First Gen Integrated Report 2020

Our Risk Management Process

First Gen identifies and assesses the potential risks and feasible opportunities that underpin value creation. Based on these assessments, the Company designs and executes action plans aimed at addressing these risks.

OUR RISKS AND MITIGATING MEASURES

In reviewing and classifying the risks affecting the Company, First Gen goes through a regular comprehensive risk management process covering all operating plants, projects, and support units. Identification of critical risks and development of the appropriate mitigation plans are embedded in this process based on the assigned ratings. Risks classified as top risks are regularly reported to senior management and the Board Risk Oversight Committee (BROC). The Company’s top risks are:

EXTERNAL ENVIRONMENT RISKS MITIGATING MEASURES

PANDEMIC RISK

The on-going COVID-19 pandemic has far reaching implications affecting the Company’s operations, its workforce, its market, and its earnings.

The company has:

  • Developed an extensive health and safety strategy supported by modifications in the work set-up (work-from-home & shelter-in-place), rigorous health screening protocols, programs to maintain physical and mental wellness, and intense information campaigns.
  • Actively supported local and national health programs by donating testing equipment and providing accommodations for frontline workers and returning Overseas Filipino Workers.
  • Engaged industry players and business partners on pandemic preparedness and response by sharing information and supporting competency development programs.

COMPETITION RISK

Amid the drop in energy demand due to the pandemic, competitors continue to expand capacity and vie for the same contracts.
  • Institute systematic and targeted customer acquisition while improving customer stickiness through data-driven analytics for existing customers.
  • Improve client coverage to ensure contracts are closed in various customer segments—including the Retail and Ancillary Service Markets—to minimize exposure to low WESM prices.
  • Improve plant flexibility to cater to different types of contracts or energy demands.
  • Launch communication campaigns for First Gen’s brand and retail subsidiary, First Gen Energy Solutions, to increase awareness and to differentiate the brand and its services.
  • Ensure competitiveness through portfolio optimization, attractive pricing, plant flexibility, premier client servicing, and constant participation in Competitive Selection Process activities to ensure client servicing and retention.

POLITICAL AND REGULATORY RISKS

The regulatory landscape in the power and energy industry remains challenging as regulatory directives are dynamic, still evolving, and continue to confront the constraints posed by the COVID-19 pandemic.
  • Avail of institutional avenues through which regulators and government instrumentalities engage the public and stakeholders.
  • Participate in industry discussions and actions on matters that are relevant to the Company’s business and values.

FUEL SUPPLY RISK

Operations are highly dependent on:

  • The consistent availability of the plants’ required fuels, particularly natural gas.
  • The expertise of the natural gas field operator.
  • The existence of a valid Gas Supply Purchase Agreement (GSPA) prior to the depletion of resources.
  • The availability of steam as a geothermal resource in commercial quantities.
  • Natural Gas Plants
    • In anticipation of the expiry of the Service Contract of the Malampaya Gas Field in the next four years, the Company remains on-track with its proposed LNG project. The Company completed the pre-development work to make the site construction-ready and hired a competent contractor in initially developing the Interim Off-shore Terminal (IOT) Project.
    • The plants, with the exception of San Gabriel, are dual-fired, which means that they can operate using liquid fuel in the absence of natural gas.
    • Ensuring the availability and adequacy of liquid fuel in times of need.
  • Geothermal Plants
    • Access technologies to optimize steam extraction from the wells.
    • Conduct regular steam supply assessment and implement drilling and non-drilling workovers.
    • Steam outage is being mitigated by employing a more comprehensive and synchronized well development planning, improved well design and predictive modelling tools, intensive monitoring of production lines, debottlenecking activities, and fortification of vulnerable wells and surface facilities.

EXPOSURE TO NATURAL CATASTROPHES

Climate change has been observed to lead to climate variability and extreme weather, and consequently, the higher probability and intensity of natural disasters.
  • Conduct various natural calamity studies (e.g., typhoon, earthquake, flood, tsunami, etc.)
  • Continuously modify the plants’ design and implement various weather-proofing initiatives to safeguard against the effects of natural catastrophic incidents.
  • Regular inspection and maintenance of earthquake risk mitigating measures such as the installation of seismic monitors in strategic locations on-site.
  • Continuously improve the Emergency Response & Business Continuity Management Plans, and conduct drills regularly.
  • Obtain or maintain natural catastrophe insurance cover (to the extent necessary and possible) for the various sites.
  • To lessen vulnerability to climate change and its effect on water supply, the Company is developing a pump storage hydro project to facilitate consistency of water supply for its existing hydropower plants.
BUSINESS ACTIVITIES/OPERATIONS RISKS MITIGATING MEASURES

PLANT & EQUIPMENT RELIABILITY

  • Many of the plants are over 20 years old and may need more frequent maintenance and rehabilitation.
  • Experience is skewed towards the operation of baseload plants while expertise in mid-merit and peaking operations
  • Operations & Maintenance (O&M) standards abide by world-class standards in operational management.
  • As the plants age, the Company proactively implements preventive maintenance to ensure that the plants meet or exceed international performance standards.
  • Strengthen the program to monitor rating and reliability of aging equipment.
  • Constantly assess the plants for improvements and upgrades.
  • Keep inventories of vital spare parts.
  • Obtain or maintain insurance cover for business interruption, machine breakdown, etc.

CYBERSECURITY RISK

There is increasing dependence on information systems, plant modernization, and construction of new plants with increasing dependence on automation and internet-linked machinery and equipment.
  • Conducted Information Technology (IT) and Operational Technology (OT) Vulnerability Assessment Studies and prioritized the implementation of recommended mitigation plans.
  • Created a committee focused on overseeing information security activities for both IT and OT initiatives.
  • Acquired IT Security Governance and IT Security Operations services.
  • Development of related frameworks and policies for cascading to the whole organization.

FINANCIAL RISKS

  • The Group has relied on debt-financing particularly for large projects.
  • Banks are more risk averse due to the on-going pandemic and are not comfortable with merchant financing.
  • The payment of debt and debt capital expenditure for growth needs to be balanced with dividends over time.
  • Continued and timely paydown of debt through the Company’s deleveraging program
  • First Gen has been open to exploring, and has formed partnerships, particularly for the new projects.
  • Interest Rate Risk – sound mix of fixed and floating rate loans, close monitoring of interest rate movements, and regular engagement of Senior Management on funding plans
  • Liquidity Risk – prepayment of loans as possible, and refinancing bulky maturities to smoothen or extend the repayment profile

TCFD AS A GUIDE IN PREPARING FOR CLIMATE CHANGE IMPACTS

Climate change is a major concern of any organization. For businesses, it may lead to an increase in the cost of operation or irreversible impacts on the earth where no business can thrive. Thus, First Gen, along with the FPH Group, manages the risks and opportunities climate change poses in its operations and finances. Additionally, the Company empowers its host communities with information on climate scenarios for them to implement adaptation actions.

The parent company, FPH, referenced First Gen's climate change management planning on the prescriptions of the Task Force on Climate-related Financial Disclosures (TCFD) in 2020, for a systemic assessment of climate change's impacts. The TCFD protocol was established by the Financial Stability Board to develop voluntary and consistent climate- related disclosures for transparency and to help companies and funders efficiently allocate capital to the transition to a low carbon economy as envisioned in the Paris Climate Agreement of 20151.

FPH recognizes, due to its diverse businesses, that climate-related factors vary based on the business unit's location and the nature and scale of their respective operations. Thus, FPH created a unified process at the conglomerate level with different strategies implemented by the subsidiaries. OML Center, in consultation with subsidiaries, prepared a unified report on climate-related information so the results can be correlated better with the total business activities and circumstances.

Process

Following the FPH TCFD road map, First Gen aligned its activities to complement the FPH initiatives.

TCFD CORE ELEMENTS WHAT FPH HAS DONE WHAT FIRST GEN HAS DONE

Climate Governance
  • Policy
    • The FPH Corporate Sustainability Policy, which provides for the Company’s resolve to contribute to a low-carbon world and the search for sustainable solutions, was issued in 20152.
  • Oversight
    • In 2018, the FPH Board issued a resolution declaring sustainability as a fiduciary duty of directors. Furthermore, the Board shall be assisted by the Corporate Governance Committee.
    • All major climate risks and measures are cascaded to the Board for further guidance on and approval of the Risk Management Program.
  • Adopted the FPH Corporate Sustainability Policy and planned for sustainable activities that contribute to GHG emissions reduction.
  • First Gen Board adopted ESG as part of its fiduciary duties on March 13, 2020.
  • First Gen’s Board Risk Oversight Committee provides guidance and approves the risk management programs related to First Gen and its subsidiaries.

Strategy
  • Climate strategy is embedded in the new FPH mission of forging collaborative pathways for a decarbonized and regenerative future.
  • Conducted a climate scenario analysis study from August 2019 to May 2020.
  • Assessment of climate change’s potential impacts in the various business segments is on-going (Nov.2020-April 2021).
    • Physical risks and opportunities
    • Transitional risks and opportunities (market, technology, regulations, and reputation)
  • The First Gen Board of Directors adopted, confirmed, and ratified the unified mission of the FPH Group of “forging collaborative pathways for a decarbonized and regenerative future” on February 11, 2021.
  • Ensured that First Gen’s climate strategies are aligned with the FPH Mission and reflected in the First Gen Mission, Purpose, and Chosen Path.
  • The FPH study included all business units of First Gen and its subsidiaries.
  • Provided support to the FPH assessment through provision of needed data and information.

Risk Management
  • Existing process
    • Climate risks form part of the natural catastrophe assessment in 2016.
    • Climate change as a factor in Enterprise Risk Management was mainstreamed since 2012 in First Gen and 2016 in the other FPH subsidiaries.
    • FPH Risk Management Group, led by the Chief Risk Officer, regularly conducts the assessment and monitoring of the risk management measures.
  • The risk assessment process and indicators shall be updated based on the results
  • Conducts risk assessments, including climate-related risks, on all assets and projects, following the established Enterprise Risk Management (ERM) System. The assessment results as well as the corresponding mitigating actions are documented in risk registers.

Metrics and Targets

For identification based on the foregoing processes.

For identification based on foregoing processes.
Progress in 2020

In 2020, FPH, with the assistance of the Oscar M. Lopez Center for Climate Change Adaptation and Risk Management Foundation Inc., completed the climate scenario analysis for the conglomerate’s 30 business unit locations. The climate scenario analysis explores how climate change might impact the organization over time. It uses the Representative Concentration Pathway (RCP) or the projected cumulative concentration of GHG emissions that causes global warming.

The study covers the decadal scenarios of 2030, 2050, and 2090 downscaled to RCP 8.5 and RCP 4.5. The RCP 8.5 is a “high emissions scenario” or business as usual where there is no policy reform nor measure to stop GHG emissions. The RCP 4.5 is an “intermediate emissions scenario” where emissions will slightly increase but will start to decline by 2040. These two pathways were selected because currently, the country is still dependent on coal with no set energy transition plan. Although, there were recommendations from various sectors in late 2020 to develop one soon. The First Gen business unit locations covered in the study and the climate scenarios by 2050 are shown below.

First Gen Sites Climate Scenarios by 2050

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First Gen Sites
Climate Scenarios
by 2050

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Climate change has been mainstreamed in the Company’s enterprise risk management activities since 2012 and adaptive measures are done to address these climate change conditions. For the past 10 years, the prevailing climate scenarios at the First Gen sites consist of high rainfall during the rainy season, rising sea levels, and more frequent bouts of El Niño. Below are the existing measures of the Company to adapt to the effects of climate change:

  • Typhoon-proofing and reinforcement of power plant structures to withstand 300 kilometers per hour (kph) speed wind, as well as increased plant stability against earthquakes;
  • Upgrading of plant equipment such as cooling towers upgraded from wood to Fiber Reinforced Plastic (FRP) to make them more resistant to wind, earthquakes, and fire, and to protect them against decay and degradation;
  • Execution of Flood/Tsunami Protection Program through the a) reinforced concrete retaining walls, and b) Installation of structural steel hot dipped galvanized retaining wall atop sheet piles;
  • Implemented strategic spares program to ensure that spares for critical parts are readily available in case the installed equipment malfunctions;
  • Updating the Geohazard Map using latest, finer- resolution Light Detection and Ranging (LiDAR) data to further identify areas that are susceptible to rainfall-induced landslides that pose a threat to the Company’s assets;
  • Technology review for the structure’s wind defense mechanism that reduces wind speed up to 66 percent before it reaches the structure;
  • Partnership with GNS Science, New Zealand’s leading geosciences research institution, which channels the Company’s processes and systems to improve efficiencies, lower risks, and to develop solutions to the challenges of managing critical energy resources and operations; and,
  • Acquisition of insurance against acts of nature or natural catastrophes for the assets. The assessment of the specific risks and opportunities for the climate regimes in 2030 and 2050 as well as the corresponding measures is scheduled for completion in 2021.

The assessment of the specific risks and opportunities for the climate regimes in 2030 and 2050 as well as the corresponding measures is scheduled for completion in 2021.

1 TCFD (2017). Final report. Recommendations of the Task Force on Climate-related Financial Disclosures.
Retrieved from https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf

2 FPH (2016). Sustainability report. Then path to a cleaner world. 44pp.