Transcription

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20 MANAGEMENT REPORT Brief Description of the General Nature and Scope of the Business of the Registrant and its Subsidiaries and Associates First Gen Corporation (First Gen or the Parent company) is engaged in the business of power generation through the following operating companies: (i) First Gas Power Corporation (FGPC) which operates the 1,000 MW Santa Rita natural gas-fired power plant; (ii) FGP Corp. (FGP) which operates the 500 MW San Lorenzo natural gas-fired power plant; and (iii) FG Bukidnon Power Corporation (FG Bukidnon), via First Gen Renewables, Inc. (FGRI), which operates the 1.6 MW FG Bukidnon mini hydroelectric power plant. Equity in net earnings from associates include: (i) Energy Development Corporation (EDC), with an aggregate installed capacity of approximately 1,198.8 MW of geothermal power; and (ii) First Gen Hydro Power Corporation (FG Hydro) which operates the newly rehabilitated and upgraded 132 MW Pantabangan-Masiway hydroelectric power plants. The 225 MW Bauang bunker-fired power plant, which operated under Bauang Private Power Corporation (BPPC) under a Build-Operate-Transfer Agreement (BOT) with National Power Corporation (NPC), was turned over to the Government last July 25, Therefore, BPPC s equity in net earnings contribution was only until July 31, First Gen s 40% economic interest in EDC is indirectly held through Prime Terracota Holdings Corp. (Prime Terracota) and Red Vulcan Holdings Corporation (Red Vulcan), while its interest in FG Hydro is 40% held directly, and 60% held indirectly through EDC. As of December 31, 2010, the Parent company also directly owned million shares in EDC. This is equivalent to a 3% economic interest in EDC. The following discussion focuses on the results of operations of First Gen and its power generating companies. As of December 31, 2010, First Gen's ownership interests in these operating companies are indirectly held through intermediate holding companies, with the exception of FG Hydro where First Gen directly holds a 40% interest. First Gas Holdings Corporation (FGHC) was incorporated on February 3, 1995 as a holding company for the development of gas-fired power plants and other non-power gas related businesses. The company is 60% owned by First Gen and 40% owned by BG Consolidated Holdings (Philippines), Inc. FGHC wholly owns FGPC, the project company of the 1,000 MW Santa Rita Power Plant. Unified Holdings Corporation (UHC) was incorporated on March 30, 1999 as the holding company of First Gen s 60% equity share in FGP, the project company of the 500 MW San Lorenzo Power Plant. First Gen owns 100% of UHC. FGRI, formerly known as First Philippine Energy Corporation, was established on November 29, It is tasked to develop prospects in the renewable energy market. FGRI has transformed itself from a supplier of solar products and systems to a power service provider in the countryside. First Gen owns 100% of FGRI. FG Bukidnon, a wholly-owned subsidiary of FGRI, was incorporated on February 9, Upon conveyance of First Gen in October 2005, FG Bukidnon took over the operations and maintenance of the FG Bukidnon hydroelectric power plant (FGBHPP). The run-of-river plant consists of two 800-kW turbine generators that use water from the Agusan River to generate electricity. It is connected to the local distribution grid of the Cagayan Electric Power & Light Company, Inc. (CEPALCO) via the National Grid Corporation of the Philippines (NGCP) line. 1 P age

21 Prime Terracota was incorporated on October 17, 2007 as the holding company of Red Vulcan. Red Vulcan was incorporated on October 5, 2007 as the holding company for First Gen s stake in EDC. On November 22, 2007, First Gen, through Red Vulcan, was declared the winning bidder for Philippine National Oil Company and EDC Retirement Fund s remaining shares in EDC, which consisted of 6.0 billion common shares and 7.5 billion preferred shares. Such common shares represented 40% economic interest in EDC while the combined common and preferred shares represented 60% of the voting rights in EDC. EDC is the Philippines largest producer of geothermal energy, operating 12 geothermal steamfields in the 5 geothermal renewable service contract areas where it is principally involved in the following: (i) the production of geothermal steam for sale to EDCowned power plants; and (ii) the generation of electricity for sale to NPC and privately-owned distribution utilities. On May 12, 2009, Prime Terracota issued Class B voting preferred shares at par value to the Lopez Inc. Retirement Fund (LIRF) and Quialex Realty Corporation (QRC). Prime Terracota is the effective 60% voting / 40% economic owner of EDC through its subsidiary Red Vulcan. Prior to its issuance of preferred shares to LIRF and QRC, Prime Terracota was a wholly-owned subsidiary of First Gen. With the issuance of the preferred shares, First Gen s voting interest in Prime Terracota is now reduced to 45%, with the balance taken up by LIRF (40%) and QRC (15%). This transaction triggered the deconsolidation of Prime Terracota, Red Vulcan, EDC and FG Hydro (collectively referred to as the Prime Terracota Group) in First Gen s consolidated financial statements effective May Thereafter, First Gen s investment in Prime Terracota is accounted for using the equity method in the consolidated financial statements of First Gen as it still retains significant influence over Prime Terracota through its 45%-voting interest. FG Hydro was incorporated on March 13, 2006 as a wholly-owned subsidiary of First Gen. On September 8, 2006, FG Hydro emerged as the winning bidder for the then 100 MW Pantabangan and the 12 MW Masiway Hydroelectric Power Plants (PMHEPP). The then 112 MW PMHEPP was transferred to FG Hydro on November 18, 2006, representing the first major generating asset of NPC to be successfully transferred to the private sector. On October 15, 2008, First Gen s Board of Directors approved the sale of 60% of FG Hydro to EDC and the divestment was completed in November As a result of the divestment, First Gen s direct voting and indirect voting interest in FG Hydro after the transaction are 40% and 36%, respectively. Moreover, the completion of the rehabilitation and upgrade project of Pantabangan hydroelectric power plant s Units 1 and 2 in 2010 increased the power generation capacity of PMHEPP to 132 MW. First Private Power Corporation (FPPC) was established on November 27, 1992 primarily to engage in power generation. FPPC is 40%-owned by First Gen. FPPC owns a 93.25% interest in BPPC. BPPC was incorporated on February 3, 1993 and operated the Bauang power plant in Payocpoc Sur, Bauang, La Union, a 225 MW bunker-fired power plant which had a BOT with NPC for a period of fifteen (15) years from July 25, 1995 until July 25, BPPC s BOT contract with NPC expired last July 25, 2010 and the Bauang power plant was turned-over to NPC on the same date. On November 15, 2010, BPPC and FPPC filed an application to be merged into one entity, with the former as the surviving entity. The application for merger was approved by the Securities and Exchange Commission of the Philippines on December 13, 2010, and the assets and liabilities of FPPC have been transferred to, and absorbed by, BPPC on December 15, 2010, the effectivity date of the merger. 2 P age

22 Deconsolidation of Prime Terracota, Red Vulcan, EDC and FG Hydro In November 2008, First Gen completed the divestment of a 60% controlling stake in FG Hydro to EDC. In May 2009, with the investments of LIRF and QRC in the voting preferred shares of Prime Terracota, First Gen s voting interest in Prime Terracota was reduced to 45%. Under Philippine Financial Reporting Standards (PFRS), a subsidiary is consolidated from the date on which the parent first achieves control up to the date on which control is lost. The operating results of controlled entities acquired or disposed of during the year are included in the consolidated statement of income from the date of acquisition and up to the date of disposal, as appropriate. As a result of the foregoing transactions, the consolidated financial statements of First Gen contained herein present the financial information of the Prime Terracota Group as follows: the consolidated statements of income and the consolidated statements of cashflows for the year ended December 31, 2008 reflect the results of operations and cash flows of the Prime Terracota Group under the line item Discontinued Operations. However, in the consolidated statements of income and the consolidated statements of cashflows for the year ended December 31, 2009, the results of operations and cash flows of the Prime Terracota Group for the period ended April 30, 2009 is reflected under the line item Discontinued Operations. The consolidated statements of income and the consolidated statements of cashflows have been restated, as permitted under PFRS, and do not include the revenue and expense line items of the Prime Terracota Group for comparative purposes; and, the consolidated statement of financial position as of December 31, 2009 does not consolidate the results of the Prime Terracota Group due to the divestment explained above. Beginning May 2009, First Gen s investments in Prime Terracota and FG Hydro are shown as part of Investments in associates in the consolidated statement of financial position. Subsequent to the deconsolidation, the results of operations for the eight-month period ended December 31, 2009 and for the year ended December 31, 2010 are now accounted for using the equity method of accounting and are reflected in the Equity in net earnings of associates account in the consolidated statement of income. Under PFRS, First Gen s interests in the Prime Terracota Group are required to be reported under the equity method of accounting from the date on which control was lost, which occurred in May 2009, and restating the consolidated statement of income for the periods when Prime Terracota, Red Vulcan, EDC, and FG Hydro were still controlled and consolidated is permitted so as to provide some form of comparability with the new presentation. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A. FINANCIAL RESULTS FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 (Amounts in USD thousands) Statements of Income Data Revenues $1,244,278 $1,022,116 $1,262,398 Income from continuing operations before income tax $162,826 $91,157 $124,151 Net income attributable to Equity Holders of the Parent Company $70,217 $16,754 $14,474 Statements of Financial Position Data ASSETS Total current assets $377,889 $346,515 $665,541 Long-term receivables - net of current portion 652,831 Investments in associates 1,207,518 1,020,722 20,958 Property, plant and equipment 580, , ,262 Intangible assets 17,370 17,972 1,301,651 Deferred income tax assets 3, ,794 Other noncurrent assets 154, , ,840 3 P age

23 Total Assets $2,341,393 $2,161,023 $3,697,877 LIABILITIES AND EQUITY Total current liabilities $383,621 $282,566 $996,508 Bonds payable net of current portion 277, ,978 Long-term debt net of current portion 729, ,324 1,073,285 Derivative liabilities net of current portion 39,911 25,335 59,861 Retirement liability ,899 Deferred income tax liabilities net 10,479 18,609 30,036 Other noncurrent liabilities 29,189 49, ,899 Total Liabilities 1,193,424 1,353,986 2,679,466 Equity attributable to Equity Holders of the Parent Company 989, , ,660 Non-controlling Interests 158, , ,751 Total Equity 1,147, ,037 1,018,411 Total Liabilities and Equity $2,341,393 $2,161,023 $3,697,877 RESULTS OF OPERATIONS December 2010 vs. December 2009 Results CONSOLIDATED STATEMENTS OF INCOME Revenues Based on the audited consolidated financial statements for the year ended December 31, 2010, First Gen's revenues increased by $222.1 million or 21.7% to $1,244.3 million in 2010 from $1,022.1 million in The increase was due to higher revenues from sale of electricity by $159.2 million or 15.8% to $1,169.1 million in 2010 from $1,009.9 million in 2009, which resulted from higher fuel charges during the year as oil prices increased in the world market. Fuel revenues increased by $150.5 million with gas prices averaging at $9.6/GJ (or $10.2/MMBtu) in 2010 versus $8.6/GJ (or $9.1/MMBtu) in With the scheduled maintenance outage of the Malampaya platform in February and March 2010 and several gas curtailments that were experienced during the year, the Santa Rita and San Lorenzo power plants were required to operate on more expensive liquid fuel. The gas plants combined dispatch were slightly higher year-on-year at 82.7% capacity factor in 2010 compared to 82.3% in Another factor for the increase in total revenues was the mark-to-market (MTM) gain on derivatives in 2010 amounting to $5.4 million, as compared to the $0.9 million MTM loss in Derivative gains or losses recognized during the year pertain to MTM changes in the valuation of First Gen s existing Convertible bonds and the call option to purchase EDC shares. First Gen has a call option over an aggregate of 585 million common shares of EDC exercisable up to April 2013 (see Note 13 of First Gen s audited consolidated financial statements for the year ended December 31, 2010). The equity in net earnings of associates amounting to $47.7 million in 2010 significantly increased by $46.6 million as compared to $1.2 million in 2009 indicating the full year effect of the Prime Terracota Group as an associate. In 2009, equity in net earnings only included the share in net earnings of the Prime Terracota Group from the time of deconsolidation in May 2009 to December Earnings from the Prime Terracota Group for the periods January to April 2009 is reflected under Net income from discontinued operations in the consolidated statements of income for the year ended December 31, P age

24 Out of the total dollar increase in equity in net earnings, $39.8 million and $12.0 million are due to the higher equity in net earnings from EDC and FG Hydro, respectively. These were partly offset by the absence of equity in net earnings from BPPC as the Bauang BOT contract with NPC expired last July On a 12-month year-on-year comparison (adjusting for the attributable earnings from the Prime Terracota Group during the periods January to April 2009), net earnings from EDC is higher only by $21.5 million or 69.4%. The increase is due to higher revenues from Green Core Geothermal, Inc. (Green Core), a subsidiary of EDC which operates the Palinpinon-Tongonan power plants, following its full year operation in 2010 as compared to two months in 2009; net increase in miscellaneous income from the recovery of impairment loss on Input VAT claims amounting to P1,746.8 million, and absence of a deferred tax assets write-down due to implementation of the Renewable Energy (RE) law which amounted to P2,959.2 million in Similarly, net earnings from FG Hydro is higher only by $8.4 million or 551.7% due to high WESM prices during the year and high volume of electricity sales during the first quarter of In addition, lower interest expense at Red Vulcan and Prime Terracota by $7.6 million and $3.2 million, respectively, also contributed to the higher contributions to earnings during the year. Total revenue was further increased by interest income amounting to $8.9 million in 2010, which increased by $1.9 million or 27.9% from $6.9 million in This resulted from higher ending cash balances at the Parent company level due to the new loans availed during the year and the remaining cash from the Rights Offer. The Parent company also received management fees amounting to $3.9 million in 2010, which improved by $0.4 million or 11.9% from $3.5 million in Moreover, there were additional reimbursements to cover employee costs of First Gen s seconded employees that were charged to EDC during the year. Net Income Consolidated Net Income First Gen s consolidated net income increased by $26.0 million or 27.4 % to $121.0 million in 2010 from $95.0 million in The significant change in consolidated net income was a result of the movements of the following items: Net income from continuing operations increased by $68.0 million to $121.0 million resulting from: higher Equity in net earnings of associates by $46.6 million resulting from the recognition of equity in net earnings of the Prime Terracota Group covering the whole year of 2010 as compared to the eight months recognized in 2009; the higher net earnings from EDC was due to higher revenues from Green Core following its full year operation in 2010 as compared to two months in 2009, net increase in miscellaneous income from the recovery of impairment loss on Input VAT claims, and absence of a deferred tax assets write-down in Adding to this was the higher net earnings from FG Hydro due to high WESM prices during the year and high volume of electricity sales during the first quarter of In addition, lower interest expense at Red Vulcan and Prime Terracota by $7.6 million and $3.2 million, respectively, also contributed to the higher contributions to earnings in 2010; the recognition of MTM gain on derivatives of $5.4 million in 2010, a reversal from last year s $0.9 million MTM loss on derivatives. Derivative gains or losses recognized during the year pertain to MTM changes in the valuation of First Gen s existing Convertible bonds and the call option to purchase EDC shares; increased interest income by $1.9 million or 27.9% resulting from higher ending cash balances at the Parent company level due to the new loans availed during the year and the remaining cash from the Rights Offer; 5 P age

25 interest expense and financing charges decreased by $7.9 million due to lower interest expense as a result of scheduled loan repayments of FGPC and FGP. Another factor adding to this decrease is the Parent company s buy-back of its Convertible bonds and the maturity of the Peso-denominated bond in July The decrease was, however, partially offset by the higher interest expense at UHC by $2.8 million after recognizing a full year of interest expense on its P5.4 billion loan, which was drawn in March 2009; Other revenues were higher by $9.0 million as a result of the recognition of higher consultancy fees and reimbursements to cover employee costs of the First Gen s seconded employees to EDC; and, Lower foreign exchange loss of $5.1 million in 2010 as compared to a $8.7 million foreign exchange loss recognized in 2009 resulting from the payment of the Peso-denominated bond in July 2010, which reduced First Gen s exposure to foreign exchange translation. The increase in net income from continuing operations was offset by the absence of net income from discontinued operations during the year as compared to the amount recognized in 2009 of $42.0 million. This amount pertains to the net income of the Prime Terracota Group from January to April 2009, prior to the deconsolidation. Considering the absence of net income from discontinued operations, First Gen s consolidated net income increased by $26.0 million or 27.4 % to $121.0 million in 2010 from $95.0 million in Net Income Attributable to Equity Holders of the Parent Company Of the $121.0 million consolidated net income for the year ended December 31, 2010, net income attributable to the Parent company amounted to $70.2 million, which is $53.5 million or 319.1% higher than the $16.7 million net income attributable to the Parent company in The higher net income attributable to the Parent company in 2010 is mainly due to the following factors: higher net income of FGPC by $6.9 million, of which, the Parent company s share amounts to $4.1 million; increased net income contribution of EDC by $21.5 million resulting from higher revenues from Green Core following its full year operation in 2010 as compared to two months in 2009, net increase in miscellaneous income from the recovery of impairment loss on input VAT claims, and absence of a deferred tax assets write-down in 2010; improved net income of FG Hydro by $8.4 million resulting from higher dispatch and WESM prices; lower interest expense at the Parent company, Red Vulcan and Prime Terracota by $4.6 million, $7.6 million and $3.2 million, respectively; and, At the Parent company level, a $5.4 million derivative gain from its existing Convertible bonds and its call option to purchase EDC shares and a $9.0 million increase in other revenues from consultancy fees and employee cost charges to EDC have likewise contributed to the increase. The above items were partially offset by lower earnings from BPPC by $4.7 million, as the BOT contract expired last July 2010, and higher interest expense at UHC by $2.8 million. Adjusting for non-recurring items in 2010 such as foreign exchange gains/losses, deferred income taxes, MTM gains/losses, loss on disposal of FG Hydro s PPE, recognition of impairment losses on EDC s NNGPF, and recovery of Input VAT claims, recurring net income in 2010 attributable to First Gen is $57.0 million. This is $22.8 million or 66.7% higher than recurring net income in 2009 of $34.2 million, which can be mostly attributed to higher equity in net earnings from EDC and FG Hydro, coupled with lower 6 P age

26 interest expense at the Parent company and Red Vulcan. It is also worth mentioning that First Gen only recognized a $7.1 million impairment loss in This is significantly lower compared to the $29.9 million, which represents the Parent company s 40% share in the $74.8 million write-down of NNGPF by EDC. This was a result of the lower value attributed by First Gen to NNGPF under the purchase price allocation method when the former acquired its stake in EDC in November (Amount in USD thousands) Net income attributable to the Parent company $70,217 $16,754 Adjustment of non-recurring items: Movement in deferred income tax of FGPC and FGP (4,213) (4,428) Recovery of Input VAT claims by EDC (14,469) Write-down of EDC s deferred tax assets 22,765 Unrealized foreign exchange losses of Parent, FGPC, FGP, UHC 4,340 8,691 Unrealized foreign exchange loss (gain) of EDC 2,010 (9,035) Unrealized foreign exchange gain of FG Hydro (1,277) (1,463) MTM loss (gain) on derivatives of Parent company and EDC (9,338) 922 Share in impairment loss on EDC s NNGPF 7,096 Share in loss on disposal of PPE by FG Hydro 5,635 Gain on FPPC s return of investment to the Parent company (1,067) Realized gain on sale of AFS by Parent company (1,922) Recurring Net Income attributable to Parent company $57,012 $34,205 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ASSETS Major movements in the audited consolidated statements of financial position of First Gen Group from December 31, 2009 to December 31, 2010 resulted in a net increase of $180.4 million or 8.3% in First Gen Group s consolidated total assets. The net increase is a result of the following major movements: Cash and cash equivalents increased by $75.7 million or 60.3% as a result of the remaining cash proceeds from the Rights Offer, new loans availed, and cash accumulated from operations during the year. Investments in associates increased by $186.8 million or 18.3% due to higher accumulated equity in net earnings of the Prime Terracota Group, additional deposits for future stock subscriptions totaling $53.4 million, and the purchase of EDC shares directly by First Gen. Other noncurrent assets decreased by $59.4 million or 27.8% as a result of the consumption of Prepaid gas during the latter part of 2010, use of spare parts following the scheduled major maintenance outage of the Santa Rita and San Lorenzo power plants in 2010, and payment by BG of its advances from FGPC in connection with the proceeds from the Santa Rita refinancing. These transactions decreased other noncurrent assets by $20.5 million, $36.5 million, and $5.0 million, respectively. Receivables decreased by $33.8 million or 27.9% as a result of the early payment received from Meralco covering the November 2010 billings in December 2010, which was otherwise due in January P age

27 LIABILITIES AND EQUITY Total liabilities decreased by $160.6 million or 11.9% to $1,193.4 million as of December 31, 2010 from $1,354.0 million as of December 31, 2009 due to the following major movements: Bonds payable decreased by $172.0 million resulting from the buy-back of Convertible bonds and the payment of the P5.0 billion bonds by the Parent company amounting to $105.5 million. As of December 31, 2010, the Parent company bought back Convertible bonds with a total face value of $74.0 million for a total settlement amount of $83.2 million. Other noncurrent liabilities decreased by $20.4 million or 41.2% due to the reduction in unearned revenues following the use of Prepaid gas during the latter part of Scheduled principal payments during the year amounting to $21.7 million and $26.4 million were made on FGPC s and FGP s loans, respectively. Deferred income tax liabilities decreased by $8.1 million due to lower deferred income tax liabilities of FGPC, and FGP s recognition of deferred income tax assets both resulting from the movements in foreign exchange rate of the Philippine Peso against the U.S. dollar in Accounts payable and accrued expenses decreased by $5.8 million or 5.5% resulting from the payment of FGP s liquid fuel suppliers in February This decrease was partially offset by higher operations and maintenance (O&M) fees payable to Siemens Power Operations, Inc. (SPOI) following the effectivity of the new O&M agreement on August 1, 2010 and higher payables to the gas sellers as a result of the increase in gas prices. The above reduction in liabilities was partly offset by the following movements: Availment of new loans by the Parent company in May 2010 amounting to $72.2 million and $11.4 million (or P500.0 million), which increased total outstanding debt by $83.6 million. Derivative liabilities increased by $14.6 million due to higher derivative liabilities of FGPC resulting from lower LIBOR rates in 2010 as compared to the previous year. FGPC recognized a derivative liability as it entered into interest rate swap agreements to hedge the interest payments of its debt. Total equity increased by $340.9 million or 42.2% to $1,148.0 million as of December 31, 2010 as compared to $807.1 million as of December 31, 2009 mainly due to the successful completion of the Rights Offer in January 2010 and income earned during the year. Likewise, equity attributable to equity holders of the Parent company increased to $989.3 million, or 49.2% higher, as compared to $663.0 million in P age

28 FIRST GEN MATERIAL CHANGES IN FINANCIAL CONDITION (2010 vs. 2009) CONSOLIDATED STATEMENTS OF INCOME Horizontal and Vertical Analyses of Material Changes for the years ended December 31, 2010 vs HORIZONTAL ANALYSIS (Amounts in U.S. Dollars and in Thousands) Dec Dec vs REVENUE VERTICAL ANALYSIS 2010 vs Sale of electricity 1,169,155 1,009, , % 94.0% 98.8% Mark-to-market gain on derivatives 5,395 5, % 0.4% 0.0% Interest 8,881 6,942 1, % 0.7% 0.7% Equity in net earnings of associates 47,729 1,167 46, % 3.8% 0.1% Others 13,118 4,089 9, % 1.1% 0.4% TOTAL REVENUES 1,244,278 1,022, , % 100.0% 100.0% Fuel cost (821,467) (669,832) (151,635) 22.6% -66.0% -65.5% Power plant operations & maintenance (40,220) (37,624) (2,596) 6.9% -3.2% -3.7% Depreciation and amortization (54,970) (53,932) (1,038) 1.9% -4.4% -5.3% Staff costs (16,582) (10,625) (5,957) 56.1% -1.3% -1.0% Other administrative expenses (38,664) (37,244) (1,420) 3.8% -3.1% -3.6% Sub-total (971,903) (809,257) (162,646) 20.1% -78.1% -79.2% Interest expense & financing charges (104,222) (112,089) 7, % -8.4% -11.0% Foreign exchange loss - net (5,114) (8,691) 3, % -0.4% -0.9% Mark-to-market loss on derivatives (922) % 0.0% -0.1% Other charges (213) (213) 0.0% 0.0% 0.0% Total (1,081,452) (930,959) (150,493) 16.2% -86.9% -91.1% INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX 162,826 91,157 71, % 13.1% 8.9% Provision for (benefit from ) Income Tax Current 48,848 45,492 3, % 3.9% 4.5% Deferred (7,022) (7,381) % -0.6% -0.7% 41,826 38,111 3, % 3.4% 3.7% Net income from continuing operations 121,000 53,046 67, % 9.7% 5.2% Net income from discontinued operations 41,961 (41,961) % 0.0% 4.1% NET INCOME 121,000 95,007 25, % 9.7% 9.3% Attributable to: Equity holders of the Parent Company 70,217 16,754 53, % 5.6% 1.6% Non-controlling Interests ,253 (27,470) -35.1% 4.1% 7.7% Revenues Revenues for the year ended December 31, 2010 increased by $222.1 million or 21.7% to $1,244.3 million from $1,022.1 million during The increase was due to the major movements in revenue items as explained in detail below: 9 P age

29 Revenue from sale of electricity Revenues from the sale of electricity increased by $159.2 million or 15.8% to $1,169.1 million in 2010 from $1,009.9 million in 2009, as a result of higher fuel charges during 2010 as oil prices increased in the world market. With the scheduled maintenance outage of the Malampaya platform in February and March 2010 and several gas curtailments that were experienced during the year, the Santa Rita and San Lorenzo power plants were required to operate on more expensive liquid fuel. In addition, the price of natural gas in 2010 averaged at $9.6/GJ (or $10.2/MMBtu), 11.7% higher than the average price during 2009 of $8.6/GJ (or $9.1/MMBtu). Santa Rita and San Lorenzo also posted a slightly higher plant dispatch in 2010 at a combined average of 82.7% as compared to 82.3% during the same period last year. Mark-to-market (MTM) gain on derivatives The company recognized a $5.4 million MTM gain on derivative transactions in 2010 as the Company recognized $3.9 million gain on its call option to purchase EDC shares in the market and $1.5 million gain on First Gen s Convertible bonds. First Gen has a call option over an aggregate of 585 million common shares of EDC exercisable up to April 2013 (see Note 13 of First Gen s audited consolidated financial statements as of December 31, 2010). This is a reversal of the MTM loss on derivative transactions of $0.9 million that was recognized in 2009, which was classified under Costs and Expenses account of the Company s consolidated statements of income. The gain/(loss) on derivatives results from the change in the price of the Convertible bonds in the market vis-à-vis the put option and from the movement of EDC s share price in the market vis-à-vis the call option s exercise price. Interest income Interest income increased by $1.9 million or 27.9% to $8.9 million in 2010 from $6.9 million in 2009 as a result of the higher cash balances at the Parent company after the successful completion of the Rights Offer in January 2010 and new loans availed during the year. Equity in net earnings of associates Equity in net earnings of associates amounting to $47.7 million in 2010 significantly increased by $46.6 million as compared to $1.2 million in 2009 showing the full year effect of Prime Terracota Group as an associate. In 2009, equity in net earnings only included the share in net earnings of the Prime Terracota Group from the time of deconsolidation in May 2009 to December Earnings from the Prime Terracota Group for the periods January to April 2009 is reflected under Net income from discontinued operations in the consolidated statements of income. Out of the total dollar increase in equity in net earnings, $39.8 million and $12.0 million are due to the higher equity in net earnings from EDC and FG Hydro, respectively. These were partly offset by the absence of equity in net earnings from BPPC of $4.7 million in 2009 as the Bauang BOT contract with NPC expired last July On a 12-month year-on-year comparison (adjusting for the attributable earnings from the Prime Terracota Group during the periods January to April 2009), net earnings from EDC is higher only by $21.5 million or 69.4%. The increase is due to higher revenues from Green Core following its full year operation in 2010 as compared to two months in 2009; net increase in miscellaneous income from the recovery of impairment loss on Input VAT claims amounting to P1,746.8 million and absence of a deferred tax assets write-down amounting to P2,959.2 million recognized in 2009 due to implementation of the RE law. Similarly, net earnings from FG Hydro is higher only by $8.4 million or 551.7% due to high WESM prices during the year and high volume of electricity sales during the first quarter of P age

30 Other revenues The $9.0 million increase is mainly due to consultancy fees received by First Gen from EDC, which was adjusted effective September The three-year consultancy services agreement took effect on September 1, 2008 and will end on August 31, Adding to the increase is the reimbursements to cover employee costs of the First Gen s seconded employees that were charged to EDC during the year. Costs and Operating Expenses Costs and operating expenses for the year ended December 31, 2010 posted a net increase of $162.6 million or 20.1% to $971.9 million as compared to $809.3 million in 2009 as a result of the following movements: Fuel cost Fuel charges of Santa Rita and San Lorenzo went up by $151.6 million or 22.6% to $821.5 million in 2010 from $669.9 million in The higher fuel cost was due to the consumption of liquid fuel during the scheduled Malampaya outage in February and March 2010, and during the gas curtailments that were experienced during the year. Both plants were required to operate using a more expensive liquid fuel during these periods. Moreover, the average price of natural gas increased by 11.7% to $9.6/GJ (or $10.2/MMBtu) in 2010 as compared to the average price in 2009 of $8.6/GJ (or $9.1/MMBtu). Staff costs Staff costs increased by $6.0 million or 56.1% due to a lower weighted average foreign exchange rate in 2010 (P45.309:$1.00) compared to the rate in 2009 (P47.769:$1.00) that was used to convert the Peso-denominated expenses to its U.S. dollar equivalent. In addition, the amounts for the year ended December 31, 2010 already reflect the salary adjustments that were effected during the year. Other administrative expenses Other administrative expenses increased by $1.4 million or 3.8% in 2010 due to higher professional fees at the Parent company level in connection with various financing activities during the year. Interest expense and financing charges Interest expense and financing charges decreased by $7.9 million or 7.0% to $104.2 million in 2010 from $112.1 million in Interest expense at FGPC and FGP decreased by $5.9 million due to the lower outstanding debt during the year after the scheduled principal payments were made. The Parent company also recognized lower interest expense by $4.6 million after paying down its P5.0 billion bond which matured in July This was offset by higher interest expense at UHC by $2.8 million after recognizing a full year interest expense on the P5.4 billion corporate notes, drawn in March MTM loss on derivatives In 2010, the Company recognized a MTM gain on derivative transactions of $5.4 million as compared to the MTM loss on derivative transactions of $0.9 million that was recognized in This MTM gain pertains to the gains in First Gen s call option to purchase EDC shares and Convertible bonds, which were included as part of Revenues in the consolidated statements of income. The net derivative loss in 2009 was due to the change in the fair values of First Gen s Convertible bonds. Foreign exchange loss - net Foreign exchange loss amounted to $5.1 million in Although the peso appreciated, the foreign exchange loss decreased by $3.6 million or 41.2% compared to $8.7 million recognized in 2009 resulting from the payment of the Peso-denominated bond in July 2010, which reduced First Gen s exposure to foreign exchange translation. Provision for (benefit from) Income Tax The First Gen group recognized a higher provision for income tax by $3.7 million or 9.7% to $41.8 million in 2010 as compared to $38.1 million in The increase was primarily due to the higher current income tax resulting from the full year effect of FGP s income tax following the expiry of FGP s income tax holiday in February 2009 and the higher taxable income of FGPC. 11 P age

31 Net Income First Gen s consolidated net income increased by $26.0 million or 27.4 % to $121.0 million in 2010 from $95.0 million in The significant change in consolidated net income was a result of the movements of the following items: Net income from continuing operations increased by $68.0 million to $121.0 million resulting from: higher Equity in net earnings of associates by $46.6 million resulting from the recognition of equity in net earnings of the Prime Terracota Group covering the whole year of 2010 as compared to the eight months recognized in 2009; the higher net earnings from EDC due to higher revenues from Green Core following its full year operation in 2010 as compared to two months in 2009, net increase in miscellaneous income from the recovery of impairment loss on Input VAT claims, and absence of a deferred tax assets write-down in Adding to this was the higher net earnings from FG Hydro due to high WESM prices during the year and high volume of electricity sales during the first quarter of In addition, lower interest expense at Red Vulcan and Prime Terracota by $7.6 million and $3.2 million, respectively, also contributed to the higher contributions to earnings in 2010; the recognition of MTM gain on derivatives of $5.4 million in 2010, a reversal from last year s $0.9 million MTM loss on derivatives. Derivative gains or losses recognized during the year pertain to MTM changes in the valuation of First Gen s existing Convertible bonds and the call option to purchase EDC shares; increased interest income by $1.9 million or 27.9% resulting from higher ending cash balances at the Parent company level due to the new loans availed during the year and the remaining cash from the Rights Offer; interest expense and financing charges decreased by $7.9 million due to lower interest expense as a result of scheduled loan repayments of FGPC and FGP. Another factor adding to this decrease is the Parent company s buy-back of its Convertible bonds and the maturity of the Peso-denominated bond in July The decrease was, however, partially offset by the higher interest expense at UHC by $2.8 million after recognizing a full year of interest expense on its P5.4 billion loan, which was drawn in March 2009; Other revenues were higher by $9.0 million as a result of the recognition of higher consultancy fees and reimbursements to cover employee costs of the First Gen s seconded employees to EDC; and, Lower foreign exchange loss of $5.1 million as compared to a $8.7 million foreign exchange loss recognized in 2009 resulting from the payment of the Peso-denominated bond in July 2010, which reduced First Gen s exposure to foreign exchange translation. The increase in net income from continuing operations was offset by the absence of net income from discontinued operations during the year as compared to the amount recognized in 2009 of $42.0 million. This amount pertains to the net income of the Prime Terracota Group from January to April 2009, prior to the deconsolidation. Considering the absence of net income from discontinued operations, First Gen s consolidated net income increased by $26.0 million or 27.4 % to $121.0 million in 2010 from $95.0 million in Net Income Attributable to Equity Holders of the Parent Company Of the $121.0 million consolidated net income for the year ended December 31, 2010, net income attributable to the Parent company amounted to $70.2 million, which is $53.5 million or 319.1% higher than the $16.7 million net income attributable to the Parent company in P age

32 The higher net income attributable to the Parent company in 2010 is mainly due to the following factors: higher net income of FGPC by $6.9 million, of which, the Parent company s share amounts to $4.1 million; increased net income contribution of EDC by $21.5 million resulting from higher revenues from Green Core following its full year operation in 2010 as compared to two months in 2009, net increase in miscellaneous income from the recovery of impairment loss on input VAT claims, and absence of a deferred tax assets write-down in 2010; improved net income of FG Hydro by $8.4 million resulting from higher dispatch and WESM prices; lower interest expense at the Parent company, Red Vulcan and Prime Terracota by $4.6 million, $7.6 million and $3.2 million, respectively; and, At the Parent company level, a $5.4 million derivative gain from its existing Convertible bonds and its call option to purchase EDC shares and a $9.0 million increase in other revenues from consultancy fees and employee cost charges to EDC have likewise contributed to the increase. The above items were partially offset by lower earnings from BPPC by $4.7 million, as the BOT contract expired last July 2010, and higher interest expense at UHC by $2.8 million. Adjusting for non-recurring items in 2010 such as foreign exchange gains/losses, deferred income taxes, MTM gains/losses, loss on disposal of FG Hydro s PPE, recognition of impairment losses on EDC s NNGPF, and recovery of Input VAT claims, recurring net income in 2010 attributable to First Gen is $57.0 million. This is $22.8 million or 66.7% higher than recurring net income in 2009 of $34.2 million, which can be mostly attributed to higher equity in net earnings from EDC and FG Hydro coupled with lower interest expense at the Parent company and Red Vulcan. It is also worth mentioning that First Gen only recognized a $7.1 million impairment loss in This is significantly lower compared to the $29.9 million, which represents the Parent company s 40% share in the $74.8 million write-down of NNGPF by EDC. This was a result of the lower value attributed by First Gen to NNGPF under the purchase price allocation method when the former acquired its stake in EDC in November (Amount in USD thousands) Net income attributable to the Parent company $70,217 $16,754 Adjustment of non-recurring items: Movement in deferred income tax of FGPC and FGP (4,213) (4,428) Recovery of Input VAT claims by EDC (14,469) Write-down of EDC s deferred tax assets 22,765 Unrealized foreign exchange losses of Parent, FGPC, FGP, UHC 4,340 8,691 Unrealized foreign exchange loss (gain) of EDC 2,010 (9,035) Unrealized foreign exchange gain of FG Hydro (1,277) (1,463) MTM loss (gain) on derivatives of Parent company and EDC (9,338) 922 Share in impairment loss on EDC s NNGPF 7,096 Share in loss on disposal of PPE by FG Hydro 5,635 Gain on FPPC s return of investment to the Parent company (1,067) Realized gain on sale of AFS by Parent company (1,922) Recurring Net Income attributable to Parent company $57,012 $34, P age

33 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION Horizontal and Vertical Analyses of Material Changes as of December 31, 2010 and 2009 HORIZONTAL ANALYSIS Increase (Decrease) VERTICAL ANALYSIS (Amounts in U.S. Dollars and in Thousands) Dec-10 Dec vs (Audited) (Audited) Amount % Dec-10 Dec-09 ASSETS Current Assets Cash and cash equivalents $201,251 $125,531 $75, % 8.6% 5.8% Receivables 87, ,334 (33,831) -27.9% 3.7% 5.6% Inventories 51,013 65,072 (14,059) -21.6% 2.2% 3.0% Other current assets 38,122 34,578 3, % 1.6% 1.6% Total Current Assets 377, ,515 31, % 16.1% 16.0% Noncurrent Assets Investments in associates 1,207,518 1,020, , % 51.6% 47.2% Property, plant and equipment 580, ,238 18, % 24.8% 26.0% Intangible assets 17,370 17,972 (602) -3.3% 0.7% 0.8% Deferred income tax assets 3, , % 0.2% 0.0% Other noncurrent assets 154, ,566 (59,407) -27.8% 6.6% 9.9% Total Noncurrent Assets 1,963,504 1,814, , % 83.9% 84.0% TOTAL ASSETS $2,341,393 $2,161,023 $180, % 100.0% 100.0% LIABILITIES AND EQUITY Current Liabilities Accounts payable and accrued expenses $98,698 $104,451 ($5,753) -5.5% 4.2% 4.8% Income tax payable 5,253 7,543 (2,290) -30.4% 0.2% 0.3% Due to related parties 6,709 6,711 (2) 0.0% 0.3% 0.3% Convertible bonds redeemed 83,134 83, % 3.6% 0.0% Convertible bonds not redeemed 130, , % 5.6% 0.0% Current portion of long-term debt 59,678 46,499 13, % 2.5% 2.2% Philippine peso-denominated bonds 107,984 (107,984) % 0.0% 5.0% Obligations to Gas Sellers on Annual Deficiency 9,378 (9,378) % 0.0% 0.4% Total Current Liabilities 383, , , % 16.4% 13.1% Noncurrent Liabilities Convertible bonds 277,353 (277,353) % 0.0% 12.8% Long-term debt net of current portion 729, ,324 29, % 31.2% 32.4% Derivative liabilities 39,911 25,335 14, % 1.7% 1.2% Retirement liability % 0.0% 0.0% Deferred income tax liabilities net 10,479 18,609 (8,130) -43.7% 0.4% 0.9% Other noncurrent liabilities 29,189 49,632 (20,443) -41.2% 1.2% 2.3% Total Noncurrent Liabilities 809,803 1,071,420 (261,617) -24.4% 34.6% 49.6% TOTAL LIABILITIES 1,193,424 1,353,986 (160,562) -11.9% 51.0% 62.7% Equity Attributable to Equity Holders of the Parent Redeemable preferred stock 14,585 13,561 1, % 0.6% 0.6% Common stock 74,697 45,915 28, % 3.2% 2.1% Additional paid-in capital 590, , , % 25.2% 14.8% Deposits for future stock subscriptions 93,318 (93,318) % 0.0% 4.3% 14 P age

34 Accumulated share in other comprehensive losses of associates (21,006) (78,516) 57, % -0.9% -3.6% Cumulative translation adjustments (16,309) (9,642) (6,667) 69.1% -0.7% -0.4% Retained earnings 400, ,930 69, % 17.1% 15.3% Cost of common stock held in treasury (52,987) (52,987) 0.0% -2.3% -2.5% 989, , , % 42.3% 30.7% Non-controlling Interests 158, ,003 14, % 6.8% 6.7% Total Equity 1,147, , , % 49.0% 37.3% TOTAL LIABILITIES AND EQUITY $2,341,393 $2,161,023 $180, % 100.0% 100.0% Cash and cash equivalents This account consists mainly of cash on hand and in banks. Cash equivalents include cash investments with original maturities of less than three months. Cash and cash equivalents increased by $75.7 million or 60.3% to $201.2 million as of December 31, 2010 as compared to $125.5 million as of December 31, The increase is mainly due to accumulated cash from operations and the higher cash balances at the Parent company level due to the remaining proceeds from the Rights Offer that was completed in January 2010 and new loans availed during the year. Adding to the increase is the higher ending cash balances at FGPC and FGP since payments from Meralco for the November 2010 billing were received early, which were otherwise due in January Receivables Receivables decreased by $33.8 million or 27.9% to $87.5 million as of December 31, 2010 from $121.3 million as of December 31, The decrease mainly resulted from the early payment received from Meralco covering the November 2010 billings. Receivables from Meralco as of December 31, 2009 still include the November 2009 billings which were paid by Meralco in January Inventories The decrease in this account by $14.1 million or 21.6% was due to the use of liquid fuel during the scheduled 30-day maintenance outage of the Malampaya gas plant which started in February Other current assets This account increased by $3.5 million or 10.2% primarily due to higher balance of current maturing receivables from BG during the year and higher prepaid expenses. Investments in associates This account, which increased by $186.8 million or 18.3%, mainly includes the accumulated equity in net earnings of the Prime Terracota Group, the additional deposits for future stock subscription totaling to $53.4 million, and the cost of the EDC shares that were purchased directly by the Parent company through an ordinary block sale in the Philippine Stock Exchange (PSE). As of December 31, 2010, First Gen has a 3% direct ownership in EDC. It is worth mentioning that on April 19, 2010, First Gen executed a call option agreement over an aggregate 585 million common shares of stock in EDC within a period of three years or up to April Property, plant, and equipment net This account slightly increased by $18.4 million or 3.3% mainly due to the prepaid major spare parts that were reclassified from Other noncurrent assets account as a result of the scheduled major maintenance outages of the Santa Rita and San Lorenzo power plants that were completed during the year. This increase was partially offset by the depreciation expenses for the year. Intangible assets This account decreased by $0.6 million or 3.3% due to amortization of FGP s Pipeline rights for the year. 15 P age

35 Deferred income tax assets This account increased by $3.8 million as a result of appreciation of the Philippine Peso against the U.S. dollar (i.e. from P46.20 in December 2009 to P43.84 in December 2010). In the case of FGP, this appreciation has led to higher difference between the carrying values of non-monetary assets and their related tax bases as of December 31, 2010 which resulted to a higher deferred income tax asset. Other noncurrent assets This account decreased by $59.4 million or 27.8% due to the consumption of Prepaid gas by FGPC and FGP during the latter part of Moreover, the cost of spare parts pertaining to turbine blades of the Santa Rita and San Lorenzo power plants, which were previously capitalized under Prepaid major spare parts account were now reclassified under Property, plant, and equipment account as these parts were used during the gas plant s scheduled major maintenance outages during the year. Accounts payable and accrued expenses This account decreased by $5.8 million or 5.5% due to lower net trade payables of FGPC and FGP during the year. In February 2010, FGP settled its payments with its liquid fuel suppliers. This decrease was partially offset by the increase in FGPC s O&M fees payable to SPOI following the effectivity of the new Operations O&M agreement on August 1, The increase in gas prices during the year likewise resulted in higher payables to the gas sellers. Income tax payable Income tax payable decreased by $2.3 million or 30.4% which resulted from higher creditable withholding taxes applied against the income tax payables of FGPC and FGP in Obligations to Gas Sellers on Annual Deficiency The $9.4 million decrease in this account pertains to the settlement of the Annual Deficiency claims for Contract Year The original balance of $9.4 million has been reduced to $2.1 million following the final settlement of the gas dispute which took effect in June Convertible bonds redeemed This account pertains to the total put value of the Convertible bonds that will be redeemed in February On February 11, 2011, holders of the First Gen s Convertible bonds amounting to $72.5 million exercised their option to require the Parent company to redeem the Convertible bonds at a price of 115.6% of the face value. The total put value amounting to $83.8 million (with a face value of $72.5 million and carrying value of $83.1 million) was paid on February 11, Convertible bonds not redeemed After the redemption on February 11, 2011 as explained above, this account pertains to the carrying value of the unredeemed Convertible bonds amounting to $130.1 million (with face value of $113.5 million) which will now have a maturity date of February 11, As compared to the $277.4 million value in December 2009, the carrying value of the Convertible bonds decreased due to the buy-back of Convertible bonds during the year, with a face value of $74.0 million, by the Parent company for a total settlement amount of $83.2 million. Philippine peso-denominated bonds The decrease in this account pertains to the final maturity of the P5.0 billion bond, which matured on July 30, Derivative liabilities This account increased by $14.6 million or 57.5% due to higher derivative liabilities of FGPC resulting from lower LIBOR rates in 2010 as compared to the previous year. FGPC recognized a derivative liability as it entered into interest rate swap agreements to hedge the interest payments of its debt. Retirement liability The $0.6 million increase in this account was due to the effect of the revised actuarial valuation report across the First Gen group during the year. 16 P age

36 Deferred income tax liabilities net The decrease of $8.1 million or 43.7% was due to lower deferred tax liabilities of FGPC and FGP, as a result of the movements in foreign exchange rate of the Philippine Peso against the U.S. dollar (i.e. from P46.20 in December 2009 to P43.84 in December 2010). Other noncurrent liabilities net of current portion This account decreased by $20.4 million or 41.2% resulting from the use of Prepaid gas by the gas plants during the latter part of 2010, which led to the decrease in Unearned revenues account by $20.5 million, though partially offset by the accretion of the asset retirement obligation amounting to $0.1 million. The settlement of the outstanding dispute with the gas sellers covering the Annual Deficiency claims for 2006 has likewise led to lower ending balances for this account. Redeemable preferred stock The $1.0 million or 7.6% increase in this account pertains to the stock dividends on Series E preferred shares that were declared in Common stock The $28.8 million or 62.7% increase in common stock was due to the Rights Offer that was successfully completed in January Additional paid-in capital The $269.7 million or 84.2% increase in this account pertains to the proceeds from the Rights Offer in excess of the par value of the stocks issued, net of transaction costs. Accumulated share in other comprehensive losses of associates The Company recognized a reduction in equity amounting to $21.0 million as of December 2010, which was $57.5 million or 73.2% lower compared to the $78.5 million in This account reflects First Gen s share in the translation of the peso-denominated balances of the Prime Terracota Group into U.S. Dollar, which is First Gen s functional currency, effective May The reduction in this amount is due to the appreciation of the Philippine peso against the U.S. dollar from P46.20 in December 2009 to P43.84 in December Cumulative translation adjustments This contra-equity account increased by $6.7 million or 69.1% to reflect First Gen share in the translation of the peso-denominated balances of the subsidiaries and the unfavorable movements in the MTM valuation of FGPC s and FGP s interest rate swaps. As noted above, the appreciation of the Philippine peso against the U.S. dollar and the lower LIBOR rates in 2010 as compared to the previous year has led to the change in this account. Retained earnings First Gen s retained earnings increased by $69.2 million or 20.9% resulting from the earnings accumulated during the year. The increase was partially offset by the $1.0 million stock dividend to the Parent company s preferred shareholders. Non-controlling Interests This account increased by $14.7 million or 10.2% as a result of higher earnings, net of dividends received, from FGPC and FGP accumulated during the year. 17 P age

37 FIRST GEN MATERIAL CHANGES IN FINANCIAL CONDITION (2009 vs. 2008) CONSOLIDATED STATEMENTS OF INCOME Horizontal and Vertical Analyses of Material Changes for the years ended December 31, 2009 vs HORIZONTAL ANALYSIS VERTICAL ANALYSIS (Amounts in USD thousands) Dec 2009 (Audited) Dec (Audited) 2009 vs vs REVENUE Sale of electricity $1,009,918 $1,212,016 ($202,098) -16.7% 98.8% 6.0% Interest 6,942 9,079 (2,137) -23.5% 0.7% 0.7% Equity in net earnings of associates 1,167 3,530 (2,363) -66.9% 0.1% 0.3% Mark-to-market gain on derivatives -net 12,190 (12,190) % 0.0% 1.0% Foreign exchange gains - net 24,011 (24,011) % 0.0% 1.9% Others 4,089 1,572 2, % 0.4% 0.1% TOTAL REVENUES 1,022,116 1,262,398 (240,282) -19.0% 100.0% 100.0% Fuel cost (669,832) (863,874) 194, % -65.5% -68.4% Depreciation and amortization (53,932) (54,026) % -5.3% -4.3% Power plant operations & maintenance (37,624) (37,320) (304) 0.8% -3.7% -3.0% Staff costs (10,625) (12,027) 1, % -1.0% -1.0% Other administrative expenses (37,244) (49,263) 12, % -3.6% -3.9% Sub-total (809,257) (1,016,510) 207, % -79.2% -80.5% Interest expense & financing charges (112,089) (121,417) 9, % -11.0% -9.6% Foreign exchange loss - net (8,691) (8,691) 0.0% -0.9% 0.0% Mark-to-market loss on derivatives - net (922) (922) 0.0% -0.1% 0.0% Other charges (320) % 0.0% 0.0% Total (930,959) (1,138,247) 207, % -91.1% -90.2% INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX 91, ,151 (32,994) -26.6% 8.9% 9.8% Provision for (benefit from ) income tax Current 45,492 31,448 14, % 4.5% 2.5% Deferred (7,381) 18,472 (25,853) % -0.7% 1.5% 38,111 49,920 (11,809) -23.7% 3.7% 4.0% Net income from continuing operations 53,046 74,231 (21,185) -28.5% 5.2% 5.9% Net income from discontinued operations 41,961 19,237 22, % 4.1% 1.5% NET INCOME $95,007 $93,468 $1, % 9.3% 7.4% Attributable to: Equity holders of the Parent Company $16,754 $14,474 $2, % 1.6% 1.1% Non-controlling Interests 78,253 78,994 (741) -0.9% 7.7% 6.3% Revenues Revenues decreased by 19.0% or $240.3 million to $1,022.1 million in 2009 from $1,262.4 million in The decrease was due to the major movements in revenue items as explained in detail below: 18 P age

38 Revenue from sale of electricity Revenues from the sale of electricity decreased by $202.1 million or 16.7% to $1,009.9 million in 2009 from $1,212.0 million in 2008, which resulted from lower fuel charges during the year as oil prices declined in the world market. Fuel revenues decreased by $199.4 million with gas prices averaging at $8.6/GJ (or $9.1/MMBtu) in 2009 versus $11.6/GJ (or $12.3/MMBtu) in The gas plants combined dispatch was marginally higher at 82.2% capacity factor in 2009 compared to 81.6% in 2008, making Santa Rita and San Lorenzo the highest dispatched in the Luzon grid. Mark-to-market (MTM) gain on derivatives The $12.2 million decrease in this account pertains to the non-recurring MTM gain on derivative transactions of First Gen that was recognized in The Company recognized a MTM loss on derivative transactions of $0.9 million in 2009, which was classified under Costs and Expenses account of the Company s audited consolidated statements of income. Interest income Interest income decreased by 23.5% or $2.1 million to $6.9 million in 2009 from $9.1 million in 2008 as a result of lower interest income on Annual Deficiency by $2.8 million following scheduled Annual Deficiency payments by FGPC and FGP to the Gas Sellers. In addition, the Parent company and FGP recorded lower interest income from its cash balances by $1.7 million and $0.7 million, respectively. These were partly offset by higher interest income of FGPC by $3.1 million due to interest earned on advances made to its non-controlling shareholder. Equity in net earnings of associates Equity in net earnings of associates decreased by $2.4 million with the deconsolidation effective May Beginning May 2009, equity in net earnings of associates include the combined share in net earnings from the deconsolidated subsidiaries; namely, Prime Terracota, Red Vulcan, EDC, and FG Hydro. The combined amount from the deconsolidated subsidiaries from May 2009 to December 2009 is a net loss of $3.5 million due to interest expenses at Red Vulcan and Prime Terracota, which offset earnings from EDC. Earnings from the deconsolidated subsidiaries for the periods January to April 2009 and the whole year of 2008 are reflected under Net income from discontinued operations in the consolidated statements of income. Prior to the deconsolidation, equity in net earnings only included share in net earnings from BPPC. The lower earnings from the deconsolidated subsidiaries, reflected in equity in net earnings of associates, were offset by the higher share in net earnings of BPPC by $1.2 million in Foreign exchange gains - net No unrealized foreign exchange gain was recognized in 2009 as compared to a $24.0 million foreign exchange gain recognized in The foreign exchange gain in 2008 was mainly due to the unrealized foreign exchange gain on the Peso bond as a result of the depreciation of the Philippine Peso against the US dollar. The Company recognized unrealized foreign exchange loss of $8.7 million in 2009 which was included as part of Costs and Expenses in the consolidated statements of income. Other revenues The $2.5 million increase in Other revenues in 2009 pertains to consultancy fees received by First Gen from EDC, which started in September Costs and Operating Expenses Costs and operating expenses for the year ended December 31, 2009 posted a net decrease of $207.3 million or 20.4% to $809.3 million as compared to $1,016.5 million in 2008 as a result of the following movements: Fuel cost Fuel cost decreased by $194.0 million or 22.5% in 2009 due to lower gas prices in P age

39 Staff costs Staff costs decreased by $1.4 million or 11.7% due to a lower provision for retirement expenses in 2009 and higher weighted average foreign exchange rate in 2009 (P47.769:$1.00) compared to the rate in 2008 (P43.970:$1.00) that was used to convert the Peso-denominated expenses to its US dollar equivalent. Other administrative expenses Other administrative expenses decreased by $12.0 million or 24.4% in 2009 due to lower professional fees by $4.3 million and lower taxes and licenses by $6.7 million at the Parent company level. The higher professional fees and taxes and licenses in 2008 pertain to underwriting fees, legal fees, and documentary stamp taxes associated with various loans availed during the previous year. Taxes and licenses in 2008 also include the capital gains tax on the sale of First Gen s 60% stake in FG Hydro. Interest expense and financing charges Interest expense and financing charges decreased by $9.3 million or 7.7% to $112.1 million in 2009 from $121.4 million in The decrease was due to a decrease in interest expense on loans of the Parent company and FGP by $19.2 million and $3.0 million, respectively, after paying down debt during the year. In addition, interest expense on Annual Deficiency payable to the gas sellers decreased by $2.8 million following the scheduled payments made on the Payment Deferral Agreement. These were partly offset by higher interest expense in FGPC after the refinancing of its loans in November 2008 and the issuance of UHC s P5.4 billion corporate notes, which increased interest and financing expense by $7.4 million and $6.9 million, respectively. Foreign exchange loss net The Company recognized an unrealized foreign exchange loss of $8.7 million in 2009 pertaining to unrealized foreign exchange loss on UHC s P5.4 billion corporate notes and the Parent company s Peso bond as a result of the appreciation of the Philippine Peso against the U.S. dollar. MTM loss on derivatives The Company recognized a MTM loss on derivative transactions of $0.9 million in 2009 as compared to the MTM gain on derivative transactions of $12.2 million recognized in 2008, which was included as part of Revenues in the consolidated statements of income. The derivative loss was due to the change in the fair value of First Gen s Convertible bonds. Provision for (benefit from) Income Tax The Company recognized a lower provision for income tax by $11.8 million or 23.7% of $38.1 million in 2009 as compared to The decrease was primarily due to the recognition of a benefit from deferred income tax of $7.4 million in 2009 versus an $18.5 million provision that was recognized in 2008 resulting from the movements in foreign exchange rate of the Philippine Peso against the U.S. dollar. The benefit from deferred income tax was partly offset by higher current income tax of FGP by $13.5 million due to the expiry of its income tax holiday in February Net Income First Gen s consolidated net income increased by $1.5 million or 1.6% to $95.0 million in 2009 from $93.5 million in Of the total net income in 2009, $53.0 million is net income from continuing operations and $42.0 million pertains to the net income from January to April 2009 of the recently deconsolidated subsidiaries of First Gen. The relatively flat change in consolidated net income was a result of the offsetting movements of the following items: Net income from discontinued operations which pertains to the net income of the Prime Terracota Group for the months of January to April in 2009 and January to December in 2008 increased by $22.7 million in This is mainly due to lower interest expense at Red Vulcan level after reducing debt in 2009 and foreign exchange gains of EDC during the year. Administrative expenses were lower in 2009 by $13.4 million due to lower provision for retirement expenses, and lower professional fees and tax expenses. The Company incurred higher professional fees and tax expenses in 2008 from underwriting fees, legal fees, and documentary stamp taxes associated with various loans availed in P age

40 The Company recognized lower provision for income tax by $11.8 million in 2009 as a result of changes in deferred tax liabilities due to the appreciation of the Philippine peso against the U.S. dollar in Interest expense and financing charges decreased by $9.3 million due to lower interest expense at the Parent company level as a result of the Company s debt reduction program. Other revenues were higher by $2.5 million as a result of the recognition of consultancy fees from EDC. The above gains were offset by the following: First Gen group incurred a foreign exchange loss of $8.7 million in 2009, in contrast with the foreign exchange gain of $24.0 million recognized in The Parent company incurred a loss on derivative liabilities of $0.9 million resulting from the change in the fair value of the Convertible bonds. This is a reversal of the MTM gain on derivative liabilities recognized in 2008 of $12.2 million. A $6.4 million gain was recognized in 2008 pertaining to monetized banked gas as compared to in Equity in net earnings decreased by $2.4 million due to the recognition in this account of Red Vulcan and Prime Terracota s interest expense covering the months of May to December Interest income decreased by $2.1 million mainly due to lower interest on cash at the Parent company. Capacity charges slightly decreased by $2.3 million or 1.0% due to lower NDC of Santa Rita and San Lorenzo as a result of normal plant degradation. Of the $95.0 million consolidated net income in 2009, net income attributable to the Parent company amounted to $16.8 million, $2.3 million or 15.8% higher than the $14.5 million net income attributable to the Parent company in Adjusting for non-recurring items in 2009 such as foreign exchange gains/losses, deferred income taxes, and the write-down of EDC s deferred tax assets, recurring net income in 2009 attributable to First Gen is $34.2 million. This is $15.5 million or 83.2% higher than recurring net income in 2008 of $18.7 million, which can be mostly attributed to lower interest expense at the Parent company and Red Vulcan. (Amount in USD thousands) Net income attributable to the Parent company $16,754 $14,474 Adjustment of non-recurring items: Movement in deferred income tax of FGPC and FGP (4,428) 11,083 Monetized banked gas (6,369) Arbitration gain of EDC (32,515) Write-down of EDC s deferred tax assets 22,765 Unrealized foreign exchange losses (gains) of the Parent company, FGPC, FGP, UHC 8,690 (23,999) Unrealized foreign exchange loss (gain) EDC (9,035) 70,378 Unrealized foreign exchange loss (gain) of FG Hydro (1,463) 5,658 MTM loss (gain) on derivatives of Parent company and EDC 922 (20,036) Recurring Net Income attributable to Parent company $34,205 $18, P age

41 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION Horizontal and Vertical Analyses of Material Changes as of December 31, 2009 and 2008 HORIZONTAL ANALYSIS Increase (Decrease) VERTICAL ANALYSIS Dec-09 Dec vs (Amounts in USD Thousands) (Audited) (Audited) Amount % Dec-09 Dec-08 ASSETS Current Assets Cash and cash equivalents $125,531 $229,647 ($104,116) -45.3% 5.8% 6.2% Receivables 121, ,996 (123,662) -50.5% 5.6% 6.6% Inventories 65,072 76,206 (11,134) -14.6% 3.0% 2.1% Available-for-sale (AFS) financial assets 14,194 (14,194) % 0.0% 0.4% Derivative asset 12,923 (12,923) % 0.0% 0.3% Other current assets 34,578 49,508 (14,930) -30.2% 1.6% 1.3% 346, ,474 (280,959) -44.8% 16.0% 17.0% Noncurrent assets held for sale 38,067 (38,067) % 0.0% 1.0% Total Current Assets 346, ,541 (319,026) -47.9% 16.0% 18.0% Noncurrent Assets Investments in associates 1,020,722 20, , % 47.2% 0.6% Property, plant and equipment 562, ,262 (174,024) -23.6% 26.0% 19.9% Intangible assets 17,972 1,301,651 (1,283,679) -98.6% 0.8% 35.2% Deferred income tax assets 10 71,794 (71,784) % 0.0% 1.9% Long-term receivables - net of current portion 652,831 (652,831) % 0.0% 17.7% Other noncurrent assets 213, ,840 (35,274) -14.2% 9.9% 6.7% Total Noncurrent Assets 1,814,508 3,032,336 (1,217,828) -40.2% 84.0% 82.0% TOTAL ASSETS $2,161,023 $3,697,877 ($1,536,854) -41.6% 100.0% 100.0% LIABILITIES AND EQUITY Current Liabilities Loans payable $ $200,461 ($200,461) % 0.0% 5.4% Accounts payable and accrued expenses 104, ,216 (126,765) -54.8% 4.8% 6.3% Income tax payable 7,543 1,836 5, % 0.3% 0.0% Due to related parties 6,711 7,056 (345) -4.9% 0.3% 0.2% Obligations to Gas Sellers on Annual Deficiency 9,378 36,696 (27,318) -74.4% 0.4% 1.0% Current portion of: Bonds payable 107, , % 5.0% 0.0% Long-term debt 46, ,101 (471,602) -91.0% 2.2% 14.0% Derivative liabilities 1,142 (1,142) % 0.0% 0.0% Total Current Liabilities 282, ,508 (713,942) -71.6% 13.1% 26.9% Noncurrent Liabilities Bonds payable net of current portion 277, ,978 (85,625) -23.6% 12.8% 9.8% Long-term debt net of current portion 700,324 1,073,285 (372,961) -34.7% 32.4% 29.0% Derivative liabilities - net of current portion 25,335 59,861 (34,526) -57.7% 1.2% 1.6% Retirement and other post-retirement liability ,899 (24,732) -99.3% 0.0% 0.7% Deferred income tax liabilities net 18,609 30,036 (11,427) -38.0% 0.9% 0.8% Other noncurrent liabilities 49, ,899 (82,267) -62.4% 2.3% 3.6% Total Noncurrent Liabilities 1,071,420 1,682,958 (611,538) -36.3% 49.6% 45.5% TOTAL LIABILITIES 1,353,986 2,679,466 (1,325,480) -49.5% 62.7% 72.5% Equity Attributable to Equity Holders of the Parent Company 22 P age

42 Redeemable preferred stock 13,561 9,572 3, % 0.6% 0.3% Common stock 45,917 20,624 25, % 2.1% 0.6% Additional paid-in capital 320, , % 14.8% 8.6% Deposits for future stock subscriptions 93,318 93, % 4.3% 0.0% Accumulated share in other comprehensive losses of associates (78,516) (78,516) 0.0% -3.6% 0.0% Cumulative translation adjustments (9,642) (136,645) 127, % -0.4% -3.7% Accumulated unrealized gain on AFS financial assets 382 (382) % 0.0% 0.0% Equity reserve (28,383) 28, % 0.0% -0.8% Retained earnings 330, ,137 (23,207) -6.6% 15.3% 9.6% Cost of preferred and common stock held in treasury (52,987) (80,557) 27, % -2.5% -2.2% 663, , , % 30.7% 12.4% Non-controlling Interests 144, ,751 (415,748) -74.3% 6.7% 15.1% Total Equity 807,037 1,018,411 (211,374) -20.8% 37.3% 27.5% $2,161,023 $3,697,877 ($1,536,854) -41.6% 100.0% 100.0% Cash and cash equivalents This account consists mainly of cash on hand and in banks. Cash equivalents include cash investments with original maturities of less than three months. Cash and cash equivalents decreased by 45.3% or $104.1 million to $125.5 million as of December 31, 2009 as compared to $229.6 million as of December 31, The decrease is mainly due to the higher cash balances of FGPC and FGP as of December 31, 2008 since payments to Gas Sellers on the November 2008 fuel charges were already made in January The decrease in this account was also due to the deconsolidation of cash and cash equivalents of EDC and FG Hydro amounting to $16.3 million and $3.9 million, respectively, as of December 31, Receivables Receivables decreased by 50.5% or $123.7 million to $121.3 million as of December 31, 2009 from $245.0 million as of December 31, 2008 after the deconsolidation of EDC s and FG Hydro s receivables amounting to $154.8 million. The decrease was partly offset by the higher trade receivables from FGPC and FGP by $28.5 million. Receivables from Meralco as of December 31, 2009 still include the November 2009 billings which were paid by Meralco in January Available-for-sale (AFS) financial assets The $14.2 million decrease in AFS financial assets was due to the deconsolidation of EDC. This account previously included EDC s investments in dollar-denominated ROP bonds. Inventories The decrease in this account by 14.6% or $11.1 million was due to the deconsolidation of EDC s inventories amounting to $32.2 million as of December 31, This was partly offset by higher fuel inventory of Santa Rita and San Lorenzo by $21.1 million due to liquid fuel purchases made during the year in preparation for the scheduled maintenance outage of the Malampaya gas plant in February Derivative asset The decrease of $12.9 million was primarily due to the deconsolidation of EDC and FG Hydro in May The balance in 2008 includes EDC s freestanding derivative transactions, particularly the range bonus forward contracts and the foreign currency forward contracts; and FG Hydro s embedded foreign currency options on the contract with Andritz Hydro, GmbH for the Pantabangan Refurbishment and Upgrade Project (PRUP). Other current assets The net decrease in other current assets by 30.2% or $14.9 million was primarily due to the deconsolidation of EDC s current assets amounting to $12.6 million and the application of prepaid taxes against various taxes totaling to $4.8 million. 23 P age

43 Noncurrent assets held for sale This account pertains to the land owned by EDC in Fort Bonifacio to be sold to PNOC. The $38.1 million balance as of December 2008 was deconsolidated effective May Long-term receivables net of current portion This account decreased by 100.0% or $652.8 million resulting from the deconsolidation of EDC s concession receivables and other long-term receivables amounting to $652.8 million as of December Investments in associates The $999.8 million increase in this account pertains to the investment cost of First Gen in FG Hydro and Prime Terracota. With the deconsolidation effective May 2009, the investments in Prime Terracota and FG Hydro are now recognized as part of Investments in associates account in the consolidated statement of financial position. Property, plant, and equipment net This account decreased by 23.6% or $174.0 million mainly due to the deconsolidation of FG Hydro s and EDC s property, plant, and equipment amounting to $87.2 million and $40.2 million, respectively. The decrease in the gas plants property, plant, and equipment by $46.5 million due to depreciation expenses also contributed to the decrease in this account. Intangible assets This account decreased by 98.6% or $1,283.7 million to $18.0 million due to the decrease in recognized goodwill by $953.8 million, which pertained to the acquisition of FG Hydro and EDC that were no longer taken up after the deconsolidation. Furthermore, intangible assets of EDC and FG Hydro that were identified during the acquisition amounting to $283.0 million and $46.3 million, respectively, were already deconsolidated from the December 2009 consolidated statements of financial position. Deferred income tax assets This account decreased by $71.8 million as a result of the deconsolidation of EDC s deferred tax assets. Other noncurrent assets This account decreased by 14.2% or $35.3 million mainly due to the deconsolidation of EDC s noncurrent assets amounting to $32.5 million. Furthermore, the Prepaid gas account decreased by $24.0 million due to the consumption of banked gas by FGPC and FGP during the latter part of the year. These were partly offset by the capitalization of turbine blades of the gas plants during the year, which increased Other noncurrent assets by $23.5 million. Loans payable This account decreased by 100.0% or $200.5 million resulting from the full payment of short-term loans at the Parent company amounting to $119.4 million. In addition, $38.9 million of loans payable of Prime Terracota and $42.1 million of EDC were deconsolidated from this account. Accounts payable and accrued expenses This account decreased by 54.8% or $126.8 million due to the deconsolidation of EDC s accounts payable amounting to $95.5 million as of December 31, In addition, FGPC also had higher trade payables by $41.0 million on December 31, 2008 as a result of the accrual of the November and December 2008 billings of the Gas Sellers, which were both paid in January 2009, versus only one month of outstanding payables reflected as of December 31, The above decreases were partially offset by the accrual of payables to the liquid fuel supplier totaling to $21.5 million. Income tax payable Income tax payable increased by $5.7 million resulting from higher taxes payable of FGPC and FGP due to the expiration of FGP s Income Tax Holiday (ITH) incentive in February P age

44 Obligations to gas sellers The 74.4% or $27.3 million decrease in this account pertains to the payments made to the gas sellers on the Payment Deferral Agreements (PDA). As of December 31, 2009, the obligations to gas sellers under the PDA were already settled in full. Current portion of bonds payable This account increased by $108.0 million which is mainly a reclassification to current portion of the Peso bond that will mature in July Current portion of long-term debt This account decreased by 91.0% or $471.6 million due to the deconsolidation of EDC s and Red Vulcan s current portion of long-term debt amounting to $173.5 million and $291.7 million, respectively, as of December 31, In addition, FGPC s current portion of long-term debt decreased by $8.6 million following its scheduled principal payments. Derivative liabilities The $1.1 million decrease in this account pertains to the deconsolidation of EDC s derivative liability. Bonds payable This account decreased by 23.6% or $85.6 million resulting from the reclassification of First Gen s Peso bond to current portion, partially offset by the $18.9 million increase in the balance of Convertible bonds due to the accretion of debt issuance costs. Long-term debt net of current portion This account decreased by 34.7% or $373.0 million due to the deconsolidation of EDC s loans amounting to $439.3 million as of December 31, 2008, and the reduction in FGPC s and FGP s long-term debt by $21.7 million and $26.4 million, respectively, after their scheduled principal payments. These were partly offset by the issuance of UHC s P5.4 billion ($112.5 million) three-year corporate notes in March Derivative liabilities net of current portion This account decreased by 57.7% or $34.5 million due to the decrease in the fair value of FGPC s derivative liability in relation to the hedged portion of its loans availed in November Retirement and other post-retirement liability The 99.3% or $24.7 million decrease was due to the deconsolidation of EDC s retirement and other postretirement liability account. Deferred income tax liabilities The decrease of 38.0% or $11.4 million was mainly due to the appreciation of the Philippine peso against the U.S. dollar (i.e. from P=47.52 as of December 31, 2008 to P=46.20 as of December 31, 2009). Other noncurrent liabilities This account decreased by 62.4% or $82.3 million resulting from the deconsolidation of FG Hydro s noncurrent portion of Deferred Payment Facility with PSALM amounting to $51.7 million and EDC s noncurrent liabilities amounting to $6.6 million. Furthermore, unearned revenues of FGPC and FGP decreased by $24.0 million resulting from the consumption of banked gas by the gas plants during the latter part of Redeemable preferred stock The 41.7% or $4.0 million increase in this account pertains to the property dividends to First Gen s preferred stockholder in 2009 in order to maintain its percentage voting interest following the stock dividend declaration to the Company s common shares. 25 P age

45 Common stock The 122.6% or $25.3 million increase in common stock was due to the conversion of a portion of FPHC s deposit for future stock subscription amounting $16.8 million to million common shares as part of FPHC s rights offering subscription. In addition, First Gen declared a 50% stock dividend in September 2009, which further contributed to the increase in common stock in Deposits for future stock subscriptions In August 2009, the Company received from FPHC $110.1 million as deposits for future stock subscription. In December 2009, $16.8 million of the deposits was converted to million common shares. The $93.3 million remaining balance of the deposits as of December 31, 2009 were fully utilized to subscribe to FPHC s pro-rata share in First Gen s stock rights offering which was successfully completed in January Accumulated share in other comprehensive losses of associates The Company recognized a reduction in equity amounting to $78.5 million in 2009 to reflect First Gen s share in the translation of the peso-denominated balances of the Prime Terracota Group into U.S. Dollar, which is First Gen s functional currency, effective May Cumulative translation adjustments This account decreased by 92.9% or $127.0 million due to deconsolidation of Prime Terracota Group in May This account previously included the translation of the peso-denominated balances of the Prime Terracota Group into U.S. Dollar. With the deconsolidation, this account will now only include the translation of the peso-denominated balances of the subsidiaries and First Gen s share in the effect of the translation. The peso-balances of the Prime Terracota Group are now shown as part of Accumulated share in other comprehensive losses of associates account in the consolidated statement of financial position as noted above. Equity reserve In November 2008, First Gen completed its divestment of its 60% stake in FG Hydro in favor of EDC. As a result, First Gen recognized a loss in dilution of $28.4 million, which was recorded as equity reserve in the equity section of the 2008 consolidated statement of financial position. The decrease in this account was mainly due to the deconsolidation of FG Hydro from First Gen effective May Retained earnings First Gen s retained earnings decreased by 6.6% or $23.2 million resulting from the 50% stock and 50% property dividends declared in September 2009, partly offset by the earnings accumulated during the year. Cost of preferred and common stock held in treasury The 34.2% or $27.6 million decrease was due to the property dividends declared by First Gen to its voting preferred shareholder in conjunction with the 50% stock dividends declared to common shares in order to maintain the percentage voting interest of the preferred shareholder. Non-controlling Interests This account decreased by 74.3% or $415.7 million as a result of the deconsolidation of EDC and FG Hydro effective May P age

46 DISCUSSION OF MAJOR SUBSIDIARIES AND ASSOCIATES FGPC As of and for the years ended December 31 (in USD thousands) (Audited) (Audited) Revenues 782, ,510 Operating income 155, ,193 Net income 78,104 71,192 Total assets 812, ,657 Debt net of debt issuance costs 475, ,734 Other liabilities 135, ,336 Total equity 201, ,587 December 2010 vs. December 2009 Results FGPC's revenues for 2010 increased to $782.0 million or 13.4% higher than last year s $689.5 million on account of higher fuel charges which was mainly driven by the increase in average gas prices (from $9.1/MMBtu in 2009 to $10.1/MMBtu in 2010), the consumption of liquid fuel due to the scheduled maintenance outage of the Malampaya platform and several gas curtailments by the Gas Sellers that were experienced by the Santa Rita plant during the year, and higher actual NDC of 1,043.3 MW in 2010 from 1,036.0 MW in Operating income increased by $6.6 million or 4.5% due to lower administrative expenses and the supplemental charges related to the professional fees incurred during the GSPA arbitration was collected from Meralco. FGPC posted a net income of $78.1 million, which is $6.9 million or 9.7% higher than last year s $71.2 million. The increase was mainly due to lower finance charges as a result of continuous pay down of long term debt. ASSETS FGPC s total assets as of December 31, 2010 stood at $812.8 million, about $25.8 million or 3.1% lower as compared to last year s $838.7 million due to the following factors: decrease in Advances to shareholders due to the scheduled payments; consumption of liquid fuel inventory as a result of the Malampaya outage; decrease in receivables from Meralco on 2006 Annual Deficiency resulting from the final settlement of the dispute in June 2010; decrease in the Prepaid gas account as a result of the banked gas usage during the latter part of 2010 amounting to $18.8 million; and full year depreciation and amortization of fixed assets. LIABILITIES AND EQUITY FGPC s total liabilities amounted to $610.8 million lower by $32.3 million as compared to $643.1 million, primarily due to the scheduled payments of loans, final settlement of the Obligations to gas sellers relating to the 2006 Annual deficiency, and the use of banked gas which led to lower balances of the Unearned revenues account. These decreases were partly offset by the increase in derivative liabilities due to the unfavorable movements in the MTM valuation of FGPC s derivative instruments. 27 P age

47 Total equity was higher by 3.2% or $6.4 million to $202.0 million as compared to $195.6 million in December The increase in equity resulted from higher earnings during the year and lower cash dividend payments in comparison to the previous year. This was partially offset by the increase in the Accumulated other comprehensive loss account due to the unfavorable movements in the MTM valuation of FGPC s derivative instruments. FGP Corp. As of and for the years ended December 31 (in USD thousands) (Audited) (Audited) Revenues 401, ,200 Operating income 73,061 74,822 Net income 52,049 52,251 Total Assets 365, ,710 Debt net of debt issuance costs 114, ,159 Other Liabilities 46,615 67,151 Total Equity 204, ,400 December 2010 vs. December 2009 Results Total revenues for the year ended December 31, 2010 posted a 19.7% or $66.0 million increase to $401.2 million. The increase in revenues was primarily attributable to increase in average gas prices from $9.1/MMBtu in 2009 to $10.3/MMBtu in 2010 and higher average plant dispatch of 83.2% in 2010 from 80.2% in These increases were partly offset by slightly lower actual NDC of MW in 2010 from MW in On the other hand, operating income decreased by $1.8 million from last year s $74.8 million due to higher variable O&M costs in 2010 resulting from the new O&M Agreement of FGP Corp. with SPOI. The 0.4% or $0.2 million slight decrease in net income to $52.0 million in 2010 from last year s $52.2 million was primarily due to the full year provision for current income tax as compared to last year s tenmonth provision for current income tax. Note that FGP s income tax holiday incentive ended on February 28, ASSETS FGP s total assets as of December 2010 stood at $365.5 million, about $15.2 million or 4.0% lower than last year s level of $380.7 million due to: consumption of liquid fuel inventory as a result of the Malampaya outage; decrease in receivables from Meralco on 2006 Annual Deficiency resulting from the final settlement of the dispute in June 2010; decrease in the Prepaid gas account as a result of the banked gas usage during the latter part of 2010 amounting to $6.4 million; and full year depreciation and amortization of fixed assets. LIABILITIES AND EQUITY As of December 2010, total liabilities decreased by $45.6 million or 22.1% to $160.7 million from last year s $206.3 million. The continuous pay down of San Lorenzo s debt, payment of liquid fuel purchased last December 2009, final settlement of the Obligations to gas sellers relating to the 2006 Annual deficiency, and use of banked gas which led to lower balances of the Unearned revenues account, resulted in a reduction of FGP s total liabilities. Total equity increased by 17.5%, or $30.4 million to $204.8 million in 2010 as compared to $174.4 million in The increase in equity was brought about by lower cash dividend payments in comparison to last year and income earned. 28 P age

48 FG Bukidnon December 2010 vs. December 2009 FG Bukidnon s revenues, operating income and net income for the year ended December 31, 2010 decreased compared to last year due to relatively lower plant dispatch and lower water supply level. Total assets as of December 31, 2010 increased by P14.2 million or 9.5% due to accumulation of cash from operations. Total liabilities as of December 31, 2010 also increased by P6.9 million or 35.3% due to accrual of additional liability for the use of transmission line and the set-up of retirement liability for Total equity likewise increased by P7.2 million or 5.6% mainly due to income earned during the year. BPPC As of and for the years ended December 31 (in PHP thousands) 2010 (Audited) 2009 (Audited) Operating revenues 38,112 40,782 Operating income 8,007 15,901 Net income 7,252 13,424 Total Assets 163, ,490 Total Current Liabilities 17,935 11,968 Other Liabilities 8,630 7,666 Total Equity 137, ,856 As of and for the As of and for the year period ended July ended December 31, 31, 2010* 2009** (Audited) (in USD thousands) (Audited) Revenues 10,091 20,369 Net income (loss) (708) 12,579 Total Assets 35,916 60,873 Other Liabilities 4,058 7,249 Total Equity 31,858 53,624 * Following the expiration of the Co-operation Period, BPPC turned-over the 225MW Bauang power plant to NPC on July 26, 2010 to mark the end of the Build-Operate-Transfer Agreement. ** Excluding provision for real property taxes because this has a corresponding receivable from NPC. July 2010 vs. December 2009 BPPC turned-over the power plant to NPC on July 26, 2010 to mark the end of the 15-year Co-operation Period under the Project Agreement. Through a Deed of Transfer executed between BPPC and NPC, BPPC transferred to NPC all its rights, titles and interests in the power plant, free of liens created by BPPC, without any compensation. Operating revenues for the seven-month period in 2010 was reported at $10.1 million as compared to the operating revenues for the full year in 2009 of $20.4 million. However, resulting net loss of $0.7 million in 2010 was due to provisions for possible losses on input VAT and inventory write-offs totaling about US$2.6 million. Total assets decreased by $25.1 million with the full amortization of Financial Asset under IFRIC 12. Other liabilities of $4.6 million as of July 2010 represent remaining accounts/accrued payables and income tax payable. 29 P age

49 Total equity decreased by $21.9 million due to the partial capital return and dividends paid during the year. EDC (through Red Vulcan) Following is the condensed consolidated financial information of EDC: As of and for the years ended December 31 (Amounts in PHP millions) (Audited, as (Audited) restated) Revenues 24, , Foreign exchange gains (losses) - net (13.8) 1,291.2 Income before income tax 5, ,267.5 Net income 4, ,357.0 Recurring net income 7, ,276.1 Total assets 81, ,763.6 Total liabilities 49, ,443.1 Total equity 32, ,320.6 December 2010 vs. December 2009 Net income increased by 30.9% or P1,038.1 million to P4,395.1 million in 2010 from P3,357.0 million in The favorable variance was primarily attributed to the following: Increase in revenues by P2,834.7 million mainly due to Green Core s higher revenues with its full year operation in 2010 as compared to two months in 2009; One-time write-down in 2009 of the P2,959.2 million of deferred tax assets due to the implementation of RE Law while there was none in 2010; A P1,746.8 million net increase in miscellaneous income mainly due to the P1,638.9 million recovery of impairment loss on Input VAT claims; and A P635.8 million turnaround in derivatives gains from a P198.8 million loss in 2009 due to the P437.0 million gain in 2010 arising from the full settlement of Miyazawa II loan. These were offset by: Higher provision of allowance for impairment of NNGPF s assets by P3,041.0 million from P3,390.0 million in 2010 compared to P349.0 million in 2009; Higher depreciation expenses by P2,233.6 resulting from reclassification of service concession receivables to property, plant and equipment as the Company no longer applied IFRIC 12 commencing October 23, 2009; and A P1,305.1 million turnaround from the P1,291.3 million foreign exchange gains in 2009 to the P13.8 million foreign exchange losses in In terms of recurring net income generated in 2010, it slightly decreased by 0.5% or P38.3 million to P7,237.8 million from P7,276.1 million in The unfavorable variance was primarily due to the following: P1,344.2 million increase in operating expenses due to higher depreciation with the reclassification of financial asset to property, plant and equipment following the scope-out from IFRIC 12; P932.3 million increase in net financial expense due to the full year recognition of interest expense in 2010 of the Fixed Rate Corporate Notes (FRCN) and Peso public bonds. These were issued in the second half of Additional interest expense was recognized by EDC for the US$175.0 million syndicated term-loan facility, which was availed in June 2010; and P384.5 million foreign exchange loss, which was a turnaround from the realized foreign exchange gain position in P age

50 These were offset by P2,622.7 million increase in total revenue mainly from electricity sales with the full year operations of Green Core and increased sales volume of FG Hydro, net of income taxes. Cash and cash equivalents decreased by 45.1% or P5, million to P6,157.9 million as of December 31, 2010 from the P11,220.9 million December 31, 2009 balance. The decrease was primarily accounted for by the following: P19,250.3 million settlement of the Miyazawa II loan, PNOC on-lent loans, PSALM s staple financing on FG Hydro s acquisition of PMHEPP and regular debt servicing; P5,789.8 million combined capital expenditures of both FG Hydro and EDC P2,496.3 million payment of cash dividend; P1,279.7 million payment for acquisition of Bacon-Manito Geothermal Power Plants; P452.9 million payment to First Gen by FG Hydro for the settlement of cash advance. The decrease was partly offset by internal cash generation (P10,798.5 million), proceeds from US$175.0 million syndicated term-loan facility (P8,058.8 million) for Parent company and FG Hydro s loan from local banks (P5,000.0 million) and the interest income received on investments (P321.5 million). EDC s consolidated long-term debt decreased by P6,258.6 million or 13.2% to P41,205.9 million in 2010 from P47,464.5 million in The net decrease resulted from the full settlement of P11,092.0 million of JPY 22 billion Miyazawa II loan which matured in June 2010, full payment of FG Hydro s deferred payment facility with PSALM amounting to P2,299.0 million, and payment of P4,212.2 million PNOC onlent loans. These decreases were partly offset by the new loans availed during the year, particularly the $175M syndicated term loan facility and a P5,000.0 million loan availed by FG Hydro from PNB and Allied Bank. FG Hydro As of and for the years ended December 31 (in PHP thousands) 2010 (Audited) 2009 (Audited) Operating revenues 2,139,536 1,247,178 Operating income 1,413, ,340 Net income 704, ,069 Total current assets 1,581, ,446 Total noncurrent assets 7,434,560 7,239,401 Total current liabilities 516,920 1,884,357 Other noncurrent liabilities 4,570,241 1,909,087 Total equity 3,928,955 3,824,403 December 2010 vs. December 2009 FG Hydro generated revenues of P2,139.5 million for the year ended December 31, 2010, 71.6% higher than revenues of P1,247.2 million for the same period in The favorable variance was mainly on account of the combined effects of higher dispatch due to increased irrigation requirements and the 10 MW increase in power generation capacity on account of the completion of the rehabilitation of Pantabangan s Unit 1, and significantly higher spot prices in the WESM driven by power supply shortage in the first quarter. The favorable variance was partly offset, however, by increased depreciation, plant operation and maintenance expenses, staff costs and higher accrued taxes. Loss on disposal of machineries and equipment replaced for Pantabangan s Unit 2 was also higher at P359.2 million compared to P273.6 million loss for Pantabangan s Unit 1 in December Overall, FG Hydro posted a net income of 31 P age

51 P704.6 million for the year ended December 31, 2010, 517.7% better than the P114.1 million reported income for the same period in Total assets as of December 31, 2010 stood at P9,016.1 million, 18.4% higher than the 2009 level of P7,617.8 million. The favorable variance was mainly due to higher cash balance generated from operations and from the proceeds of the Company s Peso loan, net of debt service and dividend payments, and capital expenditures resulting from the Pantabangan refurbishment and upgrade project. As of December 31, 2010, total liabilities stood at P5,087.2 million, 34.1% higher than the 2009 level of P3,793.4 million. The net increase in liabilities was mainly due to the refinancing of the USD denominated liability with PSALM with a P5.0 billion peso loan availed from PNB and Allied Bank. The increase in longterm debt was also partly offset by the payment of advances from related parties. Total equity as of December 31, 2010 of P3,929.0 million is 2.7%% higher compared to the December 2009 level of P3,824.4 million. Key Performance Indicators First Gen Consolidated Current ratio Return on assets (%) 5.17% 4.40% Long-term debt plus noncurrent liabilities / Equity ratio (times) Debt ratio 50.97% 62.65% Interest-bearing debt-to-equity ratio (times) FGPC (Santa Rita) Current ratio Return on assets (%) 9.61% 8.49% Long-term debt plus noncurrent liabilities / Equity ratio (times) Debt ratio 75.15% 76.68% Interest-bearing debt-to-equity ratio (times) Debt-to-equity ratio (times) P age

52 FGP (San Lorenzo) Current ratio Return on assets (%) 14.24% 13.72% Long-term debt plus noncurrent liabilities / Equity ratio (times) Debt ratio 43.96% 54.19% Interest-bearing debt-to-equity ratio (times) Debt-to-equity ratio (times) FG Bukidnon Current ratio Return on assets (%) 4.43% 8.98% Debt ratio 16.23% 13.13% Debt-to-equity ratio (times) EDC Current Ratio Debt-to-Equity Ratio Net Debt-to-Equity Ratio Return on Assets (%) 5.3% 4.4% Return on Equity (%) 14.1% 11.4% FG Hydro (Pantabangan-Masiway) Current ratio Return on assets 7.81% 1.50% Long-term debt plus noncurrent liabilities / Equity ratio (times) Debt ratio 56.42% 49.80% Interest-bearing debt-to-equity ratio (times) Debt-to-equity ratio (times) BPPC (Bauang) July 2010* 2009** Current ratio Return on assets -1.97% 20.66% Long-term debt plus noncurrent liabilities / Equity ratio 4.99% Debt ratio 11.30% 11.91% Debt-to-equity ratio (times) * Following the expiration of the Co-operation Period, BPPC turned-over the 225MW Bauang power plant to NPC on July 26, 2010 to mark the end of the BOT Agreement. ** Excluding provision for real property taxes because this has a corresponding receivable from NPC. 33 P age

53 Key Performance Indicators Current Ratio Return on Assets Long-term Debt Plus Noncurrent Liabilities / Equity Ratio (times) Debt Ratio Interest-bearing debt-to-equity ratio (percentage) Debt-to-equity ratio (percentage) Net Debt-to-Equity Ratio Details Calculated by dividing current assets over current liabilities. This ratio measures the company's ability to pay short-term obligations. Calculated by dividing net income over total assets. This ratio measures how the company utilizes its resources to generate profits. Calculated by dividing long-term debt and noncurrent liabilities over total stockholders' equity. This ratio measures the company's financial leverage. Calculated by dividing total liabilities over total assets. This ratio measures the percentage of funds provided by the creditors to the projects. Calculated by dividing total interest-bearing debt over total equity. This ratio measures the percentage of funds provided by the lenders/creditors. Calculated by dividing total liabilities over total equity. This ratio measures the percentage of funds provided by the lenders/creditors. Calculated by dividing the total interest-bearing debts less cash & cash equivalents over total equity. This measures the company s financial leverage and stability. A negative net debt-to-equity ratio means that the total cash and cash equivalents exceeds interest-bearing liabilities. FIRST GEN CORPORATION AND SUBSIDIARIES AGING OF RECEIVABLES Amounts in U.S. Dollars and in Thousands Current More than 90 days past due More than 120 days past due Total Trade $71,305 $71,305 Due from related parties 14,917 14,917 Others 1,281 1,281 87,503 87,503 Less: allowance for doubtful accounts $87,503 $87, P age

54 INFORMATION ON INDEPENDENT AUDITORS The following table sets out the aggregate fees billed and paid for each of the last three (3) fiscal years for professional services rendered by SyCip Gorres Velayo & Co.: AUDIT FEES (in P= ) Audit and Audit-Related Fees 6,593, ,160, ,187, Tax Fees 670, ,481, ,655, All Other Fees 1 5,201, ,742, ,092, ,464, ,385, ,935, Under the existing policies of the First Gen Audit Committee, the Audit Committee shall: [i] ensure that the fees charged by the external auditors are commensurate with their reputation, level of expertise, and required scope of work, and in accordance with current industry standards; [ii] regularly review and assess their fees and quality of work performed; [iii] determine the necessity of the external auditors performing non-audit work for any relevant year, and review and approve/ratify fees charged for such non-audit services which shall be covered by a written agreement separate and distinct from the agreement for audit services; and [iv] review and consider the rotation, every five (5) years, of the external auditor or handling partner. MARKET INFORMATION First Gen s common shares were listed with the Philippine Stock Exchange, Inc. on February 10, The high and low stock prices for 2009, 2010, and the 1 st quarter of 2011 are indicated below: High Low Q (as of March 24, 2011) Q Q Q Q Q Q Q Q The closing price of First Gen s common shares as of March 24, 2011 was P=11.98 per share. As of March 8, 2011, there were 368 stockholders of record and 3,362,614,360 common shares issued and outstanding. 1 For services relating to due diligence for proposed acquisitions/various financing activities, preparation of agreed-upon procedures report for the Company s application for the increase in authorized capital stock, due diligence for the stock rights offering, due diligence for the convertible bond offering, and conduct of seminars. 35 P age

55 The top 20 stockholders of First Gen as of March 8, 2011 are as follows: Nationality Stockholder No. of Shares Percentage 1 Filipino FIRST PHILIPPINE HOLDINGS CORPORATION (COMMON) 2,224,989, % 4F Benpres Bldg. Exchange Road, Pasig City FIRST PHILIPPINE HOLDINGS CORPORATION (PREFERRED) 1,468,553, % 4F Benpres Bldg. Exchange Road, Pasig City 2 Others PCD NOMINEE CORPORATION 750,771, % 37F Enterprise Bldg. Ayala Ave., Makati City 3 Filipino PCD NOMINEE CORPORATION 351,675, % 37F Enterprise Bldg. Ayala Ave., Makati City 4 Filipino PETER D. GARRUCHO, JR. 6,807,004.14% C/O FGEN 5 Filipino OSCAR M. LOPEZ 6,546,933.14% C/O FGEN 6 Filipino FEDERICO R. LOPEZ 5,675,811.12% C/O FGEN 7 Filipino FRANCIS GILES B. PUNO 1,800,001.04% C/O FGEN 8 Filipino RICHARD B. TANTOCO 1,768,681.04% C/O FGEN 9 Filipino ERNESTO B. RUFINO, JR. 1,552,328.03% C/O STSI 10 Filipino ARTHUR A. DE GUIA 1,422,160.03% C/O FPHC 4F Benpres Bldg. Exchange Road, Pasig City 11 Filipino EMMANUEL P. SINGSON 1,402,534.03% 12 Filipino PUNO, FRANCIS GILES B. &/OR MA. PATRICIA D. PUNO 1,105,800.02% 23 Aries St. Bel-Air 3, Makati City 13 Filipino MANUEL SANTIAGO &/OR ELLA SANTIAGO 900,000.02% 14 Filipino NESTOR H. VASAY 450,000.01% C/O FGEN 15 Filipino M.J. SORIANO TRADING, INC. 423,480.01% 16 Filipino MONINA D. LOPEZ 264,738.01% 17 Filipino CROSLO HOLDINGS CORPORATION 250,000.01% 18 Filipino PERLA R. CATAHAN 245,460.01% 19 Filipino CONSUELO R. LOPEZ 235,050.00% 36 P age

56 20 Filipino RICHARD P. DIFUNTORUM 207,380.00% Total Top 20 4,827,047, % Other Stockholders 4,120, % Total Issued and Outstanding Shares 4,831,168, % DIVIDENDS The board of directors may declare dividends on common and preferred shares out of the Company s unrestricted retained earnings. On August 15, 2007, the board of directors declared a cash dividend in the amount of: (i) P= 2.50 per share on all outstanding common shares in favor of stockholders of record as of September 7, 2007, with payment date of September 14, 2007; and (ii) P= 0.05 per share on all outstanding preferred shares in favor of stockholders of record as of September 7, 2007, with payment date of September 13, On March 30, 2009, the board of directors of First Gen approved the declaration of a 50% stock dividend on First Gen s common shares to be taken from unissued common shares, and a 50% property dividend on First Gen s preferred shares to be taken from treasury preferred shares. The Philippine SEC approved on August 27, 2009 the issuance of $8.4 million (P=405.0 million) common shares consisting of 405,000,000 common shares with a par value of P=1.00 per share, to cover the stock dividends declared by the board of directors on March 30, 2009 and ratified by the company s stockholders on May 13, Record and payment dates of the common stock dividends were set at September 11, 2009 and October 7, 2009, respectively. The Philippine SEC s approval was pursuant to the Amended Rules Governing Pre-emptive and other Subscription Rights and Declaration of Stock or Cash Dividends of Corporations whose securities are registered under the SRC or listed in the PSE. On September 23, 2009, the Philippine SEC approved First Gen s declaration of a 50% property dividend consisting of 177,619,000 preferred shares, to be taken from treasury preferred shares and amounting to $7.6 million (P=680.3 million), in favor of First Gen s preferred stockholder of record as of May 13, On October 5, 2009, the board of directors of First Gen approved the declaration of a property dividend on First Gen s preferred shares to be taken from the remaining 467,143,000 treasury preferred shares, and a stock dividend of 375,000,000 million Series E preferred shares to be taken from First Gen s unrestricted retained earnings. The board of directors likewise approved the reduction in the dividend rate of Series A to D preferred shares from P0.05 to P0.02 per share. The above matters were approved by the stockholders during the special stockholders meeting held on November 20, 2009, and by the Philippine SEC on November 26, The property dividends were taken from the remaining 467,143,000 preferred shares held in treasury amounting to $20.0 million (P=1,787.1 million), and paid to First Gen s preferred stockholder of record as of November 20, On December 7, 2009, the Philippine SEC approved First Gen s declaration of stock dividends consisting of 375,000,000 Series E preferred shares amounting to $4.0 million (P=187.5 million) in favor of the preferred stockholder of record as of December 7, On March 8, 2010 and May 12, 2010, First Gen s board of directors and stockholders, respectively, approved the declaration of a stock dividend on Series E preferred shares consisting of 93,553,892 shares to be taken from the company s unrestricted retained earnings. On June 2, 2010, First Gen submitted to the Philippine SEC a notice of declaration of stock dividend on Series E preferred stocks. On January 26, 2011, the board of directors approved the declaration of cumulative cash dividends on the Series B preferred shares amounting to $1.8 million (P=77.8 million) to be taken from the company s unrestricted retained earnings. The cash dividends have a record date of February 9, 2011 and a payment date of March 7, In the same meeting, the board of directors approved the dividend rate of Series E preferred shares at P= 0.01 per share. 37 P age

57 SALE OF UNREGISTERED / EXEMPT SECURITIES Executive Stock Option Plan. In its Resolution No. 445 dated August 29, 2002, the Philippine SEC held that First Gen s issuance of 452,285 shares of stock pursuant to its Executive Stock Option Plan ( ESOP ) is exempt from the registration requirements under Section 10.2 of the Securities Regulation Code ( SRC ). As a result of the company s restructuring in May 2005, the Philippine SEC set aside Resolution No. 445 and issued on November 29, 2005 Resolution No. 372 to reflect adjustments in the number of allocated shares from 452,285 to 18,091,400 and subscription price from P= to P= The number of shares awarded was likewise adjusted from 409,756 shares to 15,856,800 shares. Following the 50% stock dividend on common shares which was approved by the Philippine SEC on August 27, 2009, further adjustments were made. The number of shares allocated was increased from 18,091,400 to 27,137,100 shares, the subscription price per share was reduced from P= to P= 8.80, and the number of shares awarded was increased from 15,856,800 to 23,785,200 shares. In Resolution No. 010 dated January 11, 2010, the SEC confirmed the continuing exemption of the subject ESOP shares from the registration requirements of the SRC. As of December 31, 2010, of the 23,785,200 shares awarded, a total of 22,555,608 shares have vested, out of which 21,182,573 shares have been exercised. A total of 1,373,035 shares remain vested and unexercised while a total of 1,229,592 shares have been forfeited. Employee Stock Purchase Plan. The SEC, in Resolution No. 272 dated August 30, 2005, held that First Gen s issuance of 113,071 shares of stock pursuant to its Employee Stock Purchase Plan ( ESPP ) is exempt from the registration requirements under Section 10.2 of the SRC. No issuance of shares under the ESPP has been made to date. The corporate governance structures of First Gen are managed and driven by its board of directors which is composed of individuals of proven competence and integrity. Fully aware of their duties and obligations as directors of a publicly-listed company, the directors make every effort to ensure that the company is able to respond to the needs of its officers, employees, customers and partners, as well as government and the public in general. Having set forth the company s goals, the board is responsible for guiding the company in fulfilling its economic targets and governance aspirations. CORPORATE GOVERNANCE The board of directors of First Gen consists of nine (9) members, including two (2) Independent Directors, all of whom are elected by the company s qualified stockholders during the annual stockholders meeting held on the 2 nd Wednesday of May of each year. Independent Directors Tony Tan Caktiong and Cezar P. Consing have neither interest nor relationship with First Gen that may hinder their independence from the company or its management, or interfere with the exercise of independent judgment in carrying out their responsibilities. To ensure the company s compliance with the principles of good corporate governance, the members of the board have been selected as members of the standing committees pursuant to the Manual on Corporate Governance. These are the Risk Management Committee, Nomination and Governance Committee, Compensation and Remuneration Committee, and Audit Committee. The creation of the Risk Management Committee was approved by the board of directors on March 8, The committee is chaired by Director Peter D. Garrucho Jr., with Directors Elpidio L. Ibañez and Francis Giles B. Puno as members. The committee is tasked to oversee the formulation, establishment and implementation of an enterprise risk management (ERM) system; review and assess First Gen s ERM policy, processes, strategies, methods and activities and recommend revisions thereto for approval by the board; understand and set clear directions for the management of the Corporation s strategic and critical risks; and provide management the support and resources necessary to manage the risks to the Corporation. 38 P age

58 On April 8, 2010, the company submitted to the Philippine SEC its revised Manual on Corporate Governance. Among the changes introduced in the amended manual was the constitution of a Nomination and Governance Committee, to be composed of at least three (3) members, one (1) of whom shall be an Independent Director. The committee is responsible for the following: review and evaluate the qualifications of all persons nominated to the board and other appointments that require board approval; ensure, through a managed and effective system consistent with the corporation s By-laws, that each board election will result in a mix of proficient directors, each of whom will be able to add value and bring prudent judgment to the board; assess the effectiveness of the board s processes and procedures in the election or replacement of directors; review the recommendations of the Compliance Officer in relation to the Manual on Corporate Governance as well as other corporate governance rules and regulations and endorse the same to the board for its approval; review, as may be necessary, the charters of all board committees and recommend any changes to the board for its approval; and perform such other tasks or duties as may be requested or delegated by the board. The Nomination and Governance Committee judiciously passes upon the qualifications of nominees to the board, and makes sure that a board election will result in a mix of proficient directors, each of whom will be able to add value and bring prudent judgment to the board of directors. The committee is presently composed of Chairman Federico R. Lopez, Director Richard B. Tantoco, and Independent Director Tony Tan Caktiong. The Compensation and Remuneration Committee is composed of the Chairman of the board and two (2) members, one (1) of whom shall be an Independent Director. The committee shall have powers and functions over the compensation and remuneration of the corporate officers other than the Chairman, whose compensation and remuneration shall be determined by the Vice-Chairman or President and two (2) directors, one of whom shall be an Independent Director. The committee ensures that their compensation of the company s directors and officers is consistent with the Corporation s culture, strategy, and the business environment in which it operates. The Audit Committee is headed by Independent Director Cezar P. Consing, with Director Elpidio L. Ibañez and Independent Director Tony Tan Caktiong as members. Pursuant to the company s Manual on Corporate Governance, the committee is tasked to perform the following functions: assist the board in the performance of its oversight responsibility for the financial reporting process, system of internal control, audit process, and monitoring of compliance with applicable laws, rules and regulations; provide oversight over management s activities in managing credit, market, liquidity, operational, legal and other risks of the corporation; review the annual internal audit plan to ensure its conformity with the objectives of the corporation; prior to the commencement of the audit, discuss with the external auditor the nature, scope and expenses of the audit, and ensure proper coordination if more than one audit firm is involved in the activity to secure proper coverage and minimize duplication of efforts; organize an internal audit department and consider the appointment of an independent internal auditor and the terms and conditions of its engagement and removal; monitor and evaluate the adequacy and effectiveness of the company s internal control system, including financial reporting control and information technology security; review the reports submitted by the internal and external auditors; review the quarterly, half-year and annual financial statements before their submission to the board, with particular focus on: [i] any change/s in accounting policies and practices; [ii] major judgmental areas; [iii] significant adjustments resulting from the audit; [iv] going concern assumptions; [v] compliance with accounting standards; and [vi] compliance with tax, legal and regulatory requirements; evaluate and determine the non-audit work, if any, of the external auditor, and review periodically the non-audit fees paid to the external auditor; establish and identify the reporting line of the internal auditor to enable him to properly fulfill his duties and responsibilities; check all financial reports of the corporation against its compliance with both the internal financial management handbook and pertinent accounting standards, including regulatory requirements; perform interface functions with the internal and external auditors; and ensure the establishment of a transparent financial management controls system that aims to ensure the integrity of the system. The Audit Committee may request information, data and clarification from the officers of the corporation in the performance of their duties and responsibilities. Among the measures undertaken to comply with leading practices on good corporate governance, the board of directors and stockholders, in separate meetings held in March and May 2009, respectively, 39 P age

59 approved amendments to the corporation s By-laws providing for the general responsibility of the board of directors; providing for the election and qualification of independent directors; prescribing additional qualifications and disqualifications of directors, such as disqualification on the grounds of violation of the SRC, the Corporation Code, and rules administered by the Bangko Sentral ng Pilipinas and the SEC, insolvency, analogous acts committed in another jurisdiction, commission of other acts deemed prejudicial, inimical, or causing undue injury to the corporation, its subsidiaries or affiliates, and gross negligence or bad faith committed as an officer or director of another company; and finally, providing that the board of directors shall be governed by the Manual on Corporate Governance. The amendments were approved by the SEC on August 24, 2009, and now form part of the company s By-laws. To further ensure compliance with the principles and policies of good corporate governance, Senior Vice President Victor B. Santos Jr. serves as the company's Compliance Officer. Mr. Santos is responsible for monitoring compliance by the corporation with the Manual on Corporate Governance and the rules and regulations of regulatory agencies, including reporting the occurrence of any violation, reporting such violation to the board, recommending the imposition of appropriate disciplinary actions on the responsible parties, and adopting measures to prevent a repetition of the violation; appearing before the SEC when summoned on matters relating to the Manual on Corporate Governance; issuing a certification in January of each year on the extent of the corporation s compliance with the Manual on Corporate Governance for the preceding year, and, if any deviations are found, explaining the reasons for such deviation; and recommending to the board the review of the Manual on Corporate Governance. First Gen, through its board of directors and senior management, continues to search for ways and means to improve its corporate governance. Firmly believing that corporate governance is a necessary component of sound business management, the company regularly reviews its existing policies and programs with the intention of further elevating the level of accountability of the company s directors, officers, and employees. Efforts to enhance and develop the company s corporate governance structures have resulted in amendments to the company s By-laws and Manual on Corporate Governance. As First Gen sets its sights on playing an even greater role in the power industry, it will continue to diligently exert every effort necessary to achieve its corporate governance goals and aspirations. 40 P age

60 AUDITED CONSOLIDATET) FINANCIAL STATEMENTS

61 First Gsn t Gen Corporation, Ach.qa Rod cd^e erakoawnw,l@ P6b, Msko Manita. phtippi.rs / Fd: +63 ( /ffi&.tg n conph March 16,2011 SECUzuTIES AND EXCHANGE COMMISSION SEC Building, EDSA Greenhills Mandaluyong City, Metro Manila The management of First Gen Corporation (the Company) is responsible for all information and representations contained in the consolidateci financial statements as of December 31, 2010 and 2009 and for each of the three years in the period ended December 31, The consolidated financial statements have been prepared in accordance with Philippine Financial Reporting Standards and reflect amounts that are based on the best estimates mcl informed judgment of management with an appropriate consideration to materiality. In this regard, management maintains a system of accounting and reporting which provides for the necessary internal controls to ensure that transactions are properly authorized and recorded, assets are safeguarded against unauthorized use or disposition and liabilities are recognized. The management likewise discloses to the company's audit committee and to its extemal auditor: (i) all significant deficiencies in the design or operation of internal that could adversely affect its ability to record, process, and report financial data; ii) material weaknesses in the internal controls; and (iii) any fraud that involves or other ernployees who exercise significant roles in internal conkols. Board of Directors reviews the consolidated financial statements before suoh statements re approved and submitted to the stockholders of the Company. ycip, Gorres, Velayo & Co., the independent auditr:rs appointed by the stockholders, have ined the consolidated financial statements of the Cornpanv in accordance with hilippine Standards on Auditing and have expressed their opinion on the faimess of ion upon completion of such examination, in their report to the Stockholders and Board of Directors, red under oath by the following: -*-t; L.- )-- ", ederico R. Lopez and j &mz Francis Giles B. Puno President and Chief Operating Officer icer & 'lreasurer

62 I FIAR 25 2OII UBSCRIBED AND sworn To before me this day of March 201r, affiants xhibited to me their cclmmunity Tax certificate Nos, as foilows: CTC No. Date/Place Issued Federico R. Lopez January 24,20fi / pasig city Francis Giles B. Puno January 24,2011 / pasig city Emmanuel P. singson February 14,zTrlleuezon city eries of 2011.

63 First Gen Corporation and Subsidiaries Consolidated Financial Statements December 31, 2010 and 2009 and Years Ended December 31, 2010, 2009 and 2008 (In U.S. Dollars) and Independent Auditors Report SyCip Gorres Velayo & Co.