shifts in how the world works will be worthwhile investments with immeasurable returns. Best to do them early and avoid getting locked into stranded assets.

The next 10 years are absolutely critical to whether we get the transition on course for Carbon Neutrality by 2050, or watch it run away from us irreversibly. The signs and the frequency of 1-in-100-year events and temperature records everywhere (including the Arctic and Antarctic last year) are already demonstrating, in no uncertain terms, that time’s up and we’ve messed around with the stability of the planet to geologic-scale proportions! This is the incisive and foreboding truth behind the saying, “We’re the first generation to feel the effects of climate change and the last that can do anything about it”.

As this reality mainstreams, the world will also recognize that we have a remaining carbon budget that halts warming to less than 1.5° Celsius. That number is in the realm of 500 or so gigatons left before we blow past that point of no return. Since global emissions are 51 gigatons per year, we have less than ten years before we use that up. We need to get this number down to zero before 2050. Not just by 20% or 30% but down to zero, otherwise the Earth’s warming just continues with all the terrible consequences.

The COVID-19 lockdowns have only brought down global emissions by 7-8%. So we need COVID-scale emission reductions every year till 2050 if we are to achieve that. That is the magnitude of the task. This is bigger than anything man has ever done in the history of this planet. The world either fragments and quarrels for their fair share of what’s left (which will surely be catastrophic), or we take the high road as a global community, prioritize, constrain what we do, and make the hard choices of where that remaining emissions budget gets used.

As the world comes to grips with this reality, we will see paradigms shifting drastically. We will go back to basics. Consumerism will hopefully be anchored less on our wants and more toward our needs. Hopefully, we focus on prosperity for all, especially those left behind, rather than on simply aiming to raise gross domestic product (GDP) growth per se.  Then, very importantly, we begin to reimagine and redesign our infrastructure and way of life for a changed world: decarbonized, resilient, and socially inclusive.

Why should we care about decarbonizing when the Philippines is just a tiny fraction (barely 0.4%) of global emissions? Shouldn’t the large, developed nations just be tasked with correcting all these as their debt to society, and we, the developing world, should be given the chance to grow as they have in the past? Don’t they owe us this debt after using up the planet’s carbon limits all these decades and centuries for their own material ends?

 

“The COVID-19 lockdowns have only brought down global emissions by 7-8%. So we need COVID-scale emission reductions every year till 2050 if we are to achieve that.”

 

There’s truth to all that but it’s also good to keep the issue in the right perspective. The Philippines, despite its tiny contribution to world emissions, is one of the most vulnerable nations on earth to the unfolding climate crisis. We have an inordinate stake in limiting global temperature rise to within 1.5° Celsius. Our voice in the community of nations resonates with a stronger moral power if we’re willing to back our words with action, proving it can be done.

The thought of lowering the carbon emissions of our electricity grid enthralls me because, if done successfully, you can electrify transportation and buildings, and even the industrial sector, which is regarded as the most difficult to electrify. After all, it features processes that rely heavily on the petroleum sector for both feedstocks and energy. This will bring down carbon emissions even more and also lead to cleaner urban air. And while all these may appear to be a daunting challenge we must face, I am optimistic about the future as many new developments continue to unfold.

First, the costs of renewable energy and battery storage have come down considerably in the last decade or so. The Energy Development Corporation (EDC) is also working on bringing down the cost of geothermal power although, admittedly, not yet quite as dramatically as what we’ve seen for wind and solar. As renewable energy and battery storage costs drop further in the coming years, their penetration into our grids, rooftops, and our lives will increase. However, if we want to encourage a deeper penetration and deep decarbonization, we must effectively plan for the intermittency issues that arise with renewable energy.

Second, there are a host of solutions to the issues that intermittency and seasonality bring to a grid that would maximize the penetration of renewable energy in the transition. The power industry has to use a full arsenal of technological solutions to manage the variability and intermittency inherent in renewable energy, make energy consumption more efficient, and thus facilitate the rapid lowering of carbon footprints.

Third, there is a fundamental shift to lower-carbon sources of energy. The world of energy and electricity markets is being massively disrupted. In countries like Australia, Germany, and some US states like California with even modest renewable energy penetration, the preference of the consumers and policymakers for low-carbon sources has manifested in coal plants being utilized less or being idled. The world is seeing the acceleration of this shift as it discovers that massive grid flexibility is needed for the inevitable penetration of renewable energy sources that are growing at a rapid pace. Global banks, huge pension funds, sovereign wealth funds, private equity, and insurance firms are now being clear about their waning appetite for investments in high-carbon fuels and technologies. Even engineering firms, technical advisers, and equipment manufacturers have announced staying away from building high-carbon emitting assets.

Our own transition to a decarbonized future will be anchored in the next few years by our efforts to bring in liquefied natural gas (LNG) before the end of Malampaya. Bear in mind, though, that while we are embarking on this timely shift to LNG, we are, at the same time, also planning for its eventual phaseout in ways that complement a pathway to Carbon Neutrality by 2050 and consistent with a 1.5° Celsius target.

Beyond the energy sector, we can unlock more opportunities as we reimagine how and where we get our food, our building materials (even integrating carbon-negative materials like bamboo), the design of our buildings, how we cool them, how we insulate them, district cooling, what refrigerants we use, how we dispose of those refrigerants, smart buildings, and other similar innovative solutions.

Beyond designing for a decarbonized world, just as important would be planning for resilience amidst a harsher climate. Here, we could reimagine how we design our cities with resilient infrastructure like underground power lines and distributed generation, as well as circularity in the use of water, rainwater, and waste (a valuable resource we’re literally throwing away).

 

“Carbon Neutrality 2050 could become that focal point that catalyzes multi-dimensional solutions from all sectors and corners of society.”

 

But it’ll also be about building cities that encourage social integration, community, and compassion. The so-called 15-minute cities being planned for by progressive urban designers and mayors in Paris, Barcelona, London, Detroit, Melbourne, and Portland, Oregon where work, shopping, health, and culture are not more than a 15-minute walk, bike ride, or mass transit ride away. They are characterized by having a more thoroughly integrated urban fabric that builds social cohesion among income classes and races.

These ideas merely scratch the surface but preparing for that world now, with innovative business models that work, will ensure that we’re equipped to thrive as individuals, companies, communities, and as a nation in the coming decade. Carbon Neutrality 2050 could become that focal point that catalyzes multi-dimensional solutions from all sectors and corners of society.

I hope that you all share my excitement and optimism as we move along our journey to a decarbonized and regenerative future.  Thank you for your unwavering support.

 

 

Federico R. Lopez
Chairman and Chief Executive Officer

 

Dear Shareholders,

 

In the midst of navigating the challenges and limitations of a pandemic- gripped world, we in Energy Development Corporation (EDC) affirmed our commitment to forge collaborative pathways to a decarbonized and regenerative future. At the core of our mission, which is aligned with that of our parent company First Philippine Holdings, is the belief that our business must live up to its purpose of creating value for its stakeholders, while elevating our customers, employees, communities, the environment and our business partners (suppliers, contractors, etc.) to a whole living system where we can all flourish.

2020 will be remembered as the year when we said it is no longer enough to be sustainable, to be on the same worn path that simply seeks to do less harm.

For EDC, this means we need to reimagine our business to become regenerative. To do this, we must challenge ourselves to rethink what we do, and consider how and why we do things. This means that we need to establish clear business models for all our actions. We need to think critically as we look to increase our renewable energy investments and grow regeneratively moving forward.

 

FACING THE “PANDEMIC YEAR” AS ONE EDC

The year 2020 disrupted us all.

From the outset, when the pandemic struck, our top priority was to keep our employees and their families safe. We rapidly established protocols and steadily improved these as each week passed.

We communicated clearly to our employees that the energy we produced was essential in keeping food manufacturing facilities running and hospitals open to serve Filipinos during these very difficult times.

It was very important for us to communicate this empathetically across the Company, to establish a union of hearts and minds as we demanded many changes and sacrifices on the part of our employees at a time of great uncertainty. Everyone responded to this call.

Two factors set EDC’s response apart and enabled us to deliver on our commitments to our stakeholders. The first factor is Agility. EDC has about 160 Agile teams simultaneously delivering different projects. Our Agile way of work expanded even further at the start of the pandemic as more teams coalesced without the need for instructions to keep our employees safe, to keep our facilities operating, and meet the demands of our customers and communities. 

We found that the best strategy is to let the people with the domain expertise and skills take the lead. Putting the right people in critical positions and allowing them to call the shots enabled us to act quickly and decisively. We gave our people the chance to gain greater experience and confidence in crisis management and response.

We learned that perfection is the enemy of progress and that it is better to move forward with “minimum viable products”, because it is easy enough to iterate once the learnings cascade in. Within a day, we established our Corporate Crisis Management Committee (CMC). Within two weeks, we completed the hub-and-spoke system and had Incident Management Teams (IMT) across all sites. Within just three weeks, the shelter-in-place facilities, version 1.0, were habitable and went live; many improvements have been made since then.

The second factor is that we consciously tried to be a step ahead of the pandemic. We adapted to work-from-home (WFH) and transitioned to shelter-in-place (SIP) arrangements quickly. We kept thinking, “what else should we be doing?” To guide our actions, we spoke to our employees often, through townhalls, surveys, and countless personal calls made by the leadership team throughout the organization. As an example of this proactive approach, we were able to see the need to provide world-class counselling support to employees struggling with very real problems of anxiety and mental health.

 

“Two factors set EDC’s response apart and enabled us to deliver on our commitments to our stakeholders. The first factor is Agility… The second factor is that we consciously tried to be a step ahead of the pandemic.”

 

When the pandemic started, we were sitting on a stockpile of close to 2 million face masks, built slowly since 2015. We did the math, kept what was essential, and shared the rest with our employees working from home, who were then able to support their families safely as they ran errands. We brought more comfortable office chairs and other necessary equipment to the homes of our employees. We repurposed benefits and provided sponsorship for creative and other pursuits to keep our people whole and thriving.

In this pandemic, we learned that in times of crisis, it is important to reach out empathetically and often, to listen actively, care deeply, and respond appropriately. The smallest acts mean more than potentially much larger ones, if these are targeted, relevant, and based on real listening.

For our operations, we adopted a testing and contact tracing strategy to reduce the risk of infection and contagion among our SIP employees. We began with antigen testing, but havesinceadopted100%ReverseTranscription- Polymerase Chain Reaction (RT-PCR) tests for employees sheltering in place. The Company also provides tests for employees who need to ensure they are safe to return to their homes.

With more employees and contractors reporting to work on site, we now do regular random testing on 5-10% of our employees, practice isolation when needed, and perform contact tracing to control the spread of the virus.

 

Financial Highlights 

2020 is a year wherein I cannot reasonably complain about the performance of the Company. Despite a significant reduction in electricity demand, we registered a recurring net income attributable to parent of PHP9.85 billion, down 15% from 2019. Our EBITDA, or earnings before interest, taxes, depreciation, and amortization, held steady from the prior year’s PHP22.1 billion, at close to PHP21.7 billion for 2020. Part of this performance was due to the selected cuts to our work programs to match the cash flow uncertainty that persisted until 3Q2020.

However, it is good to recall the first 100 days of the pandemic, when customers couldn’t pay and the government rightly supported them to ease the financial burden on the public. It was fortunate that when the crisis happened, EDC was in good financial health. Our Chairman has prudently directed the group companies to practice fiscal discipline and keep debt at low manageable levels. We were able to build up and maintain our cash reserves well in advance, to prepare for paying off our largest debt facility in January of 2021.

Now, we are using the space we created in our balance sheet to implement projects and build up for when business conditions pick up again. The 29MW Palayan Bayan and the 3.6MW Mindanao 3 binary plants are under construction. Later in 2021, we expect to move forward with the 100MW Aya pumped storage hydro project, as well as the 20MW Tanawon geothermal power plant project in Bacon Manito.

For 2020, in addition to our robust internally generated cash flows, EDC also signed PHP20 billion of new facilities and of this, drew PHP13 billion resulting in a consolidated cash balance and short-term investment of PHP25.8 billion. This significant cash balance created an environment where your Company and its employees felt safe and secure amidst the pandemic.

 

 

EDC also capitalized on the opportunity to borrow money at all-time-low interest rates. To date we have refinanced PHP12 billion of our loans, and lowered the borrowing rate for some of the refinanced debt by 2.8%, resulting in savings of approximately PHP300 million this year.

 

 

A BUSINESS MODEL FOR REGENERATION

From March until about the first week of May 2020, much of the Philippines was at a standstill and was weighed down with fear and anxiety. However, once the Inter-Agency Task Force on Emerging Infectious Diseases (IATF) classified energy as an essential service and exempted it from the lockdowns, EDC acted quickly to get things moving. Our CMC and site IMTs responded as we ramped up work. The idea was to stay ahead of the curve and get as much work done while cases were low around our sites.

Ramping up operations allowed us to ask contractors to return to work, which helped us give them a sense of dignity and pride for an honest day’s work and allay their concerns about hunger. One of the Mayors in our host communities called me to thank EDC for “being contrarian,” by keeping locals working and projects going when there was a sense of paralysis all around. The results have been good, all things considered. But there have been downsides, such as delays in our drilling program and key projects like the Leyte Steam Optimization. We also experienced higher execution costs.

Against these challenges, our transformation program delivered modest savings of PHP1.5 billion. We canceled drilling of two wells, following a detailed review and challenge of our drilling program, and suspended the development of new reinjection and recharge solutions, and pre-emptive plans to attack calcite scales. We also doubled down on our workover plans, given the 60% reduction in costs of these crucial activities in the last two (2) years. These long term re-thinks about our approach are important. Problems and issues in our industry come suddenly, but solutions take a long time to implement. This asymmetry requires us to focus on continuous improvement and planning.

Being regenerative calls us to look at the business model behind an act or a choice. Last year, a random call with city officials in our areas of operation led to an agreement to build two RT-PCR testing centers. Today, there are now six more, nationwide, with our total assistance amounting to PHP165 million as of December 2020. This assistance includes container vans for temporary quarantine facilities, PPEs, medical and food supplies, among other essentials. Our local governments needed help and in an act of partnership, EDC paid for the labs and lent supply chain support, while our local government partners paid for the buildings and are shouldering operations and maintenance expenses. This brought speed to the local testing capability: from getting results in 3-10 days, to results in just one day. This helped boost the resilience of our communities and aided the local government to establish a critical capability in a time of great need. Today, these RT-PCR testing centers are running tests for close to 300 of our employees and countless contractors every 14 days as we change SIP shifts. This collaboration is a good example of being regenerative, following a risk mitigation business model.

Last year, we also supported our host communities through 17 livelihood projects to address food security and provide immediate income. These projects collectively benefitted over 1,500 households across our project sites who were among the most economically affected by the pandemic.

As these were going on, investments in our foundational systems were also being rolled out. After three (3) years of preparation and data cleansing, our Enterprise Asset Management (EAM) System, Maximo, went live in 4Q2020. Complementing this was our NISOFT platform for our permit to work system and our revamped safety policies and processes at the power plant, following the model of Electricity Supply Board International (ESBI). To improve our sourcing cycle time and provide projects with competitive bidding, we implemented our e-Procurement solution that is integrated with our core finance and Enterprise Asset Management systems. We rolled out our Workday platform, which now provides end-to-end HR solutions for the organization. In Finance, we continued to deploy robotic process automation for defined repetitive activities, rolled out a new self-serve expense reporting system, electronic invoicing, and a more efficient outlooking process. We also implemented phase two of our Smart Steamfield last year, allowing us to do real time monitoring of wellhead pressures and brine flow, previously monitored manually at least twice a day. This innovation, phase three of which will be completed this 2021, will fully enable our timely response to possible and actual well collapses based on data trending and analysis. All these foundational systems have three (3) common threads: they took a couple of years to prepare and implement, they are all digital solutions, and they have helped EDC transition to new ways of remote work.

 

“We recognized that Safety, apart from Accountability, Performance Orientation, and Collaboration, is a critical behavior that should be manifested and reinforced across EDC. Safe production will always be our utmost priority.” 

 

We recognized that Safety, apart from Accountability, Performance Orientation, and Collaboration, is a critical behavior that should be manifested and reinforced across EDC. Safe production is our core value and culture. We started streamlining and integrating processes and practices for our Health, Safety, and Environment (HSE) program. By introducing self-paced online learning modules under our HSE Academy, we increased awareness of relevant HSE laws. We also launched Good Catch, our very own conduit to empower employees to ensure workplace safety by performing walkthroughs and interventions, and having conversations to recognize everyone for being safe.

We will continue to uphold our promise that our workers, the communities we impact, and the environment we operate in will be free from injury and harm, as we pursue our goal of a regenerative HSE culture by 2025.

When I think about being regenerative, I also think of our people. Amidst the pandemic, EDC’s engagement scores shot up to 95%, an all-time high. Quite importantly, two other parameters of engagement—Enablement and Energy levels— also went up to 92% and 95% respectively, bucking the trends seen by our consultants across the globe.

EDC employees remain deeply engaged in our work. In fact, 96% of our people feel they are personally aligned with our purpose, 97% say their work gives them a sense of accomplishment and 99% say they are proud to work for the company. Our management team has created an environment of high alignment, high energy, high enablement, and high engagement, which are all the more critical given the context of the crisis we are in. Our people are confident they can help the business grow through their meaningful contributions—and they are right.

 

“I would like to personally thank our highly engaged workforce and our senior leadership team for their constant enthusiasm and motivation in the face of lingering uncertainty.”

 

Letting Our Culture Shine Through 

While there are many things I am proud of in 2020, perhaps what is most important to me is how EDC’s culture shone through. It was absolutely incredible how everyone banded together and offered each other support.

This pandemic has shown the strength of the foundations of our business and has crystallized who and what EDC is. As mentioned, our engagement scores are through the roof, and our consultants say that they have never seen scores like these before. But beyond those excellent scores, I am just proud that our people are proud. I am happy that they are energized, enabled, and engaged.

With this said, I would like to personally thank our highly engaged workforce and our senior leadership team for their constant enthusiasm and motivation in the face of lingering uncertainty. Thank you, EDC team, for allowing us to invade your homes and turn them into offices. Thank you for your many sacrifices, especially time spent away from loved ones. It’s been 30 cycles of SIP and you should all know that it is through your commitment and sacrifice that we are able to deliver the essential power our country needs day after day. Your generosity to our communities and the daily wage earners affected by our transition to WFH, like our security guards, office maintenance staff, and drivers, your work to expand our BINHI greening legacy and biodiversity monitoring partnerships to keep protecting the environment, and the COVID-19 assistance you provided to our power customers are truly heartwarming.

I am equally grateful for the ongoing trust and confidence we receive from our various business partners and investors. This further invigorates our long-standing partnerships and fosters our shared vision of a regenerative future.

Although some uncertainty remains in our industry and the businesses we serve, I feel confident that EDC has firm and nimble footing as we navigate this new reality. It is my privilege to share this 2020 Integrated Report that celebrates the impact of our unwavering dedication to our revitalized mission of forging collaborative pathways to a decarbonized and regenerative future.

 

 

Richard B. Tantoco

President