Transcription

1 COVER SHEET C S.E.C. Registration Number A B O I T I Z P O W E R C O R P O R A T I O N ( Company's Full Name ) 3 2 N D S T R E E T, B O N I F A C I O G L O B A L C I T Y, T A G U I G C I T Y, M E T R O M A N I L A P H I L I P P I N E S ( Business Address: No. Street City / Town / Province ) M. JASMINE S. OPORTO Contact Person 2nd Quarterly Report 2013 Company Telephone Number 3rd Monday of May Q Month Day FORM TYPE Month Day Fiscal Year Annual Meeting Secondary License Type, if Applicable S E C Dept. Requiring this Doc Amended Articles Number/Section Total No. of Stockholders Domestic Foreign x To be accomplished by SEC Personnel concerned File Number LCU Document I.D. Cashier S T A M P S Remarks = pls. Use black ink for scanning purposes

2 SECURITIES AND EXCHANGE COMMISSION SEC FORM 17-Q QUARTERLY REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE AND SRC RULE 17(2)(b) THEREUNDER 1. For the quarterly period ended SEPTEMBER 30, Commission identification number C BIR Tax Identification No Exact name of issuer as specified in its charter ABOITIZ POWER CORPORATION 5. Province, country or other jurisdiction of incorporation or organization Philippines 6. Industry Classification Code: (SEC Use Only) 7. Address of issuer's principal office Postal Code 32 nd Street, Bonifacio Global City,Taguig City, Metro Manila, Philippines Issuer's telephone number, including area code (02) Former name, former address and former fiscal year, if changed since last report 10. Securities registered pursuant to Sections 8 and 12 of the Code, or Sections 4 and 8 of the RSA Title of Each Class Number of Shares of Common Stock Outstanding and Amount of Debt Outstanding Common Stock P1 Par Value 7,358,604,307 Amount of Debt Outstanding P 58,377, Are any or all of the securities listed on a Stock Exchange? Yes [ x ] No [ ] If yes, state the name of such Stock Exchange and the class/es of securities listed therein: Philippine Stock Exchange Common 12. Indicate by check mark whether the registrant: (a) has filed all reports required to be filed by Section 17 of the Code and SRC Rule 17 thereunder or Sections 11 of the RSA and RSA Rule 11 (a)-1 thereunder, and Sections 26 and 141 of the Corporation Code of the Philippines, during the preceding twelve (12) months (or for such shorter period the registrant was required to file such reports)

3 Yes [ x ] No [ ] (b) has been subject to such filing requirements for the past ninety (90) days. Yes [ x ] No [ ] Item 1. Financial Statements. PART I--FINANCIAL INFORMATION Please refer to the financial statements and schedules attached herewith. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of Aboitiz Power Corporation s (AP, AboitizPower or the Company) consolidated financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying schedules and disclosures set forth elsewhere in this report. Top Five Key Performance Indicators Management uses the following indicators to evaluate the performance of registrant AboitizPower and its subsidiaries (the Company and its subsidiaries are hereinafter collectively referred to as the Group ): 1. Share in Net Earnings of Associates. Share in net earnings (losses) of associates represents the Group's share in the undistributed earnings or losses of its investees for each reporting period subsequent to acquisition of said investment, net of goodwill impairment cost, if any. Goodwill is the difference between the purchase price of an investment and the investor's share in the value of the net identifiable assets of the investee at the date of acquisition. Share in Net Earnings of Associates indicates profitability of the investment and investees' contribution to the group's net income. Manner of Computation: Associate's Net Income (Loss) x Investor's % ownership - Goodwill Impairment Cost 2. Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA). The Company computes EBITDA as earnings before extra-ordinary items, net finance expense, income tax provision, depreciation and amortization. It provides management and investors with a tool for determining the ability of the Group to generate cash from operations to cover financial charges and income taxes. It is also a measure to evaluate the Group s ability to service its debts. 3. Cash Flow Generated. Using the Statement of Cash Flows, management determines the sources and usage of funds for the period and analyzes how the Group manages its profit and uses its internal and external sources of capital. This aids management in identifying the impact on cash flow when the Group's activities are in a state of growth or decline, and in evaluating management's efforts to control the impact. 2

4 4. Current Ratio. Current ratio is a measurement of liquidity, calculated by dividing total current assets by total current liabilities. It is an indicator of the Group's short-term debt paying ability. The higher the ratio, the more liquid the Group. 5. Debt to Equity Ratio. Debt-to-Equity ratio gives an indication of how leveraged the Group is. It compares assets provided by creditors to assets provided by shareholders. It is determined by dividing total debt by stockholders' equity. The table below shows the comparative figures of the top five key performance indicators for the first nine months of 2013 and 2012, and as of December 31, 2012: Amounts in thousands except for financial ratios September September December SHARE IN NET EARNINGS OF ASSOCIATES 4,117,896 7,797,211 EBITDA 23,394,196 25,946,059 CASH FLOW GENERATED: Net cash flows from operating activities 20,416,231 19,720,837 Net cash flows from (used in ) investing activities (6,893,129) 3,030,036 Net cash flows used in financing activities (28,093,730) (19,324,738) Net increase (decrease) in cash & cash equivalents (14,570,628) 3,426,135 Cash & cash equivalents, beginning 30,678,493 23,391,561 Cash & cash equivalents, end 15,545,732 26,765,243 *CURRENT RATIO DEBT-TO-EQUITY RATIO The Company s Share in Net Earnings of Associates decreased by 47% or P3.68 billion (bn) as a result of lower contributions from the following companies: Lower income contributions from SN Aboitiz Power-Magat, Inc. (SNAP-Magat) and SN Aboitiz Power-Benguet, Inc. (SNAP-Benguet) - A sharp decline in Ancillary Revenues led to the drop in income contributions primarily from SNAP-Magat. This was as a result of lower acceptance rates under their ancillary contracts with the National Grid Corporation of the Philippines (NGCP). Both companies also noted a decrease in their average ancillary selling prices. SNAP-Magat also undertook rehabilitation works which led to lower sales volumes. A contractual rebasing of STEAG State Power, Inc. s (STEAG) tariffs which resulted into lower margins has led to lower income contributions from STEAG. The lower contributions from the above mentioned associates were slightly mitigated by the higher contributions from the Visayan Electric Company, Inc. (VECO) as a result of higher margins from the continued implementation of its approved distribution tariff under the Performance Based Regulation (PBR) scheme and lower systems loss related costs. VECO s franchise area also experienced higher electricity sales on the back of stronger demand. 3

5 The Company s Current ratio as of September 30, 2013 slightly declined from 2.65x as of the end of 2012 to 2.33x as of the end of September The decrease in the ratio is mainly due to lower cash and cash equivalents as various long term debt were paid down during the period. The debt payments made likewise lead to the improvement in the Company s Debt to Equity ratio from 0.98x as of December 31, 2012 to 0.85x as of September 30, Results of Operations The Company s consolidated net income in the first three quarters of 2013 came in at P14.28 bn, a 22% decrease from the prior year results of P18.38 bn. The Company s core net income for the period is P15.80 bn a 12% decrease from the prior year. The revaluation of consolidated dollar-denominated loans and placements resulted to a non-recurring loss of P 1.44 bn for the period in review versus a gain of P 1.17 bn in the prior year. The Company also recognized a one-time non-recurring expense of close to P 88 million mostly on the write-off of unamortized borrowing costs upon pre-termination of certain long-term loans. Power Generation The Company s Generation group contributed P bn for the nine months ending September down 29% when compared to the same period last year. After stripping away the effects of oneoff items, the group s core income contribution came in at P bn, 17% lower than last year. Sales volumes were up slightly as attributable net generation for the period grew by 4% year on year (YoY), from 7,903 GWh to 8,245 GWh on the back of higher demand during the summer months. Average selling prices to the spot market declined by 23% while selling prices on the group s bilateral contracts also declined by 10% leading to an overall decrease in average selling prices by 12%. On a capacity basis, the Company s attributable sales decreased by 3% YoY from 1,562 MW to 1,514 MW as a result of lower sales for ancillary services and a decrease in bilateral sales. Ancillary volumes dropped by 52% during the period due to the lower acceptance rate by the NGCP on its ancillary service contracts from the Company s large hydro power plants while sales by the Tiwi Makban plants dropped due to lower contract levels. On the other hand, the start of the implementation of commercial transactions under an interim development system for Open Access last June 26, 2013 allowed the group to shift a bulk of its sales from bilateral energy contracts to capacity-based contracts. Under the scheme, the Company through its licensed Retail Energy Suppliers (RES) was able to secure 280 MW in contracts with various off-takers. Power Distribution Income contributions from the distribution group continue to steadily increase contributing P2.43 bn this period versus P 2.18 bn in the prior year. The 11% increase in contributions can be attributed to the combined effects of increases in sales volumes as well as higher gross margins. Electricity sales increased by 3% YoY driven mostly by higher sales to the group s residential customers. Gross margins improved from an average of P 1.60 per kwh in the nine months of 2012 to P 1.73 per kwh for the same period this year. The increase in gross margins resulted from the following 1) systems loss level improvements in the groups distribution utilities 2) the implementation of approved distribution tariff under the Performance Based Regulation (PBR) scheme. 4

6 Changes in Line Items of Registrant s Statements of Income and Comprehensive Income Consolidated Statements of Income (January September 2013 vs. January September 2012) The various movements in the revenue and expense line items leading to the consolidated net income of P14.28 bn are shown below: Consolidated net income attributable to equity holders of the Parent (January September 2012) P 18,383,237 Decrease in operating revenues (1,948,305) Decrease in operating expenses 2,611,838 Decrease in interest income (310,819) Decrease in interest expense and other financing costs 1,281,350 Decrease in other income (2,687,047) Decrease in share in net earnings of associates (3,679,315) Lower provision for taxes 543,157 Decrease in income attributable to non-controlling interests 85,698 Total (4,103,443) Consolidated net income attributable to equity holders of the Parent (January September 2013) P 14,279,794 Operating Revenues (4% decrease from P47.01 bn to P45.06 bn) The 22% decline in operating revenues at AP Renewables, Inc. (APRI) account for a significant block of the decrease in the Company s operating revenues. This is due to an 18% decrease in sales volume as contract levels declined and a 5% drop in average selling prices. Meanwhile operating revenues at Therma Luzon Inc. (TLI) declined by 6% due to a 17% drop in its average selling prices which was mitigated by a 12% increase in sales volume. The above decreases in operating revenues were shored up by the fresh operating revenues coming from the recently closed contracts of two of the Company s Retail Energy Suppliers, as it signed up 280 MW in contracts from various off takers under the interim development system for Open Access which started last June 26, Operating Expenses (8% decrease from P31.68 bn to P29.07 bn) The decrease in operating expenses for the first nine months of 2013 as compared to the same period last year can be mainly attributed to the lower operating expenses at APRI due to lower purchased power costs incurred during the period as well as lower steam costs paid to Chevron. This year Luzon Hydro Corporation (LHC) has lower operating expenses as compared to the prior year when it had to incur significant expenses relating to its tunnel repairs. At TLI, operating expenses decreased as a result of lower coal prices. Interest Income (50% decrease from P620 mn to P309 mn) Lower average cash balances held by the Group during the period led to the decrease in interest income. 5

7 Interest Expense (23% decrease from P5.66 bn to P4.38 bn) In the past year, the Group has paid down long term debt at Parent and subsidiary companies. The lower average debt balances has led to the decrease in interest expense. Share in Net Earnings of Associates (47% decrease from P7.80 bn to P4.12 bn) The P3.68 bn drop in the Company s share in net earnings of associates is mainly attributed to the decreased contributions from the two large hydro companies, SNAP-Magat and SNAP-Benguet. The contributions from both companies yielded to the pressure brought about by the significantly lower acceptance rates by NGCP, on its ancillary services. Average ancillary prices also decreased as compared to last year. In the first quarter of the year lower water levels at both impounding dams have led to limited sales to the spot market. In the second quarter, planned refurbishment works at SNAP-Magat also led to lower sales volumes during the period. STEAG s income contribution also lagged behind last year s with the lower margins from its rebased tariffs. VECO managed to contribute higher this period than last year with the continued improvement in its gross margins and higher electricity sales. Others - net (165% decrease from P1.63 bn Other -Income to P1.06 bn Other -Expense) The decrease in this account is mainly due to the movement from an unrealized foreign exchange gain of P1.21 bn in the prior year reporting period, to an unrealized foreign exchange loss of P1.52 bn this period. The huge swing comes from the restatement of TLI s dollar denominated debt on its monthly obligations to the Power Sector Assets and Liabilities Management Corporation (PSALM). This is accounted for as a finance lease obligation. Provision for Income Tax (58% decrease from P 929 mn to P 386 mn) The decrease in provision for income tax was mainly due to the adjustment on the deferred tax benefits recognized on the unrealized foreign exchange losses recorded by TLI. Net Income Attributable to Non-controlling Interests (21`% decrease from P401 mn to P315 mn) Lower net income contributed by Cebu Private Power Corporation (CPPC-40% of which is owned by minority shareholders) for the reporting period compared to prior years led to lower Net Income attributable to Non-controlling interests. Consolidated Statements of Comprehensive Income (January - September 2013 vs. January September 2012) Total Consolidated comprehensive income attributable to equity holders of the Parent decreased by 21% after taking up the Share in movement in cumulative translation adjustments. 6

8 Changes in Registrant s Resources, Liabilities and Shareholders Equity Assets (September 30, 2013 vs. December 31, 2012 As Restated) Total assets decreased by 3% from P bn as of December 31, 2012 to P bn as of September 30, The significant accounts contributing to the decrease in total assets are discussed below: a) The Company s Cash and cash equivalents decreased by P15.13 bn. The decrease comes after the following major outflows to support financing and investing activities : 1) P13.83 bn to pay dividends in the first half of the year 2) Payment of long term debt and bank loans totaling P9.03 bn 3) TLI s payments on its finance lease obligation P 5.02 bn and 4) infusions into various green field projects Cash from operating activities of P20.42 bn mitigated the cash outflows used for financing and investing activities. b) The P16 mn increase in derivative asset is due to the mark-to-market gains recognized by a hydro subsidiary on its interest rate swap contract during the current period.. c) The inventory account decreased by 10% mainly from lower coal inventory balances held at TLI. d) Other current assets increased by 82% (from P1.04 bn in December 2012 to P1.89 bn in September 2013). The increase is primarily relating to the build-up of input VAT by power generation subsidiaries during the period in review particularly at Therma Marine, Inc. (TMI), HSI and Therma Mobile, Inc. (TMO), Prepaid expenses at some subsidiaries also contributed to the increase in the other current assets account e) The Investments and advances to associates account increased as the equity share of the income for the period is recognized. f) During the period the Company made major infusions into 1)the 300-MW coal plant in Davao and 2) the rehabilitation of the power barges under TMO which lead to the 7% increase in the Power plant and Equipment account. This is net of depreciation recorded during the period. g) Available for sale (AFS) Investments increased by 5% due to the purchase of an additional share in a membership club by Davao Light & Power Company, Inc. (Davao Light). h) The increase in Pension Assets is principally due to the retirement contributions made by the Parent Company during the current period. i) The increase in deferred income tax assets is due to the recognition of deferred tax benefits at TLI resulting from unrealized foreign exchange losses recognized during the period. j) Other non-current assets increased by 18% mainly from an increase in deferred input vat at Therma South, Inc. (Therma South). 7

9 Liabilities (September 30, 2013 vs. December 31, 2012 As Restated) Consolidated liabilities as of September 30, 2013 decreased by 10% or by P8.08 bn from December 31, 2012 balances. The major changes leading to the decrease are as follows: a) Bank loans are lower by P1.09 bn. Davao Light, Cotabato Light and Hedcor Inc. paid their short term bank loans during the year.. b) The reported Derivative Liability as of December 31, 2012 decreased by 100% due to the mark-to-market gains recognized by a hydro subsidiary on its interest rate swap contract. c) The increase in Income tax payable as of September 30, 2013 is mainly from Davao Light and LHC s higher tax payable balances as at the end of the period d) Long Term debt decreased by P7.78 bn. The following long term debt payments were made by the group: I. Parent Company - payment made on P5 bn Fixed Rate Notes; and II. Hedcor Sibulan, Inc. (Hedcor Sibulan) pre-payment on P3 bn long term debt. e) Interest accretion on SEZ s Long-term obligation on power distribution system increased this account by 11%. f) Payable to preferred shareholders of a subsidiary inclusive of current portion decreased by P15 mn as payments to preferred shareholders were made during the year. g) Customer Deposits went up by 11% as the customer base at the Company s distribution utilities particularly at Davao Light continue to expand. h) Deferred income tax liability decreased due to the effect of the foreign exchange movements which led to an elimination of previously recognized deferred income tax liability at TLI. Equity (September 30, 2013 vs. December 31, 2012 As Restated) Under the Equity section (As restated for December 31, 2012) the Group accounts for unrealized actuarial gains and losses for the group and its associates as required by PAS 19 Employee Benefits. Equity attributable to equity holders of the Parent increased by P2.25 bn from P80.90 bn as of December 31, 2012 to P bn as of September 30, 2013, as P14.28 bn in income for the current period is recognized and net of P12.22 bn in cash dividends paid. Material Changes in Liquidity and Cash Reserves of Registrant (September 30, 2013 vs. December 31, 2012) The major movements in the group s Cash and cash equivalents which decreased by P15.13 bn are accounted for as follows: Cash flows from Operating activities, for the period ending September 30, 2013 was P20.42 bn. As compared to last year s inflows, this represents a 3% increase. This increase is attributed to lower 8

10 interest expense requirements during the period which mitigated the lower EBITDA from the Company s subsidiaries. Cash during the period was used in Investing activities decreasing the Group s cash balances by P6.89 bn a change in direction of cash flows as compared to last year s investing activities which contributed P3.03 bn. This is mainly due to continued investments into the on-going construction of various Greenfield projects particularly for the 300 MW Davao coal plant as well as lower dividends received during the period. The Company s cash flows use in financing activities in the nine months of 2013 was P bn. A total of P13.83 bn of dividends were paid while P7.94 bn was used to pay down long term debt while another P 1.09 bn was used to pay down bank loans. TLI monthly payments on its finance lease obligations have also increased during the period. As a result of the above cash outflows, Cash and cash equivalents is now 49% lower from P30.68 bn as of December 31, 2012 to P15.55 bn as of September 30, Financial Ratios With the 35% decrease in the Company s current assets resulting from the lower cash balances as of the September 30, 2013, the Current Ratio dropped from 2.65x as of December 31, 2012 to 2.33x as of September 30, The lower debt balances as of September 30, 2012 led to an improved Debt to equity ratio from 0.98x as of December 31, 2012 to 0.85x as of September 30, Outlook for the Upcoming Year/ Known Trends, Events, Uncertainties which may have Material Impact on Registrant Over the long term, AboitizPower remains to be in a very good position to benefit from the opportunities that developments concerning the electricity industry will bring. Its sound financial condition, coupled with a number of initiatives that the Company is undertaking will allow it to create additional generating capacity over the next several years. Nevertheless, AboitizPower sees several challenges that may severely constrain earnings growth in These developments are as follows: Power Generation Business 1. Ancillary Services SN Aboitiz Power ( SNAP ) a partnership between AboitizPower and SN Power Invest AS ( SN Power ), is currently providing ancillary services to National Grid Corporation of the Philippines ( NGCP ) under an Ancillary Services Procurement Agreement ( ASPA ). The ASPA for Magat expired last November 5, 2012 while Binga s ASPA expired on June 25, The Company earlier disclosed that its affiliates, SN Aboitiz Power Magat, Inc. ( SNAP-Magat ) and SN Aboitiz Power Benguet, Inc., have respectively signed ASPAs with NGCP for the provision of regulating, contingency, and dispatchable reserves from the Magat and Ambuklao Hydroelectric Power Plants. Another affiliate, Therma Luzon, Inc. ( TLI ), which runs the Pagbilao Coal Plant, also signed an ASPA with the NGCP covering both firm and non-firm capacities for contingency reserve. The ASPA of Magat and Ambuklao shall be valid for three years once the approval of the Energy Regulatory Commission 9

11 ( ERC ) for the contract has been secured. On the other hand, TLI s ASPA is valid for a period of five years from the date of approval by the ERC. A provisional authority from the ERC has been obtained recently, paving the way for the implementation of the new ASPAs for the Magat, Ambuklao and Pagbilao plants starting July 26, AboitizPower believes that the implementation of the new ASPAs will result in a significant reduction in the Company s ancillary revenues due to the restructuring of the pricing mechanism for ancillary services, which is currently linked to spot market rates. On the other hand, the addition of the Ambuklao and Pagbilao plants as licensed ancillary service providers will help offset the expected decline in ancillary revenue. 2. Conversion of AP Renewables, Inc. s (APRI) existing steam contract to a Geothermal Resource Sales Contract On May 26, 2013, APRI s current steam supply contract with the Philippine Geothermal Production Corporation ( PGPC, formerly known as Chevron) shifted to a Geothermal Resource Sales Contract ( GRSC ). The change is due to an existing provision under the government s existing contract with Chevron when the Tiwi-Makban facilities were bidded out under the former s privatization program. Under the GRSC, the effective steam price of APRI payable to PGPC will be at a premium to coal. Due to competition from coal plants, the contracts of APRI mimic that of coal plants, including the proportion of fuel to total cost of power. To ensure that APRI will continue to remain competitive in the market, a two-month interim agreement supplementing the GRSC was implemented on August 14, This will result in a lower fuel cost during off-peak hours, thus allowing AboitizPower to maximize sales even during this period. The agreement has since been extended by another two months. Ultimately, the Company aims to close a more permanent agreement with the steam supplier that will also enable the full development of the existing steam field and maximize utilization of the Tiwi-Makban plants. 3. Increase in Attributable Generating Capacity Notwithstanding the challenges over the short-term, AboitizPower has built the necessary foundation to sustain its growth trajectory over the long term. Over the next several years, AboitizPower looks to expanding its portfolio of generation assets by implementing the following projects. - Greenfield and Brownfield developments 600 MW (net) Coal-fired Power Plant in Subic. This is a project by Redondo Peninsula Energy, Inc. ( RP Energy ), a joint venture among Meralco PowerGen Corporation ( MPGC ), Aboitiz subsidiary Therma Power, Inc. ( TPI ) and Taiwan Cogeneration International Corporation ( TCIC ). The project involves the construction and operation of a 2x300 MW (net) circulatingfluidized-bed (CFB) coal-fired power plant located within the Subic Bay Freeport Zone. On November 15, 2012, RP Energy was issued an amended Environmental Compliance Certificate to cover two high-efficiency 300-MW (net) units with main steam reheat systems. Site preparation is substantially completed. The EPC contract has been awarded to Hyundai with Foster Wheeler and Toshiba as major subcontractors/suppliers of the CFB boilers and turbine-generators, respectively. Hyundai has not been issued a notice to proceed with the works, however, because of the filing of a petition for a Writ of Kalikasan and environmental protection order. The petition was remanded to the Court of Appeals for a hearing. The Court of Appeals denied the issuance of Writ of Kalikasan for lack of basis, but nonetheless, nullified RP Energy s ECC and the land lease between SBMA and RP Energy on grounds of lack of compliance with requirements and lack of jurisdiction 10

12 of SBMA, respectively. This decision is the subject of a Petition for Review on Certiorari to the Supreme Court that may require the balance of 2013 to resolve. In view of the legal dispute, the commercial operation of the power plant is now estimated to begin in mid to late AboitizPower, through TPI will have an equity interest of 25% in RP Energy. 300 MW Coal-fired Power Plant in Davao. AboitizPower, through 100%-owned subsidiary Therma South, Inc. ( TSI ), is putting up a 2x150 MW coal-fired power plant in Davao, which is the biggest load center in the island of Mindanao. The project broke ground in May The EPC contract for the power block was awarded to Formosa Heavy Industries ("FHI") with FHI supplying the CFB boilers and Fuji as major subcontractor/supplier of the turbine-generators. The EPC contract for the balance of plant equipment and their integration with the power block was awarded to a consortium of Black & Veatch Corporation and Leighton Contractors (Philippines), Inc. The facility is expected to become operational by the first half of 2015, thereby providing Mindanao with the much-needed reliable, competitively-priced and environmentally-safe baseload power. 400 MW (net) Coal-fired Power Plant in Pagbilao, Quezon. On September 27, 2011, AboitizPower signed a Memorandum of Understanding with Marubeni Corporation ( Marubeni ) to formalize their intention to jointly develop, construct and operate a coal-fired power plant with a capacity of approximately 400 MW (net). The proposed location will be within the premises of the existing 735 MW (net) Pagbilao Units I and II Coal-Fired Thermal Power Plant in Quezon province. The terms and conditions of the joint investment will be finalized in a definitive shareholder agreement to be agreed upon by the parties. Marubeni and Tokyo Electric are part-owners of TeaM Energy Corporation ( TeaM Energy ), which owns and operates the Pagbilao Units I and II under a build-operate-transfer contract with the National Power Corporation ( NPC ). On the other hand, AboitizPower, through wholly owned subsidiary TLI, is the Independent Power Producer Administrator of the Energy Conversion Agreement between TeaM Energy and NPC under an IPP Administration Agreement with the Power Sector Assets and Liabilities Management Corporation ( PSALM ), which manages the assets and IPP contracts of NPC. Commercial operations of the first generating unit are targeted within the year MW (net) Coal-Fired Project in Toledo City, Cebu. AboitizPower, through 100%-owned subsidiary, Therma Visayas, Inc. ( TVI ), is developing a 2 x 150-MW (net) coal-fired power project in Toledo City. The project site was acquired in December The Environmental Compliance Certificate for the project was issued in May Technical specifications, contract drawings, contract conditions, and requests for EPC proposals were issued on July 15, 2013, with submittal deadline of November 15, 2013, thereafter extended to November 29, The evaluation of the EPC proposal will be completed by year-end EPC contract award and notice to proceed with the works is expected on or about February 1, Turnover of the first unit is targeted for year-end 2016, with the second following three months thereafter. 7 MW Tudaya 1 Hydro Power Plant Project. Hedcor Sibulan, Inc. ( Hedcor Sibulan ) started the construction of Tudaya 1 which is located upstream of the existing Sibulan A pondage in the third quarter of Almost 90% complete, it is scheduled to be finished in the first quarter of The energy to be produced by Tudaya 1 will be sold to Davao Light through the power supply agreement signed in

13 6.6 MW Tudaya 2 Hydro Power Plant Project. AboitizPower s wholly owned subsidiary Hedcor Tudaya, Inc. ( Hedcor Tudaya ) has started the construction of Tudaya 2 located downstream of the existing Sibulan B. The project which commenced construction in the third quarter of 2012 is already 95% complete. The project is estimated to be completed by the first quarter of MW Sabangan Hydro Power Plant Project. This involves the construction and operation of a hydropower plant facility in Mt. Province, in Northern Luzon. This project will be undertaken by a wholly owned subsidiary of AboitizPower, Hedcor Sabangan, Inc. The project was granted all the permits and licenses in the first quarter of The construction which will take approximately 24 months has commenced in May MW Hedcor Tamugan Hydro Power Plant Project. In 2010, wholly owned subsidiary, Hedcor Tamugan, Inc. ( Hedcor Tamugan ), has reached an agreement with the Davao City Water District on the use of the Tamugan river. Originally planned as a 27.5 MW run-of-river facility, Hedcor Tamugan submitted a new proposal, which involves the construction of a 12 MW hydropower plant. Hedcor Tamugan is waiting for the Davao City council to approve the project. Once approval and permits are secured, the two-year construction period will commence. Other Greenfield and Brownfield developments. AboitizPower, together with its subsidiaries and associate company, is conducting feasibility studies for potential Greenfield and Brownfield projects. SNAP is in the process of evaluating several hydropower plant projects. A Brownfield project is being evaluated for its Magat hydropower plant, which involves the construction of a pumped storage facility that could potentially increase its capacity by at least 90 MW. SNAP is also focusing on Greenfield development, mainly in the areas surrounding the Magat watershed. It is completing preliminary studies for a hydropower complex in Ifugao with a projected capacity of 370 MW. SNAP will fund the raising of the National Irrigation Administration-owned Maris Dam by three meters to create additional storage capacity of 7.9 MCM to the Maris reservoir. A hydropower facility is also identified in the Maris Intake Canal that can provide a total capacity of 7.75 MW. The renewable energy service contracts (RESCs) for these two minihydro projects (6-MW and 1.75-MW) were signed by SNAP last October 29, 2013 and forwarded to the Department of Energy ( DOE ) Secretary for signature and issuance of Certificate of Registration. Hedcor is conducting feasibility studies for potential hydropower projects located in Luzon, Visayas, and Mindanao. Based on current findings, Hedcor sees the potential of building plants with capacities ranging from 10 MW to 50 MW. When the projects pass the evaluation stage and once permits are secured, the two-year construction period for the hydropower plant facilities will commence. 4. Participation in the Government s Privatization Program for its Power Assets AboitizPower continues to closely evaluate the investment viability of the remaining power generation assets that PSALM intends to auction off. 12

14 AboitizPower is also keen on participating in PSALM s public auction for the IPP Administrator contracts, which involves the transfer of the management and control of total energy output of power plants under contract with NPC to the IPP administrators. Distribution Business AboitizPower remains optimistic that it will realize modest growth on its existing distribution utilities. It continually seeks efficiency improvements in its operations to maintain healthy margins. On December 13, 2006, the ERC issued the Rules for Setting Distribution Wheeling Rates ( RDWR ) for privately-owned distribution utilities entering PBR for the second and later entry points, setting out the manner in which this new PBR rate-setting mechanism for distribution-related charges will be implemented. PBR replaces the Return on Rate Base ( RORB ) mechanism which has historically determined the distribution charges paid by customers. Under PBR, the distribution-related charges that distribution utilities can collect from customers over a 4-year regulatory period is set by reference to projected revenues which are reviewed and approved by the ERC and used by the ERC to determine a distribution utility s efficiency factor. For each year during the regulatory period, a distribution utility s distribution charges are adjusted upwards or downwards taking into consideration the utility s efficiency factor as against changes in overall consumer prices in the Philippines. The ERC has also implemented a Performance Incentive Scheme whereby annual rate adjustments under PBR will take into consideration the ability of a distribution utility to meet or exceed service performance targets set by the ERC, such as the average duration of power outages, the average time of restoration to customers and the average time to respond to customer calls, with utilities being rewarded or penalized depending on their ability to meet these performance targets. Cotabato Light & Power Company ( Cotabato Light ) was supposed to start its Third Regulatory Period on April 1, The reset process is currently on hold by the ERC. Nonetheless, Cotabato Light filed its annual rate adjustment application for Regulatory Year 2014 on August 2, Cotabato Light is also currently preparing for the renewal of its franchise which will end in June It also filed an application for the renewal of its Certificate of Public Convenience and Necessity ( CPCN ) last June 14, 2013 since its CPCN is predicated on and coterminous with its franchise. Visayan Electric Company, Inc. ( VECO ) and Davao Light & Power Company, Inc. ( DLPC ) recently received approvals for the annual rate adjustment application for the Fourth Regulatory Year (July 1, 2013 to June 30, 2014). VECO implemented the new rates in the July 2013 billings while DLPC implemented their new rates in the August 2013 billings. For Subic Enerzone Corporaten ( SEZ ) and San Fernando Light and Power Co., Inc. s ( SFELAPCO ) Second Regulatory Year covering October 1, 2012 to September 30, 2013, SEZ was able to implement the new rate schedule starting February 2013 while SFELAPCO implemented beginning April SEZ filed its the application for rate translation for the Third Regulatory Year last October 18, 2013, while SFELAPCO filed its application last October 31, Market and Industry Developments Open Access and Retail Competition Per EPIRA, the conditions for the commencement of the Open Access and Retail Competition are as follows: (a) Establishment of the WESM; 13

15 (b) Approval of unbundled transmission and distribution wheeling charges; (c) Initial implementation of the cross subsidy removal scheme; (d) Privatization of at least 70% of the total capacity of generating assets of NPC in Luzon and Visayas; and (e) Transfer of the management and control of at least 70% of the total energy output of power plants under contract with NPC to the IPP administrators. Under the Open Access and Retail Competition, an eligible contestable customer, which is defined as an end-user with a monthly average peak demand of at least 1 MW for the preceding 12 months, will have the option to source their electricity from eligible suppliers that have secured a Retail Electricity Supplier license from the ERC. Eligible suppliers shall include the following: - Generation companies that own, operate or control 30% or less of the installed generating capacity in a grid and/or 25% or less of the national installed capacity; - NPC-Independent Power Producers with respect to capacity which is not covered by contracts; IPP Administrators with respect to the uncontracted energy which is subject to their administration and management; and - Retail Electricity Suppliers ( RES ) duly licensed by the ERC. The implementation of the Open Access and Retail Competition presents a big opportunity for AboitizPower, as it has two wholly owned subsidiaries (i.e. Aboitiz Energy Solutions, Inc. and AdventEnergy, Inc.) that are licensed retail suppliers, which can enter into contracts with the eligible contestable customers. Moreover, AboitizPower s generation assets that have uncontracted capacity will be able to have direct access to eligible contestable customers through AboitizPower s licensed RES. In June 2011, the ERC declared December 26, 2011 as the Open Access Date to mark the commencement of the full operations of the competitive retail electricity market in Luzon and Visayas. However, after careful deliberation, the ERC acknowledged that not all the necessary rules, systems and infrastructures required for the implementation of the Open Access and Retail Competition have been put in place to meet the contemplated timetable for implementation. In October 2011, the ERC announced the deferment of the Open Access Date. In September 2012, the ERC declared the start of Open Access on December 26, Commercial transactions under an interim development system have been implemented starting June 26,

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41