Management Report: Chairman’s Letter

Federico R. Lopez
EDC Chairman and CEO

“We re-acquainted ourselves with the Lopez values that have brought us to where we are today. These values have been at the heart of our DNA as Lopez companies. It is our wish that these same values will also reside at the core of the multi-year transformation of EDC.”



To My Fellow Stakeholders,

We look back at the year 2012 with much to be proud of as a company: at Php28.4 billion, consolidated revenues stand at levels our company has never attained before while our recurring net income attributable to equity holders of the parent, at PhP8.2 billion, has surpassed anything EDC has ever accomplished in its 37 years as a company. In many ways these stellar results reflect our successful strategy of building EDC into both an integrated and more diversified power and energy player.

Revenues from the geothermal power plants we acquired from the National Power Corporation (NPC), namely the 112.5MW Tongonan I and 192.5MW Palinpinon plants, have been driving this growth with both higher contracted volumes as well as higher average tariffs. On the other hand, the 60% owned First Gen Hydro Power Corporation (FGHPC), which operates the 132MW Pantabangan-Masiway hydroelectric plants in Nueva Ecija, also contributed quite significantly due to higher sales of ancillary services and an increase in average tariffs and volumes from both contracted and spot market sales.

EDC also received a Gold Level rating from the Securities and Exchange Commission (SEC), the Philippine Stock Exchange (PSE) and from the Institute of Corporate Directors (ICD) at the Annual Corporate Governance Scorecard awards last year. This three-peat achievement merited what they christened the Platinum Award for EDC—attaining a Gold Level rating for its third consecutive year.

However, not everything was rosy. At the annual stockholders’ meeting last year I mentioned that we expected to bring the Bacon-Manito (Bacman) plants online by September of 2012. Of course we were disappointed that we missed this date altogether, and the plant has not yet operated over a sustained period. In many ways, this illustrates for us the challenges inherent in rehabilitating power plants. What’s certain, however, is that our rehab team remains unfazed by the numerous challenges they’ve encountered and we recognize that all technical problems have solutions. We continue to make solid headway toward bringing the units to commercial operations and hope to resolve all issues in due course.

Another unfortunate event that occurred earlier in March 1st of this year was the tragic landslide at the Upper Mahiao sector in Leyte that claimed the lives of 14 people employed by a subcontractor, J.E. Arradaza. The incident occurred at 9:50 in the morning, ironically while the team was working on mitigating measures precisely aimed at preventing such landslides in the future. The work was for the reinforcement of just one of 104 vulnerable geohazard areas identified by both internal and external experts. Over the past several years, 98 areas had already been addressed and that pad in the Upper Mahiao sector was among the final six sites that would have been completed over the next few months. The event was tragic to say the least and there have been many lessons learned. It was difficult but we always have to remind ourselves that the challenges we faced were nothing compared to the pain and suffering of those who lost their loved ones. Although our crisis management teams were tried yet again, true closure is only achieved by empathetically addressing the real human concerns that surround such incidents. In this regard, I can say that your company stood tall amidst adversity.

In many ways, we like to describe EDC as a company still in the early phase of what will be a multi-year transformation. Aside from its integration with the power plants formerly owned by NPC, EDC has also been in the midst of diversifying its generation platform into other renewable forms of energy, like hydro through FG Hydro, and soon, wind, through our 87MW Burgos wind farm in llocos Norte.

Not as visible externally, but just as critical, is the transformation of the entire organization from being function-led into one driven by separate Strategic Business Units (SBUs) each in Bacman, Leyte, Negros Island, and Mt. Apo, with each being responsible for their own results and bottom lines. The functions will now actively support the needs of each SBU and we expect this heightened sense of accountability will drive efficiency and change efforts at each of the sites.

We are already seeing the various SBUs spinning off many non-core activities to third parties that can manage these projects with more focus and efficiency. These so-called “strategic contracting” initiatives will enable EDC to concentrate its balance sheet and manpower resources on core activities, like steam resource development and management, as well as power generation. We can see the visible effects of such initiatives in the form of more modern heavy equipment being made available to the sites, more incentivized drilling performance, as well as a more appropriate headcount that’s 26% lower than pre-privatization levels, just to name a few.

The proof of the pudding can already be seen in the numbers. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margins were hovering at 49% in 2009, shortly after we took over from government in 2007. Today, just three years later, that margin now stands at 60% and we’re just getting started!

These last two years, our Chairman Emeritus launched a campaign throughout the First Philippine Holdings (FPH) group to reacquaint all of us with our past as well as the Lopez values that have brought us to where we are today. We reacquainted ourselves with values such as: a pioneering entrepreneurial spirit, business excellence, unity, nationalism, social justice, integrity and an overriding concern for employee welfare and wellness. Throughout our family’s history, these values have been at the heart of our DNA as Lopez companies. It is our wish that these same values will also reside at the core of the multi-year transformation of EDC as it continues its post-privatization journey and becomes a full-fledged “Kapamilya” in FPH and the Lopez group of companies.

So this year, once again, I’d like to thank all our customers, suppliers, employees and management teams. Change and transformation never come easy but together, we see all of us braving the toughest of headwinds to create a stronger and better company. Our appreciation also goes to our board members and all our shareholders for being steadfast in the face of challenges. We want you to know that it is precisely your faith and trust that inspires us to take EDC to greater heights, and can make anything possible!

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.