Report of the Chief Financial Officer

Nestor H. Vasay

Chief Financial Officer

“To protect the company’s key investments and safeguard its financial health, we will continue managing some of these key climate risks and continue pursuing our power plant optimizations along with our reliability and efficiency programs.”

Dear Stakeholders,

The energy landscape in the Philippines continues to shift in response to the trends in the global supply and demand for coal, the introduction and rapid growth of new and disruptive power technologies, as well as economic developments—both local and international—and changing energy preferences.

While there are strong and visible moves to promote cleaner fuel sources, particularly in the international market, cheap coal remains to be the dominant choice in power plant fuels, with some 65 percent of incoming capacities in the near term still coming from coal plants. The country’s continued reliance on imported fossil fuel continues to pose a threat to EDC’s competitive position, considering the low variable cost and high minimum stable load requirements for coal-fired power plants.

The continuing downward pressure on bilateral contract prices being offered by coal plants is another factor that affects the company’s position, especially given the common misconception that coal is cheaper than geothermal. The prevailing model of “one-size-fits-all” cost, combined with the government’s goal of lowering electricity costs, appears to be favoring coal-fired power plants. In the long term however, cheap coal will have dangerous environmental impacts, as well as other extremely expensive social costs that have not yet been factored in.

Another development that may have repercussions on EDC’s financial performance is the signing into law of the Tax Reform for Acceleration and Inclusion (TRAIN) Act last December 2017. The TRAIN provided for excise tax on domestic or imported coal at PHP50/metric ton (MT) effective January 2018, PHP100/MT effective January 2019, and PHP150/MT effective January 2020. It remains uncertain as to whether this excise tax is able to sufficiently capture the negative externalities that results from the burning of coal. If these externalities are finally recognized and efficiently valued, as they should be, geothermal rates will obviously become more competitive and an even more sensible replacement to coal.

Apart from these market factors, EDC’s 2017 performance was marked by the impact of natural events, particularly for our Leyte business unit. The 6.5 magnitude earthquake in July and the unusually heavy rains induced by Typhoon Urduja in December, underscored the importance of building back better and providing resilience into our business operations, and ensuring further, that the company is able to withstand similar, or even stronger climate related events in the future.

Financial highlights and lowlights

Despite the challenging conditions and the setbacks brought about by natural calamities in 2017, EDC maintained its stable financial footing, which allowed the company to continue making the necessary investments on plant resiliency, operational reliability and efficiency.

The strongest proof of EDC’s efforts to build resilience into its operations is yet another year of sterling performance delivered by the Bacman plants that improved their revenues by 28.8 percent or PHP0.9 billion to PHP4.0 billion. This came from a combination of higher average price by PHP0.74 per kilowatt-hour (kWh) and additional generation of 29 gigawatt-hours (GWh). The plant’s fully contracted capacity in 2017 protected the company from further exposure to the spot market.

Likewise, our wind farm in Burgos showed its best year of operations thus far, as it upped its revenues by 16 percent or PHP0.4 billion to PHP3.2 billion on account of the better wind regime in 2017. This in turn allowed the Burgos wind farm to deliver 52 GWh more of generation.

Our Leyte assets on the other hand, underdelivered, with revenues that were down by PHP0.8 billion versus last year. This was due to the effects of 340 GWh lower volume from both our Unified Leyte and Tongonan plants as we pursued our restoration efforts following the natural catastrophe events in 2017. This, however, was partially offset by a higher average price per KWh by PHP0.12.

The operations in Negros also experienced some setbacks with the load curtailments that were imposed on the asset in order to give way to power generations coming from solar facilities. This yielded a sales volume that is lower by 132 GWh and translated to PHP0.8 billion of foregone revenues. This, however, was mitigated by the Negros asset as it secured 50 megawatts worth of additional ancillary service contracts, which served as a strong cushion to the impact of power curtailments. This higher contracted volume helped offset the lower generation volume from the Palinpinon power plants.

The company ended the year with consolidated revenues of PHP33.3 billion, 3 percent or PHP0.9 billion lower than the previous year.

Geothermal notably remains as the company’s primary growth engine, with its core geothermal assets generating PHP28.3 billion of EDC’s PHP33.3 billion consolidated revenue in 2017.

Our cash operating expenses in 2017 went up by PHP0.7 billion to PHP14.2 billion, mainly on account of our unplanned return-to-service (RTS) activities resulting from previous climate events that hit our assets in Leyte. The company incurred some PHP0.9 billion in related expenses, combined with the work over of wells in Mt. Apo, where we spent PHP0.2 billion. These increase in cash cost were partially toned down by the lower head office cost of PHP0.5 billion, pertaining mainly to personnel costs and contracted services.

Interest Expense was lower by PHP0.4 billion mainly on account of the company’s settlement of its maturing PHP3.5 billion public bonds that previously fetched an interest rate of 9.33 percent per annum.

And given a more manageable Philippine Peso depreciation against the US Dollar, the company was able to better contain its foreign exchange loss in 2017 to PHP50.2 million, from PHP653.5 million the previous year.

All through 2017, the company ably maintained its strong financial position and ended the year with a robust cash balance of PHP11.7 billion, up by 10.3 percent compared to the PHP10.6 billion the year before. EDC likewise kept its comfortable gearing levels, as shown by its consolidated debt to equity ratio of 1.11x and a consolidated net debt to Earnings Before Interest Taxes Depreciation and Amortization of 2.79x.

EDC’s recurring net income (RNI) attributable to EDC at PHP8.8 billion is 4 percent lower than last year’s PHP9.2 billion.

Other financial highlights in 2017 include:

  • Savings of PHP0.14 billion that we derived from the renewal of the company’s 2017 insurance policy – savings that came at the heels of a rapidly hardening insurance market;
  • Additional collection of PHP0.64 billion from various insurance claims related to outstanding claims on our insurance policy;
  • Monetization of tax credit certificates amounting to PHP0.9 billion and an additional refund of excess input VATs amounting to PHP0.4 billion; and
  • Maintained our strong earnings from Peso fund investments despite the increase in market volatility. Total earnings from fund investment amounted to PHP0.2 billion at an average yield of 2.4 percent.

Managing climate risks

As evidenced by the two calamities that struck our Leyte assets, climate change can pose real threats to our operational and financial stability. To protect the company’s key investments and safeguard its financial health, we will continue managing some of these key climate risks and continue pursuing our power plant optimizations along with our reliability and efficiency programs.

In 2017, we completed rehabilitation efforts and upgraded our control systems in our Tongonan facility, as well as maintenance measures in our other business units. Moving forward, we will constantly revisit and strengthen our mitigating strategies to manage the impact of natural catastrophes that now include earthquakes, given the experience of 2017.

We foresee that these are the challenges that we will have to confront in light of the “new normal.” We are confident that our business will continue to grow, especially as more people understand the importance of making better and cleaner energy choices. Despite the difficulties we experienced in 2017, it is a source of great pride and satisfaction that we were able to mount more efficient RTS activities and restore electricity to the Visayas region. We will continue to make the necessary investments to improve our operations and make our business more resilient in the face of rapid climate change. All these we will do as our hardworking team continues to draw its strength from the support of all our stakeholders.