PRESIDENT’S REPORT

Dear Stakeholders,

Allow me to reiterate the theme of this year’s annual report: We are running out of time. The world is in peril, and so are we. If global temperatures remain at unmanageable levels, we can expect the consequences of global warming to continue: searing heatwaves, extended droughts, catastrophic hurricanes, devastating floods, and declining air quality. All these have wreaked havoc in people’s lives in our very own country and in the rest of the world. What we face is daunting. How can we not be alarmed?

2017 turned out to be the second warmest year on record according to NASA, and the warmest year without the El Niño effect. In the Global Carbon Project study, carbon emissions worldwide grew higher in 2017 compared to the three years prior where emissions stayed relatively flat. At this rate, the COP21 target of limiting increase in global temperatures to no more than 1.5 degrees Celsius by 2030 – a goal the Philippines has committed to – will not likely be met. So we are, in fact, running out of time.

No doubt, ‘business as usual’ cannot be our default. The urgency to make responsible decisions today is crucial especially if there are viable and sustainable alternatives. For as long as we are not making smarter choices and not moving in the right direction, we all should continue to increase awareness and keep the pressure up on this urgent concern.

It’s a job for everybody – but not everyone is doing their job.

We see significance in initiatives such as the “Powering Past Coal” alliance at the UN Climate Change Conference held in Bonn, Germany (or COP23) in November last year. Though the Philippines has yet to join the alliance of over 20 countries led by the United Kingdom and Canada (and more recently Chile), the global movement to phase out destructive coal for the sake of stabilizing the planet has long since started.

Efforts like this affirm the direction that First Gen has taken. Our parent company, First Philippine Holdings, as announced by our chairman Federico R. Lopez, took a stand against coal in 2016. It is fair to say, however, that we unfortunately see ourselves as an outlier and a challenger in the sense that we are the only major conglomerate in the country who has truly taken the clean energy route as opposed to the majority of our competitors.

At First Gen, we have seen firsthand how a combination of natural gas and renewable energy provides a better option: a more sustainable approach towards energy generation that will support national development with the least impact on the environment. It is worth noting that approximately 80.0 percent of the coal supply consumed in the country is imported anyway benefiting coal exporting countries like Indonesia and Australia. We have also proven that our clean natural gas and geothermal plants deliver savings to Meralco and the other markets we serve. Since our “no to coal” declaration, we have taken greater strides in developing cleaner sources of energy, and making them accessible and affordable to the market.

Financial Performance
Let me now report on our performance in 2017 which proved to be a year with its fair share of challenges. First Gen reported a recurring net income attributable to equity holders of the Parent of USD 163.3 million, which hardly changed from 2016. On one hand, the Company’s natural gas platform delivered recurring earnings of USD 119.7 million versus USD 112.0 million the previous year. On the other hand, its geothermal and hydroelectric platforms both suffered from lower recurring earnings brought about by natural calamities that struck Leyte and weak spot electricity prices. These were offset by lower administration and development expenses, as well as finance costs as a function of debt prepayment.

The flat earnings growth does not reflect the numerous noteworthy achievements in 2017 that strongly positions First Gen to develop a cost-competitive and flexible platform. It is a unique platform that is best prepared to enable an affordable clean low-carbon energy future for our country.

We had a slow first half with the new San Gabriel and Avion gas-fired power plants going through residual technical and equipment teething issues that were temporarily disrupted by a planned gas outage and an earthquake. However, the plants performed better in the second half, when the operations of these two new plants ‘normalized’. The 420-MW San Gabriel plant is a brand-new flexible plant that utilizes many of the most advanced and efficient technologies. It can deliver power at a price that is even lower than that of the Santa Rita and San Lorenzo plants.

In 2015 and 2016, we invested heavily in the new facilities while in 2017 we looked to debt optimizing and took strategic steps to improve our financial standing. We successfully prepaid USD 309.0 million through the USD 500.0 million refinancing of the First Gas Power Corporation (FGPC) debt in May, as well as through the proceeds of USD 240.0 million when we partially sold down our EDC common shares. The combined proceeds allowed us to retire our more expensive debt and de-lever the Company’s balance sheet.

The Company’s attributable net income for 2017 of USD 134.4 million was USD 65.2 million lower due to the absence of liquidated damages received by San Gabriel in 2016, the one-time effect of break funding costs incurred as a result of FGPC’s refinancing, as well as premiums paid for First Gen’s and EDC’s partial buyback and redemption of their respective U.S. Dollar-denominated bonds. These were in addition to EDC’s expenditures relating to Leyte as a result of an earthquake in July and a typhoon in December.

Natural Gas
With the global movement towards a low-carbon economy, we are unrelenting in our renewable energy aspirations, but realize the need for a reliable and flexible complement which does not compromise both the environment and energy security – this is where our natural gas portfolio comes in. We get the best of both worlds with natural gas complementing the increase of renewable energy into the grid.

Contrary to what our competitors have been saying about coal being the better alternative because it is inexpensive, our gas-fired units are actually selling power at very competitive rates. The blended price of our gas plants today for baseload is at PHP 4.33/kWh. This is approximately five percent lower than the average price being offered by new coal plants. Furthermore, the flexibility of our gas plants to operate on mid-merit and peaking capacity makes it technically challenging for coal plants to match.

In 2017, First Gen’s natural gas portfolio contributed 12.6 percent of the country’s gross generation. Revenues were higher by USD 201.5 million, or 24.1 percent, to USD 1,036.3 million in 2017 mainly due to the full year contributions of the Avion and San Gabriel plants. As a result, the total recurring earnings of First Gen’s natural gas platform increased by USD 7.7 million, or 6.9 percent, to USD 119.7 million in 2017.

In early 2018, our gas plants were off to a good start. San Gabriel and Avion have been running at high dispatch levels and benefitting from higher spot market prices as a number of older baseload plants are going through maintenance in preparation for the hot summer months. In addition, San Gabriel was awarded a six-year baseload contract for all of its capacity by Meralco, subject to regulatory approval. San Gabriel’s contribution to the grid will help reduce the cost of electricity to consumers and will provide more predictability to our revenues moving forward.

Hydro
We remain optimistic with our hydro power portfolio. Last March 2018, the Energy Regulatory Commission (ERC) provisionally approved its Ancillary Service contract enabling First Gen Hydro Power Corporation (FG Hydro) to once again provide ancillary services. The National Grid Corporation of the Philippines (NGCP) also certified the capability of Pantabangan to provide five types of ancillary services to the grid.

The ancillary services contract should lead to improved revenues in comparison to 2017 as the expiration of FG Hydro’s ancillary services contract in February 2017 led to lower revenues from the hydro platform by PHP 627.7 million, or 27.0 percent, to PHP 1,695.3 million in 2017. The expiration likewise led to a 34.0 percent, or PHP 305.4 million decline in the platform’s recurring net income from PHP 897.6 million in 2016 to PHP 592.2 million in 2017.

As we strive to deliver more predictable earnings, FG Hydro continues to market to utilities and contestable customers to reduce its spot market exposure. Moreover, for our planned run-of-river hydro assets, First Gen is looking to directly contract with local cooperatives. This will be especially beneficial for Mindanao as the development of our run-of-river hydroelectric plants can actually produce cheaper power for the region compared to the existing coal-fired plants, which are presently contracted at higher prices due to imported coal costs.

Geothermal
Long considered the ‘Holy Grail’ of renewables due to its reliability as a constant energy source with baseload power, geothermal energy remains one of the best ways to combat climate change. It is worth noting that 2017 marked a milestone when First Gen fully paid the original PHP 29.2 billion term loan it raised to partially finance the purchase of EDC in 2007.

We also forged a strategic partnership in 2017 with Philippines Renewable Energy Holdings Corp. (PREHC), a consortium of investors managed by Macquarie Infrastructure and Real Assets (MIRA) and Arran Investment Pte. Ltd. (Arran), an affiliate of GIC Pte. Ltd. of Singapore. The consortium’s PHP 64.5 billion investment in EDC — one of the largest under this administration and among foreign direct investments by far — is a testament to the confidence in EDC’s renewable platform, as well as on the increasing global support to shift away from fossil fuels in favor of renewable energy.

BacMan Geothermal Business Unit (BGBU) contributed an additional PHP 0.9 billion in revenues on account of higher contracted capacity with contestable customers. BGBU ended the year fully contracted, which is approximately 17 percent higher than the previous year.

A challenge we encountered though was the 6.5-magnitude earthquake that struck Leyte in July, which resulted in damages to EDC’s facilities in the area. Nevertheless, the staff on the ground did a tremendous job in getting the power plants back online. Within 10 days, nearly 40 percent of the field’s power was brought back to the grid to deliver much-needed electricity in the Visayas.

As EDC was close to operating back to pre-earthquake levels, Typhoon Urduja hit Leyte in December which resulted in more than 1,000 millimeters of rain or 15 days’ worth of rainfall over a 24-hour period at the site. This caused severe landslides that damaged some steamfield assets. As of end-March 2018, 494 MW has already been restored, with repair works ongoing to bring the Leyte facility back to full load.

Nonetheless, the Leyte Geothermal Business Unit (LGBU) completed the retrofitting of all three units of the Tongonan plant by the third quarter of 2017. This not only increased its installed capacity by 10.0 percent to 41.0 MW per unit (from 37.5 MW each, pre-retrofit), it has also enhanced its durability.

As a result of the aforementioned natural calamities, the geothermal platform booked lower revenues by PHP 796.9 million, or 2.7 percent, to PHP 28,330.3 million. Recurring earnings of the geothermal platform was likewise lower by 7.9 percent at PHP 7,492.0 million in 2017 versus PHP 8,137.3 million in 2016.

Wind and Solar
For the full-year 2017, the wind and solar platform registered higher revenues by PHP 458.2 million or 16.2 percent at PHP 3,280.3 million in 2017. The wind and solar platform likewise registered higher recurring earnings by PHP 478.2 million or 102.2 percent at PHP 945.8 million in 2017 versus PHP 467.6 million in 2016.

The 150-MW Burgos Wind Project generated 372.5 GWh this year, a 16.3 percent increase from its strong performance in 2016, and also a record high since being commissioned in 2014. The wind farm generated more electricity due to favorable wind patterns. Currently, we are working on the full collection of feed-in-tariffs for the Burgos plants.

We started 2017 with an operating 6.82 MW EDC Burgos Solar Project. The commissioning of five solar rooftops with a combined capacity of 3.63 MW – particularly of Gaisano Capital malls in La Paz, Iloilo, in 2017 – brought total solar capacity to 10.45 MW.

Business Development
First Gen continues to prepare for a post-Malampaya gas era with the establishment of the country’s first liquefied natural gas (LNG) regasification terminal to be located at the First Gen Clean Energy Complex in Batangas. We are converting that idea into reality, having already invested in the feasibility and preparation of the site for it, including on-going negotiations with potential turnkey contractors. Ideally, we would like to see this project completed in time for the expiry of the existing gas contracts in 2024. Our priority today is to address a number of commercial and technical issues with a goal of delivering a cost-competitive facility. To date, discussions with various potential partners are progressing in parallel.

Within the next five years, we hope to build two more gas-fired power plants, Santa Maria and Saint Joseph, to complete our vision for the First Gen Clean Energy Complex in Batangas. Their addition to the mix will translate to more than a 900-MW expansion.

Solar also holds much promise as a sunrise industry. As solar development costs continue to drop, there is a marked increase in residential installations of solar rooftop systems worldwide. In the future, it will be attractive for consumers to generate their own electricity with a solar and battery storage combination and reduce electricity purchased from the grid.

Steadfast in our Sustainability Efforts
2017 was a landmark year for First Gen as we were awarded the Green Company of the Year at the Asia CEO Awards, cementing our status as a leader in sustainability, and recognizing our efforts as advocates of ecological protection in the country.

It is heartening to note that there is a growing trend among our local customers of requiring power suppliers to deliver only clean and/or renewable energy. Last year, 11 new customers came on board, and joined us in our clean energy vision.

As part of our celebration of the 20th anniversary of the financing of the Santa Rita and San Lorenzo gas plants, we also turned over the Advance Local Emergency Response Team (ALERT) Building to the City of Batangas. A public-private partnership project between First Gen and the local government, the ALERT Building will serve as the base for first emergency responders to the nearby communities of Barangay Bolbok and Barangay Santa Rita Karsada.

Long-term Game Plan
Admittedly, the changes we would like to see are moving slower than we would like. I wonder why people are behaving without a sense of urgency. I wonder why stakeholders including our youth do not seem more upset and more vocal about the “wrong” choices that are being made today. I always have to remind myself that, using a basketball game analogy, we are not in the last few minutes of the game where we are trailing and potentially losing. I have to remind myself that we are not yet even in the first half of the contest. There is still hope that things change for the better in the next half of the game. We cannot simply give up and feel that we have run out of time!

We still come to the conclusion that First Gen is best-positioned and is confident to take the lead with our natural gas and renewable energy portfolio. We will continue investing in sustainable energy platforms and look down the line to the end-game, which is a future dominated by clean energy and a substantial part of the country’s energy mix.

And that end-game we envision is important, especially in light of the worsening effects of climate change on a national and global scale. We stand behind our belief that our clean energy platforms are exactly what the future needs.

The time to act is now. And we are wasting no time in leading the charge towards a cleaner and greener future.

We thank you for your unwavering support.

FRANCIS GILES B. PUNO
President and Chief Operating Officer