Dear Stakeholders,
To say 2020 was a challenging year is truly an understatement. In the Philippines, in particular, the year started off with the eruption of Taal Volcano (just south of Manila), followed by the news of the outbreak of the COVID-19 pandemic. Then, during the latter half of the year, the country was beset by eight different storms affecting some of our sites.
Individually, these events are damaging enough on their own. Taken together, their damages are enough to cause an economic recession. In 2020, the Philippines had its worst economic performance to date since the country began releasing its annual growth data in 1947. According to the Philippine Statistics Authority (PSA), the country’s GDP shrank 9.5 percent in 2020. This, of course, was the inevitable result of the slowdown in economic activity brought about by extended lockdown periods (i.e. the Enhanced Community Quarantine (ECQ) that lasted from March 17 to May 31), compounded by the onslaught of natural calamities.
As many of you know by now, we at First Gen, together with our parent FPH, have for sometime now been strong advocates against the existential threat of climate change. For us, it is not surprising to see how the climate crisis has had an invisible yet steady hand in the disasters we are challenged with today. Scientists and researchers have been warning us about how continued global warming and climate change may give rise to new strains of viruses, pathogens, and tropical diseases.
Continued deforestation and habitat loss displace animals and force them to migrate. This, in turn, forces them to come in close contact with human populations they normally wouldn’t, providing ample opportunity for pathogens and new strains of viruses to transfer to humans as their new hosts. Additionally, warmer climates are also more conducive to the development of certain pathogens. The COVID-19 pandemic we are all experiencing now may just be a glimpse into other pandemics to come.
So, while we are all making sacrifices and doing the best we can to stay safe and healthy during this trying time, we would not be able to get to the root cause of the issue if we do not address the climate crisis as well. Remember: there will be a vaccine for COVID-19, but there will be no vaccine for the climate crisis.
In 2020, First Gen, together with its parent FPH, recrafted its mission to help address climate change by “forging collaborative pathways for a decarbonized and regenerative future” and its purpose of creating mutually beneficial relationships with nature and society to benefit our customers, our employees, our suppliers, our environment, our communities, as well as our investors (consistent with Carol Sanford’s Pentad Framework). This is further concretized in our chosen path centered on a program for First Gen to accelerate and lead the transition towards decarbonizing the Philippine energy system.
OVERCOMING 2020 CHALLENGES
At the onset of the pandemic, we went through a period of fear and anxiety as we needed to learn how to adjust through the uncertainties we faced; how movement restrictions and the slowdown of the economy could potentially have a serious adverse impact on our organization, our operations and our financial results. The pandemic limited mobility wherein government enforced levels of community quarantine along with restrictions on local and foreign travel.
We immediately activated the FPH Group Crisis Management and Business Continuity Management Plan that included a pandemic emergency response strategy handled by the Occupational Health and Safety team. We attended to the safety and welfare of our employees, contractors, and partner communities. Our managers monitored, quickly adapted, and responded decisively to the varying situation on the ground as events unfolded, including COVID testing and stocking of critical supplies.
Digital programs and solutions for the workforce
First Gen applied the “work-from-home” arrangement in mid-March for most employees. Required tools and allowances enabled them to communicate, conduct Zoom meetings, and work securely and efficiently in the safety of their homes. We prioritized their health and wellness by conducting weekly virtual wellness activities that continue until today. Occupational health and safety protocols and technology-based contact tracing solutions were enforced for those who needed to work in our offices or in the plant sites. From what we learned and experienced, it is unlikely that we will go back to the pre-COVID style of working.
Housing provisions for the site workforce
We activated a shelter-in-place (SIP) arrangement across all plant locations for the safety of our plant operators, maintenance personnel, and power traders. For the more remote geothermal and hydroelectric power plant sites, we fitted out already existing accommodations for SIP while we constructed new build-to-suit accommodations in FGCEC in Batangas. While in the facilities, personnel were supplied with essentials such as meals, regular COVID-19 testing, and personal protective equipment (PPE).
Community initiatives during the pandemic
The COVID-19 pandemic also required immediate assistance to the community-at-large. We approached our pandemic-related assistance through targeted efforts such as: 1) the Pantawid ng Pag-ibig feeding program with ABS-CBN; 2) Philippine General Hospital and University of the Philippines National Institute of Health with improved laboratory testing facilities and frontliners' accommodations; 3) Medical City frontliners’ temporary accommodations in the Metrowalk Tent; 4) Philippine Port Authority with its 500 bed quarantine facility for overseas foreign workers at the Eva Macapagal Terminal in Manila; 5) National Kidney Technical Institute tent facilities and rental accommodations; and 6) COVID testing equipment for IloIlo City, Ormoc City and Dumaguete City. By December 2020, the combined support that First Gen had given for pandemic-related efforts amounted to PHP741.0 million pesos.
“For us, it is not surprising to see how the climate crisis has had an invisible yet steady hand in the disasters we are challenged with today.”
Reliable and Consistent Operations
Amazingly, First Gen still experienced successes in 2020. Our operational initiatives paid off and allowed the power plants to operate reliably despite the lockdown and natural calamities. On top of the various efforts already described, we undertook prudent risk management measures to ensure the company maintained more than sufficient cash buffers to prepare for a possible prolonged “worst-case” scenario.
Continued energy provision by our gas plants
Our 2,017-MW gas-fired plants continued to provide steady power supply to consumers throughout the pandemic. The four units of Santa Rita and two units of San Lorenzo plants performed with a combined availability factor of 93 percent and reliability factor of 97 percent. The lockdown and extended quarantine period, however, made it extremely challenging to perform the scheduled major maintenance and upgrade activities for two of the Santa Rita units and the single San Gabriel unit. Our San Gabriel plant suffered from a generator electrical fault damage in September 2020. Its repair and maintenance work was completed in February 2021. We were just fortunate that demand for power had gone down with the pandemic as we were on the hook for replacement power cost. Upgrade work on the Santa Rita unit was completed in October and resulted in a 12 MW output increase.
Repair and maintenance work necessitated close coordination and permitting with the Department of Energy (DOE) and Department of Foreign Affairs (DFA) to approve the entry of about 70 experts to conduct critical activities on site. The maintenance work on one Santa Rita unit was moved back to January 2021 and completed in March. The regular scheduled maintenance of the entire First Gen fleet is necessary to achieve high availability and reliability targets. Maintenance work on the rest of the units continues to be performed in 2021 and will spill over to early 2022 for the last unit of San Lorenzo.
Avion’s approved ASPA application
The 97-MW Avion power plant’s Ancillary Services Procurement Agreement (ASPA) application was finally approved by the Energy Regulatory Commission (ERC) in May 2020. Avion has been generating revenues from ancillary services since June 2020, which has reduced its merchant exposure.
Geothermal’s continued reliability
In 2020, our geothermal platform through EDC had a combined availability of 94 percent and reliability of 95 percent. The structural improvements made to our geothermal plants allowed them to withstand three successive strong typhoons that hit the Bicol region. Our Bacon-Manito plant, in particular, was able to immediately go back to providing energy after its pre-emptive shutdown.
In addition to its steam optimization projects, EDC set out to increase their drilling program in their Leyte and Mount Apo sites from six to a total of ten wells to assure itself of steam production and reinjection capacity for the next few years. However, the pandemic and resulting lockdown period enabled them to only finish five wells with the remaining pushed back to 2021.
Wind and solar’s good performance
Our wind and solar power plants performed well in 2020. The Burgos Wind Farm generated 367GWh — 6GWh beyond the 361 GWh target. Moreover, in July, the ERC finally approved the feed-in tariff (FiT) rate adjustments for 2016 to 2020. This is the first adjustment over the life of the wind and solar projects that helped improve the projects’ returns.
2020’s financial impact
Though 2020 was challenging, First Gen was relatively insulated from disruptions felt by the power industry.
Benefit from high contracting levels
First Gen's consolidated revenues from the sale of electricity in 2020 declined by PHP20.6 billion (USD321 million), or 15 percent to PHP91.2 billion (USD1,830 million) compared to PHP111.8 billion (USD2,151 million) in 2019. All of the Company’s platforms were affected by the decline in demand brought by the pandemic that resulted in lower power prices. The decrease in revenues was mainly due to average gas prices that were lower by 19 percent or USD1.7/MMBtu (from USD8.9/MMBtu in 2019 to USD7.2/MMBtu in 2020), which significantly brought down the fuel revenues of Santa Rita and San Lorenzo by PHP10.3 billion (USD178 million), coupled with the reduced combined plant dispatch at 69 percent in 2020 compared to 76 percent in 2019. The natural gas portfolio accounted for 59 percent of First Gen’s total consolidated revenues. EDC’s geothermal, wind, and solar revenues accounted for 38 percent of First Gen’s total consolidated revenues in 2020. The hydro plants accounted for 2 percent of First Gen’s total consolidated revenues.
First Gen benefitted from high contracting levels that shielded our earnings from low and volatile spot market prices. First Gen ended 2020 with PHP13.7 billion (USD276 million), a 7 percent decline in net income attributable to equity holders from the operations of its 3,495MW clean, low-carbon, and renewable portfolio. The Company likewise delivered lower operating expenses, interest expenses, and incurred foreign exchange gains. First Gen had PHP15.4 billion (USD296 million) in attributable earnings in 2019.
The natural gas platform suffered from a 7 percent decrease in earnings to PHP9.3 billion (USD187 million) from PHP10.4 billion (USD201 million) in 2019. The 420-MW San Gabriel power plant suffered from the unplanned generator damage and incurred higher income taxes as its Income Tax Holiday expired at the end of March. The 97-MW Avion natural gas-fired power plants experienced low spot market prices, slightly offset by earnings from the start of its ancillary service contract in June.
First Gen’s renewable energy subsidiary, EDC, contributed attributable earnings from its geothermal, wind, and solar platform amounting to PHP5.3 billion (USD106 million) in 2020, 5 percent higher in comparison to the PHP5.2 billion (USD101 million) it earned in 2019. EDC suffered from lower power demand and was able to save on operating expenses in contrast to several one-time expenses that occurred in 2019 due to the company’s reorganization.
The hydro platform’s attributable earnings contribution fell by 90 percent, or PHP0.6 billion (USD12 million) to PHP0.1 billion (USD1 million) for 2020 from PHP0.7 billion (USD14 million) in 2019 mainly due to lower prices at the Wholesale Electricity Spot Market (WESM) though mildly offset by higher ancillary service sales.
First Gen’s recurring net income attributable to equity holders in 2020 was PHP12.6 billion (USD252 million). This was PHP2.2 billion (USD32 million), or 11 percent less than the 2019 earnings of PHP14.8 billion (USD284 million) due mainly to lower electricity sales across all platforms.
4th in full-year share performance
Among the 30 members of the Philippine Stock Exchange Composite Index (PSEi), First Gen ranked 4th in terms of full-year share performance, ending the year at PHP28.15 per share, a 16.6 percent increase from PHP24.15 per share in 2019. In contrast, the PSEi suffered from an 8.64 percent decline in 2020.
Benefits from deleveraging program
First Gen continued to benefit from its deleveraging program. It gave us room to raise funding for our growth projects and provided cash buffers during the lockdown. In December 2020, our consolidated debt was reduced to USD1.9 billion from USD2.9 billion in December 2015. Our net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio decreased to 1.5x in December 2020 from 3.2x in December 2015. The relatively low debt levels gave us breathing room as we managed and addressed the financial needs that arose during the pandemic.
Progress amid the pandemic
Despite the situation, we achieved significant progress for our on-going projects during the year.
LNG interim offshore terminal on track for completion
One of the key areas of focus for First Gen is developing its LNG terminal. The plan is to modify First Gen’s existing jetty facilities in Batangas to enable LNG to be shipped to the country from anywhere in the world and regasify the LNG molecules via a floating storage and regasification unit (FSRU). This LNG project will play a critical role to ensure the energy security of the Luzon Grid and the Philippines, particularly as the Malampaya gas resource is depleting and is less reliable in providing sufficient fuel supply for our very own gas-fired power plants, and even less so in our expansion plans to build new gas-fired power plants to address the growing energy demand of the country.
Our planned interim offshore terminal remains on track for completion in the 3rd quarter of 2022. For the year, we were able to make advancements in our LNG Project. DOE granted us the Permit to Construct, Expand, Rehabilitate, and Modify (PCERM). We also awarded the engineering, procurement, and construction (EPC) contract to McConnell Dowell. In 2021, we will prioritize the construction works and finalize the LNG suppliers for the terminal. More importantly, LNG will pave the way for decarbonizing the country’s entire energy system; to move away from coal dependence towards renewable resources.
Project Aya secures permits
The 120-MW Aya Project site was able to secure its permits despite the delays the pandemic caused. Along with acquiring key permits such as the Board of Investments (BOI) registration and Certificate of Non-Overlap from the National Commission on Indigenous Peoples (NCIP), the project was also able to progress in its Environmental Impact Assessment study.
EDC’s Geothermal Expansion
Our geothermal expansion is now back on track. Construction commenced on Palayan Bayan, a 29-MW binary plant within the Bacon-Manito concession. While Mindanao 3, a 3.6-MW binary plant is set to start construction in the first quarter of 2021.
KKR investment
On June 29, 2020 global private equity investment firm KKR, through Valorous, announced that it was acquiring approximately 11.9 percent of First Gen’s outstanding common shares based on a successful voluntary tender offer that began on May 27, 2020. As of end-2020, KKR owns and holds 452,917,691 common shares of First Gen, representing approximately 12.6 percent of First Gen’s outstanding common shares. It is worth noting that the offer was a 27 percent premium to the last closing on May 22 at PhP17.74 per share and a 35 percent premium to the three-month volume-weighted average price. The passive investment was undertaken in the midst of the pandemic and is a testament to the confidence that KKR has in the future of the Philippines, of our Company, the capability of its management and the strategic choices made to favor clean, low carbon, and renewable energy.
Increasing our presence in the retail market
Throughout 2020, we worked on increasing our market presence by engaging contestable customers as part of the Retail Competition and Open Access (RCOA) program, particularly for those who share similar values with First Gen. We were pleasantly surprised by the growing preference from some of our customers to switch away from coal towards clean and renewable power supply.
We are also ramping up efforts to capture increased market share through the Green Energy Option Program (GEOP) which allows consumers with an average monthly peak demand of at least 100kW to directly contract with a renewable energy supplier, empowering more consumers to choose their power supply. Two of First Gen’s subsidiaries, First Gen Energy Solutions, Inc. and Bacman Geothermal, Inc, were the first companies to be granted an operating permit for GEOP by the DOE making First Gen ready to capture the market once the program opens.
DOE’s coal moratorium
DOE’s moratorium is another welcome development that shows that the Philippine Government is taking more decisive steps toward a clean and renewable energy transition. Effective October 27, 2020, the DOE ceased processing applications for greenfield coal-fired power generation facility projects. This means that there will be more room for clean and renewable sources in the future energy mix of the country.
Creating a better tomorrow
Energy demand is slowly recovering from the effects of the pandemic. Power demand for the manufacturing and commercial segments temporarily dropped, partially offset by an increase in residential demand given the semi-permanent work from home arrangement. In the meantime, we are awaiting the arrival of the vaccines and participated in the private sector group bulk order from AstraZeneca and Moderna. Surely, we have all experienced personal suffering in the last year. It is crucially important for us to reflect and learn from the personal, societal, and economic challenges we faced in this pandemic to come up with a renewed, positive outlook.
To quote Jane Goodall, the 87-year old English-born renowned primatologist: “Climate change is actually a far more frightening thing right now than this pandemic because this pandemic will go away. But if we don’t address climate change with as much vigor as people are addressing this pandemic then the globe will heat up and we will reach a time when basically everywhere is not habitable to humans.” Jane continues by saying, “We are vulnerable and we really need to learn to understand that we are part of the natural world and not separate from it. We rely on it for clean air, clean water; we rely on forests to regulate temperature and to regulate rainfall. So we just got to start thinking differently and maybe this pandemic will start a movement.” Jane Goodall dedicated most of her life studying the personalities and survival skills of the wild chimpanzees of Tanzania since she was 26 years old. I distinctly remember watching documentary films and studying her passionate work in science class when I was a young student in elementary school. For me, she chose to live a life full of adventure. I was surprised and impressed to find out that she is still active today in her late 80’s.
The reason we recrafted our mission and our purpose is clearly to help address this existential threat of climate change and that we, as Jane Goodall emphasized, truly need to appreciate that we are part of the natural world and not separate from it. Together with you, our stakeholders, we intend to execute our plans and provide an increasing customer base the opportunity to make the right choice towards creating a cleaner and brighter future together. The full recovery of the Philippines’ energy demand is dependent on getting the economy back on its feet. When it does, First Gen will be there to provide reliable, affordable, and better power solutions to our consumers.
We thank you for your continued support!
Francis Giles B. Puno
President and Chief Operating Officer
First Gen Corporation