70

Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

  • Upload
    others

  • View
    3

  • Download
    0

Embed Size (px)

Citation preview

Page 1: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring
Page 2: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

OurVision

First Gen desires to enhance its position as the leading world-class Filipino energy company.

First Gen aims to deliver cost-effective and reliable energy services to customers.

First Gen will rise to the challenges of world-class competition.

Fir

stG

en2

004

Ann

ualR

epor

t

Tableof ContentsFinancialHighlights

At-a-Glance

Chairman’sMessage

TheCEOReport

Reviewof Operations

SantaRita

SanLorenzo

Bauang

FirstGenRenewables

Pipeline

ManagementDiscussion&Analysis

Operations&Technical

Finance

BusinessDevelopment

IndustryReview&Outlook

Boardof Directors

ExecutiveCommittee

ManagementCommittee

CorporateOfficers

CorporateSocialResponsibility

Environment,Safety&Health

Statementof Management’sResponsibility

Reportof IndependentAuditors

FinancialStatements

CorporateDirectory

1

2

4

6

10

12

14

16

18

19

20

22

24

26

30

31

32

33

34

37

38

39

40

67

ThenameFirstGenerationHoldingsCorporationwaschangedto

FirstGenCorporationinMarch2005.

Page 3: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

In Millions PHP

First Gen Conso 2002 2003 2004

GrossRevenues 22,117 36,435 37,040

EBITDA 9,465 13,160 12,813

NetIncome 3,218 5,328 4,960

CurrentAssets 17,190 16,428 17,688

Non-CurrentAssets 62,436 62,159 65,713

TotalAssets 79,626 78,587 83,401

CurrentLiabilities 14,311 12,727 12,974

Non-CurrentLiabilities 47,540 48,754 49,586

MinorityInterest 6,195 5,986 6,994

Stockholders’Equity 11,580 11,120 13,847

FinancialHighlights

In Millions PHP In Millions USD

FGPC FGP Corp. BPPC FGPC FGP Corp. BPPC

GrossRevenues 25,087 11,842 2,950 445 210 52

EBITDA 8,340 4,557 2,361 148 81 42

NetIncome 5,061 2,754 1,034 90 49 18

Fir

stG

en2

004

Ann

ualR

epor

t

1

Page 4: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

2

At-a-Glance

OPERATIONS

MW

Fuel

Location

Start of Commercial Operations

Years of Operations

SPONSORS

Holding Company

Shareholders

PARTNERS

Electricity Offtaker

Engineering, Procurement & Construction

Contractor

Operations & Maintenance Contractor

Fuel Supply

CREDITORS

Number of Lenders

Original Financing Commitments

Outstanding Debt

Debt Maturity

FINANCIALS *

Gross Revenues

EBITDA

Net Income

Total Assets

Total Stockholders’ Equity

SANTA RITA POWER PROJECT

1,000

NaturalGaswithcapabilitytoswitch

toliquidfuel

Batangas,Philippines

June2000

4of 25

FirstGasHoldingsCorp.

FirstGen&BGGroupPlc

Meralco

SiemensAG

SiemensPowerOperations,Inc.

Shell,ChevronTexaco,PNOC

40Institutions

US$680Million

US$462Million

2007-2012

Php25.09Billion

Php8.34Billion

Php5.06Billion

Php54.21Billion

Php11.74Billion

SANLORENZOPOWERPROJECT

500

NaturalGaswithcapabilitytoswitch

toliquidfuel

Batangas,Philippines

October2002

2of 25

UnifiedHoldingsCorp.

FirstGen&BGGroupPlc

Meralco

SiemensAG

SiemensPowerOperations,Inc.

Shell,ChevronTexaco,PNOC

12Institutions

US$375Million

US$275Million

2014-2016

Php11.84Billion

Php4.56Billion

Php2.75Billion

Php26.22Billion

Php6.42Billion

Page 5: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

3

BAUANGPOWERPROJECT

225

Diesel/BunkerC

LaUnion,Philippines

July1995

9of 15

FirstPrivatePowerCorp.(FPPC)

FPPC(FirstGen,Meralco&JGSummit)and

Philamlife

NationalPowerCorporation

Sulzer,MIESCOR,FirstBalfour(formerlyEcco-Asia)

Sulzersupervisioninitially,nowBauangO&MTeam

SuppliedbyNationalPowerCorporation

144-ABondInvestors&Philam

US$140Million

US$31.5Million

2004-2008

Php2.95Billion

Php2.36Billion

Php1.03Billion

Php4.65Billion

Php2.14Billion

AGUSANRIVERHYDRO-ELECTRICPLANT

1.6

Hydro

ManoloFortich,Bukidnon,

Philippines

Commissionedin1957

47

(FirstGenhasplanstoturnovertheplanttoanew

FGRIsubsidiarytobecalledFGBukidnonPower

Corp.)

CagayanElectricPower&LightCo.,Inc.

*Asof December31,2004

Page 6: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

4

Chairman’sMessage

Therewillbemorecompetitionintheindustry,andalready,weareseeinglargecustomersliketheelectronicsindustrydemandingcheaperandmorereliablepower.Theircallisechoedbyothercustomergroups.FirstGenispreparedforthatchallenge.

Page 7: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

5

Iampleasedtoreporttoallof youthatFirstGen’sfinancialperformancein

2004exceededtargetsandthecompanyisnowpoisedformajorimprovements

in2005.

Wearenowonthe3rdyearsincetheElectricPowerIndustryReformActof

2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

and liberalization of the power industry, and First Gen is prepared to bid

forassets thatareownedandmanagedby theNationalPowerCorporation

(NPC).Therewillbemorecompetitioninthe industry,andalready,weare

seeing large customers like the electronics industrydemandingcheaperand

morereliablepower.Theircallisechoedbyothercustomergroups.FirstGen

ispreparedforthatchallenge.

TheFirstGenboardof directorshasalsodecidedthatin2005,thecompanywill

gopublic.Wehavebeenencouragedbytheenthusiasmof investmentbankers

and fund managers in First Gen’s continued performance as an emerging

marketpowergenerationcompany.Thefundsthatwewillobtainfromabond

issuanceandpubliclistingwillprovidethecompanymuch-neededresources

asweplan to invest inpowerplants thatarealready inoperation. Wewill

alsopursuethedevelopmentandconstructionof newpowerplantsinviewof

shortagesweforecastwillhittheLuzongridinthenextfewyears.

We have been blessed with the strong performance of our three operating

plants,andIwouldliketotakethisopportunitytothankallof ourstakeholders

forhelpingusdelivertheseresults.Iwouldliketothankourcustomers,NPC

and theManilaElectricCompany (Meralco), for their continued support. I

wouldalsoliketorecognizethemanyemployeesof theFirstGencompanies

whose steady contribution has steered us through the many difficulties and

controversiesinthePhilippinepowerindustry.

Iamcertainthattheyear2005,whichmarksthe11thyearof operationsof

ourfirstplant,Bauang,willbeexcitingandsatisfyingforallof us.Letusjoin

togetheringuidingFirstGentothenextchapterinitsyoungbutflourishing

history.

Oscar M. Lopez

Chairmanof theBoard

Page 8: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

6

READY AND TESTED

Theyear2004wascharacterizedbyunusual tumult for thePhilippinesand

thepowerindustry,bothof whicharealreadyaccustomedtoturbulence.The

electionsinMayfollowedanintensecampaigninwhichenergypricesranked

high among the political issues. By the last quarter, the President herself

declaredthatthecountrywasinafiscalcrisis,asituationtriggeredinnosmall

partby losses incurredby theNationalPowerCorporation (NPC). Within

the energy industry itself, key fuels used for electricity doubled in prices.

Crudepricesreachednewhighsinthemid$50’s.Naturalgasprices,whichare

basedonaformulathatescalateswithMideastoil,increaseddramaticallyas

well.Coalpriceswhichhadbeencheapandstableformanyyearsmorethan

doubledin2004,largelybecauseof vigorousdemandfromChina.Hadcrude

pricesremainedat$18perbarrel,thepriceassumptionwhenweembarkedon

FirstGen’sgasprojects,perkWhpriceswouldhavebeencheaperbyatleast

Php1.50.ThoughtheFirstGencompaniesareinsulatedfromfuelpricerisk

bornebyourbuyers,westriveformoredispatchbybeingmorecompetitive.

As these national and global developments unfurled, the implementation

of the new Electric Power Industry Reform Act of 2001 (EPIRA) resulted

in the power generation sector’s movement towards greater private sector

participationandexpandedmarketreform.Theprivatizationof NPC’sowned

andmanagedassetsbegan,firstwiththesaleof smallerhydroplants,and,later

witha600MWcoalplant,Masinloc.ItwaswithinthatenvironmentthatFirst

Genoperatedandeventriedtogrow.

If evaluatingabusinesswereasimplenumbersexercise, thentheyear2004

wouldbeagoodyearforFirstGen,asallourmajorcompaniesperformedvery

TheCEOReport

Page 9: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

7

well,intotalyieldingPhp4billioninnetincome.SantaRita,SanLorenzo,and

Bauang,infact,didbetterthantargetedprofitestimates.Allthreeplantsalso

beattheirtargetsinplantoperations,asmeasuredbytheusualproductivity

standards of availability, reliability, and heat rates. One standard which we

have had less control over, but hope to improve upon, is plant utilization,

whichin2004stayedcloseto2003levels.Capacityfactorsforthegasplants

areatthe60%levelsandat15%forBauang.

Though the plants were not utilized to their contracted capacity, we were

assured of strong financial results if our plants performed well on net

dependablecapacity(NDC)tests.Onthatscore,wedidbetterthantheagreed

levels.Moreover,in2004,ourgasplantswentthroughmajoroverhaulswhich

werecompletedinrecordtime.

Evaluating the business, however, must go beyond financial and operating

results.In2004,FirstGenfacedanumberof dauntingchallenges.

Inoperations,thespikeinoilpricesimmediatelyaffectedthecompetitiveness

of Bauang,whichusesbunkerCasfuel.Oilpriceincreasesalsoaffectedthe

gasplantsbecausenaturalgaspricesareescalatedonabasketof indices,most

significantof whicharetheoilproductpricesintheMiddleEast.

The regulatory environment provided challenges. Due to strong public

outcry, all contracts of IndependentPower Producers (IPPs) went through

renegotiation, someeven throughregulatory review, in2004.TheFirstGas

Power Purchase Agreements (PPA) with Meralco and the Bauang Energy

ConversionAgreement(ECA)withNPCwerenotspared.Therenegotiation

of FirstGascontractsconcludedearlyintheyearwereagainreviewedbythe

EnergyRegulatoryCommission(ERC),andtheBauangECAwithNPCalso

wentthroughextendedrenegotiation.Ingeneral,thebasiceconomicsof the

plants remained intactdespite the renegotiation,butwehad tosacrifice the

gainsthatwouldhavecomefromhigherdispatch.

Wealsohavesomecontractualdisputestosettle,andthereweremovestoward

resolutionin2004.OurdisputewithSiemensoverdelaysintheconstructionof

theSantaRitaplantwentthroughitsinitialtrancheof arbitrationinLondon,

andwehavebeenworkingonourdisputeswiththeGasSellersoverourtake-

or-payobligations.Onthefinancialfront,wehadtoreassureourlendersthat

theproblemsof ourmaincustomer,Meralco,followingsomejudicialreversals,

wouldnotimpairourpowersalescontracts.

Theyear2004wasgratifyingintermsof assetperformance,bothtechnically

andfinancially.Moreimportantly,becausethecoreof ourprofitabilityliesin

contractsthatarerespectedandhonoredandintechnologythatcontinuesto

deliver,wearemoreoptimisticaboutthefuture.In2004,ourcontractsfaced

Theyear2004wasgratifyingintermsofassetperformance.Becausethecoreofourprofitabilityliesincontractsthatarerespectedandhonoredandintechnologythatcontinuestodeliver,wearemoreoptimisticaboutthefuture.

Page 10: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

8

theirmostseveretest,andwhileweconcededsomeof our“upsides”toboth

MeralcoandNPC/PSALM(PowerSectorAssetsandLiabilitiesManagement

Corporation), thebasicsof ourcontractswerepreserved.Ourinvestment in

themajoroverhaulof ourcombinedcyclegasplantsassuresusthatwehave

well-maintainedandwell-managedplantsthatwillcontinuetoserveuswell

intotheircontractuallives.

SET WITH THE RESOURCES

Whileourexistingassetsareperformingadmirably,wehavebeenstrengthening

ourotherresourcesaswegearforhighergrowth.First,ourfinancialresources.

First Gen’s power plants were built with project financing, which means

that lenders provided about 75% of total project cost with no recourse to

shareholders.Asaresult,ouroperations,cashflows,dividendpolicies,even

ourinsurancepolicies,aremonitoredcloselybyourlenders.Werespondto

their needs by informing them of major developments, and to this end we

conduct“update”roadshowseveryyear.Byend2004,wepareddebtlevels

forthethreeplantsinitiallytotaling$1.2billiondownto$769millioninend

2004.Bauang,whichwasrefinancedwith144-AbondsregisteredintheU.S.,

hasremainingdebtof $32million.TheSantaRitaandSanLorenzoplantsare

payingoff theirprincipalamortizationsattheagreedpace.

First Gen has always pursued an aggressive dividend policy supported and

encouraged by our principal shareholders. We continue to implement that

policy, but in 2004, the company’s financial leadership began planning for

increased growth, initiating discussions with investment banks for a bond

offeringandanInitialPublicOffering(IPO),bothof whichwehopetolaunch

in2005-2006. WeexpectaPhp3toPhp5billionbondofferingin2005and

the IPOsoon thereafter.Wehavebegun preparations toobtain theneeded

approvals of financial and exchange authorities. We have also decided to

shifttoFunctionalCurrencyReportingwhichwillenableustoreportinU.S.

dollarsandmakeiteasierforourcreditorsandstockholderstounderstandand

appreciatethefinancialimpactof ourcorporateactivities.

Second,ourhumanresources.Overthepastdecade,wehaveestablishedour

capabilitieswith thedevelopmentandoperationof greenfieldpowerplants.

Thismeansacquiringtheskillsandexperiencetocompletefullprojectcycles,

fromobtaininggovernmentandcommunityapprovals,economicandbusiness

modeling,negotiatingkeyfuelsupplyandpowersalescontracts,toobtaining

project finance, monitoring project construction of turnkey suppliers, and

formallycommencingplantoperations.Wecontinuetomakeprogresstowards

ourgreataspirationtobuildaworld-classorganizationinpowergeneration.

Thechallengesinthecomingyearswillnotonlycomefromtheconstruction

anddeploymentof newpowerplants,butintheacquisitionof existingassets

and taking over operations. Over the past year, we have strengthened our

capabilities through recruitment, training, and organizational development.

Wehave increasedour corpsof youngengineers,hiredMBAgraduates for

Thechallengesinthecomingyearswillnotonlycomefromtheconstructionanddeploymentof newpowerplants,butintheacquisitionof existingassetsandtakingoveroperations.

Page 11: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

9

ourbusinessdevelopmentinitiativesandlawyersforourincreasingcaseload

of contractsandregulatoryreviews,andsentourtechnicalstaff forseminars

overseasongasturbinetechnology.Wehavefortifiedourbusinessandproject

developmentteamsaswebiddedforpowerassetsthathavebeenputoutfor

sale.Our teamsdrawon individuals fromdifferentdisciplines andwhoare

woventogetherthroughaFirstGenregimeninduediligenceassignments.Our

managementsystemsreceivedISOcertificationin2003andwewerere-certified

in2004.Wearenowmoreconfidentthatcommunicationanddecision-making

haveimprovedwithourweeklyMancomandourbi-weeklyExcommeetings.

WearealsoabouttoimplementanEnterpriseRiskManagementSystemthat

wehaveintroducedineachFirstGencompany.

GOING FOR GROWTH

With continued strong performance from our operating plants and with

financial and organizational resources in place, we are well-positioned for

growth.NPCanditssuccessorassetmanager,PSALM,havebegunthesale

of thegovernment’sownedandmanagedpowerplants.Wesubmittedbidsfor

hydroplantshopingtobuildupourrecently-organizedrenewablescompany,

FirstGenRenewables Inc.Wewon thebid for theAgusan1.6MWrun-of-

river facility. We also took part in the Masinloc sale but lost to a Filipino-

Australianconsortium.Weexpecttoparticipateinothersalesof NPCassets,

particularlyforcoalandhydropowerplants.Wehavealsobeenapproached

tobidforcompaniesownedbyAmericanmultinationalswhichhavedecided

toselltheirinternationalassetssotheycouldconcentrateonbusinessathome.

BecausewehaveforecastthattheLuzongridwillsoonbeexperiencingpower

shortages,wearealsopursuingthedevelopmentof a500MWcombinedcycle

gas-fired power plant in Batangas City, adjacent to our Santa Rita and San

Lorenzoplants.Forthelongerterm,wehavealsoinitiatedplansforaliquefied

naturalgas(LNG)-reprocessingfacilityincasegasexplorationeffortsinthe

Philippinesproveunsuccessful.

Ourtargetistodoubleourmegawattcapacitiesfrom1,726MWin2004over

thenext fiveyears throughacombinationof assetpurchasesandgreenfield

projects.Moreover,weexpecttosupporttheseinitiativeswithamorevigorous

renewables program consisting of mini-hydro, wind, and solar projects. In

2004,wecompletedasmallturnkeyprojectforawindprojectinBatanes,our

northernmostprovince.Wehopetoexpandsuchinitiatives.

In summary, our power plants continued with their history of high

performance, our contracts faced their most difficult challenge and were

satisfactorilyrenegotiated,andourfinancialandorganizationalresourceshave

beenstrengthened.Wearereadyto takeonnewopportunities in thepower

generationbusiness.

Peter D. Garrucho, Jr.

Chief ExecutiveOfficer

Page 12: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

FirstGenhasacquiredvaluableexpertiseingreenfieldprojectdevelopment,financing,construction,andoperations

withitsSantaRita,SanLorenzo,andBauangplants.

Page 13: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Operational Highlights

FirstGenisthethirdlargestIndependentPowerProducer(IPP)inthecountry,

operatingatotalinstalledcapacityof 1,726MW,or11%of thecountry’stotal

generatingcapacity.In2004,FirstGenregisteredsolidgrossrevenuesof Php37

billionandbroughtinnetincomeof Php4.96billion.However,thecompany’s

netincomein2003washigherbyPhp368million,markedbythecompany’s

one-timegainfromthedisposalof PanayPowerCorporation.Thecompany’s

2004 incomeperformancewasaffectedby increasedeconomicandpolitical

turbulence,whichwasinturncausedbythedramaticincreaseinglobalcrude

andcoalprices,tensepresidentialelections,andloweredinternationalcredit

ratingsattachedtodelaysinfiscalreform,includingtheimplementationof the

ExpandedValue-AddedTax(VAT)law.

Withinthepowerindustry,FirstGen’sdispatchoperationswerehamperedby

transmissiongridconstraints.Thecompletionof transmissionlineupgrades

by the National Transmission Corporation (TRANSCO), particularly the

Dasmariñas–Biñan transmission lineupgradeandcompletionof thenew

SanLorenzo–MahabangParangtransmissionlines,willhopefullyhelpFirst

Gen’sSantaRitaandSanLorenzoplantsachievehigherdispatchlevelsthat

willexceedthe83%contractedminimumenergyquantity(MEQ).

Despite thesechallengingconditions,FirstGencontinuedwith itsplans for

a bond offering and an Initial Public Offering (IPO) of its shares by 2005-

2006.Proceedsfromtheseactivitiesareintendedtobeusedbythecompany

Reviewof Operations

toimproveexistingfacilities,investincapacityexpansion,includingpotential

acquisitions of power generation facilities and development of greenfield

projects,aswellasforgeneralcorporatepurposes,includingworkingcapital

andinvestments.

FirstGenhasacquiredvaluableexpertiseingreenfieldprojectdevelopment,

financing,construction,andoperationswithitsSantaRita,SanLorenzo,and

Bauangplants.Itisnowdevelopinganother500MWgas-firedfacilityinthe

vicinityof SantaRitaandSanLorenzo.Thestrategicacquisitionof the1.6MW

Agusanhydropowerplant inBukidnonmarks thebeginningof FirstGen’s

careful search and evaluation of assets of the National Power Corporation

(NPC)beingputupforsale.

First Gen supervises FPHC’s 60% interest in First Philippine Industrial

Corporation(FPIC),whichownsthefirstcommercialpipelineinthecountry.

Thisactivityisavitalsteptowardsfulfillingitsgoalof buildinganoilandgas

productslogisticsindustrydowntheline.

Fir

stG

en2

004

Ann

ualR

epor

t

11

Page 14: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

12

SantaRita(FGPC)

The1000MWSantaRitapowerplant, locatedona33-hectaresite inSanta

Rita,Batangas,isownedandoperatedbyFirstGasPowerCorp.(FGPC).The

SantaRitacombinedcyclegas-firedplant,incommercialoperationsforfour

yearsnow,consistsof twoblocksgeneratingabout500MWeach.Itsgenerated

electricityissoldtotheManilaElectricCompany(Meralco)inatake-or-pay

agreement.FuelsupplyfortheplantiscoveredbyaGasSaleandPurchase

Agreement (GSPA) with the gas sellers, a consortium consisting of Shell

Philippines Exploration B.V., Shell Philippines LLC, Chevron Malampaya

LLC,andPNOCExplorationCorporation.Thegassellersextractnaturalgas

fromtheMalampayafieldpursuanttothetermsof ServiceContractNo.38,

whichwasconcludedwiththePhilippinegovernmentinDecember1990.

In2004,SantaRitaearnedrevenuesof Php25.1billion,up5.50%from2003’s

Php23.8 billion. Net income remained steady at Php5.06 billion, providing

60%of FirstGen’stotalprofitsforthefiscalyear.

Major plant unit overhauls were conducted in record time during the year,

improvingoverallplantcapacityandperformance.Netdependablecapacity

(NDC)testsinJuneandDecember2004showedbetteroutputandheatrate

performance.Generationremainedsteadyat5,656GWh,withplantaverage

availabilityregisteredat92%andplantreliabilityat99%.

Page 15: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

2000 2001 2002 2003 2004

EnergyGeneration(GWh) 448.1 1,000.7 4,544.4 5,656.4 5,656.4

CapacityUtilization(%) 11% 11% 52% 65% 64%

Availability(%) 90% 82% 88% 93% 92%

Reliability(%) 99% 97% 97% 96% 99%

NetHeatRate(AverageBTU/kWh) 7,291.0 7,211.1 6,767.5 6,858.8 6,801.3

Fuel LiquidFuel LiquidFuel NaturalGas NaturalGas NaturalGas

Operating Highlights

Outstanding Final

(US$ Millions) Maturity

KreditanstaltfürWiederaufbau

(HermesCovered) 106 2012

U.S.PrivatePlacementfromInsuranceCompanies 160 2011

PhilippineCommercialBanks 69 2007

EuropeanInvestmentBank 59 2012

InternationalCommercialBanks

(Mexim/MecibGuaranteed) 44 2010

EximBankof Malaysia 24 2010

WorkingCapitalFacility - 2004

Total 462

Our Lenders

Page 16: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

SanLorenzo(FGPCorp.)

OwnedandoperatedbyFGPCorp.,theSanLorenzopowerplantislocatedon

a24-hectarepropertyalsoinSantaRita,Batangas.Thiscombinedcyclegas-

firedpowerplant,whichcommencedcommercialoperationsinOctober2002,

consistsof oneblockgeneratinga totalcapacityof 500MW.It sharessome

of the facilities with the Santa Rita power plant (e.g. control and

administrationbuilding,transmissionline,circulatingwaterpump

building,tankfarm,watertreatmentplant,liquidfuelunloading

jetty, and gas receiving station). Like the Santa Rita power

plant,itutilizesnaturalgasfromtheMalampayagasfields

asitsprimaryfuelsource.SanLorenzo

supplies electricity to Meralco

pursuanttoatwenty-fiveyearPower

PurchaseAgreement(PPA).

SanLorenzorevenuesandnetincomein2004werePhp11.8billionandPhp2.8

billion,respectively,orabout33%of FirstGen’snetincomefortheyear.The

slightdecreaseinrevenueof 2.53%isduemainlytoloweraverageplantdispatch

of 58%from67%thepreviousyear.MajoroverhaulswereconductedforUnit

50andUnit60,andthesewereagainexecutedinrecordtime.NDCtestsin

AprilandDecember2004againshowedbetterthanexpectedperformanceon

outputandheatrate.SanLorenzogeneratedatotaloutputof 2,601GWh,with

plantavailabilityregisteredat91%andplantreliabilityat97%.

14

Page 17: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

2002 2003 2004

EnergyGeneration(GWh) 605.0 2,953.6 2,569.2

CapacityUtilization(%) 54% 67% 58%

Availability(%) 88% 90% 90%

Reliability(%) 97% 96% 96%

NetHeatRate(AverageBTU/kWh) 6,891.0 6,774.4 6,749.3

Fuel NaturalGas NaturalGas NaturalGas

Operating Highlights

Outstanding Final

(US$ Millions) Maturity

KreditanstaltfürWiederaufbau

(HermesCovered) 111 2014

InternationalCommercialBanks

(ECDGCovered) 96 2014

KreditanstaltfürWiederaufbau

(GKAGuaranteed) 68 2016

WorkingCapitalFacility - 2007

Total 275

Our Lenders

Page 18: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

16

Bauang(BPPC)

The 225MW Bauang Power Plant in Bauang, La Union is a joint venture

between First Private Power Corp. (FPPC) and Philippine American Life

InsuranceCompany(Philamlife),whichown93.25%and6.75%of Bauang

Private Power Corp. (BPPC), respectively. FPPC is a consortium of three

companies: First Gen (which owns 40%), Meralco (which owns 40%), and

JGSummit(whichownstheremaining20%).TheBauangplantconsistsof

twenty-one11.2MWSulzerdieselgeneratingunitsoperatingona22-hectare

facility, the largestbunker-firedmediumspeeddieselpowergenerator inthe

world.TheplantcommencedfullcommercialoperationsonJuly25,1995,

andunderthetermsof itsBuild-Operate-Transfer(BOT)Agreement,BPPCis

committedtosellallof thepowergeneratedbytheplanttoNPCduringthe

fifteen-yearcooperationperiod,whichexpiresin2010.

For the year 2004, BPPC’s actual revenues were lower

thanbudgetfiguresby1.67%atPhp3billion,but3.49%

better than thepreviousyear’s revenues,due to lower

dispatchlevelsandalessthanfavorableforexregime.

NetincomereachedPhp1billion,higherthanbudget

by5.58%,due to controlledoperating expenses, lower interest charges, and

recognizedinsuranceclaims.

Bauanggeneratedatotalof 214.83GWh.Plantavailabilitywasat93%,and

betterthanexpectednetheatrateswereachievedduringtheyear.Theplant

again exceeded performance expectations in the Annual Plant Performance

Testing for the 10th Cooperation Period (July 25, 2004 to July 25, 2005)

conductedbyNPCinJuly2004.

In anticipation of the December 2004 expiry of the company’s Collective

BargainingAgreement(CBA),BPPCbeganitssecondCBAnegotiationswith

theunioninNovember.

Page 19: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

1999 2000 2001 2002 2003 2004

EnergyGeneration(GWh) 296.2 275.4 371.6 207.4 234.8 214.8

CapacityUtilization(%) 15% 14% 19% 11% 12% 11%

Availability(%) 92% 93% 90% 93% 92% 93%

Reliability(%) 94% 96% 69% 75% 96% 97%

NetHeatRate(AverageBTU/kWh) 8,422.9 8,450.4 8,504.6 8,519.18 8,546.76 8,525.28

Fuel Bunker Bunker Bunker Bunker Bunker Bunker

Operating Highlights

Outstanding Final

(US$ Millions) Maturity

DevelopmentBankof thePhilippines - 2002

Philamlife - 2004

FCDUloans¹/144-ANotes 32 2008²

Total 32

¹ Refinanced with 144-A Notes. Notes are rated by S&P and Moody’s.² Final maturity of 144-A Notes.

Our Lenders

Page 20: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

18

FirstGenRenewables,Inc.(FGRI)

FGRIintendstomakemini-hydropoweramajorpartof itsrenewableenergy

portfolio.WithFirstGen’sacquisitionof the1.6MWAgusanHydroelectric

PlantinBukidnon,FGRIlooksforwardtobecominganactiveparticipantin

thepowerindustry.

Withitsmomentuminthemini-hydrosector,FGRIstarteddiscussionswith

theMindanao-basedprivateutilityCagayanElectricPower&LightCompany,

Inc.(CEPALCO)fortheproposed8MWCabuligRivermini-hydroprojectto

belocatedinClaveria,MisamisOriental. Onsolarenergy,FGRIcontinues

to support the missionary electrification projects initiated by government,

privatecompanies,andnon-governmentalorganizations.Alsoin2004,FGRI,

exclusive distributor of BP Solar, delivered 1,045 solar photovoltaic (PV)

modulestobeusedforvariouselectrificationprojectsinthecountry.Asaresult,

about eighthundredand seventyhouseholds in remoteareasof Camarines

Sur,ZamboangadelNorte,Capiz,Antique,CebuandSultanKudaratarenow

enjoyingthebenefitsof smallsolar-poweredlightingsystems.

The year 2004 marked the final transformation of First Philippine Energy

Corp. (FPEC) intoa renewables firm.RenamedFirstGenRenewables Inc.

onSeptember28,2004,FGRIisdedicatedtowardsdevelopingaportfolioof

sustainableandrenewablesources:wind,solar,andhydroenergy.FGRIaims

tobealeaderinrenewableenergyprojectdevelopmentandastrongadvocate

forcleanandsustainablepowergeneration.

InFebruary2004,FGRIbeganwindresourceassessmentactivitiesinPandan,

Antique which are expected to last eighteen months. These micrositing

activitieshadtheultimateobjectiveof assessingwindqualityanddeveloping

aviable7.5MWwindfarm.

InAugust2004,acommercially-operating180kWwind-diesel

hybrid facility was inaugurated in Batanes,

which will hopefully reduce the

island’s dependence on diesel fuel

andprovideFGRIvaluable insight

intowind-dieselpower.

2004

EnergyGeneration(GWh) .0064

CapacityUtilization(%) 47

Availability(%) 64

Reliability(%) 99

NetHeatRate(AverageBTU/kWh) N/A

Fuel Hydro

Operating Highlights

Page 21: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

19

Pipeline

First Philippine Industrial Corp. (FPIC)

Foundedin1967primarilytoserviceMeralcofuelrequirements,FPICoperates

thecountry’sfirstcommercialoilpipelinethattransportspetroleumproducts.

FirstGenexercisesorganizationalsupervisionoverFPIC,whichis60%owned

byFirstPhilippineHoldingsCorp.,inpartnershipwithShellPetroleumCo.,

Ltd. (UK) which owns 40%. In 1992, the then Energy Regulatory Board

(ERB)renewedFPIC’sconcessiontooperateitspipelinesforanothertwenty-

fiveyears.Afterthirty-sixyearsof safeandefficientoperation,FPIC’spipeline

system continues to provide the most reliable and cost-effective means of

transportingpetroleumproducts.

FPIC’spipelinesystemconsistsof a14-inchdiameter,120-km.longwhiteoil

line,anda16-inch,90-km.blackoilline.Thewhiteoillinetransportsproducts

suchas gasoline, jet fuel, diesel fuel, andother refinedpetroleumproducts.

Theblackline,ontheotherhand,movesdifferentgradesof fueloilforpower

generation.IthasfeederlinesfromtheShellRefineryinTabangaoandthe

Caltex Terminal in San Pascual, all within the province of Batangas. The

receivingstationforwhiteproductsisatthePandacanDepotinManila,while

thestationforblackproductsisatShell’sSucatDepotinMuntinlupa.

In2004,FPICundertookcostcontainmentinitiativeswhichresultedinbenefits

amounting to more than Php5 million. With these efforts, FPIC attained

revenuesof Php529millionandanetincomeof Php158million.

Page 22: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

20

OperationsandTechnical

Following current practices of Independent Power Producers (IPP), First

Gencontractedtheservicesof itsoriginalequipmentmanufacturer,Siemens

AG,toprovideplantoperationsandmaintenance(O&M)services.Siemens

is providing this service through its fully-owned subsidiary, Siemens Power

OperationsInc.(SPOI).

Throughtheyears,FirstGasandSPOIhaveenjoyedahealthyandproductive

professionalrelationshipaspartnersinpower.Weworktogethertoensurethat

theSantaRitaandSanLorenzopowerplantsareoperatedandmaintainedin

accordancewiththeworld’sbestpractices.Westrivetodeliversafe,efficient,

andenvironment-friendlypowertoelectricityconsumersinthePhilippines.

Although the relationship is founded on a contract agreement, targets and

objectivesaregenerallyaligned.Itisineachother’sinteresttoworktogetherto

achieveourcommongoals.

ThebiggestexportfromthePhilippinesiswell-known:peopleskills.Filipino

engineers and technicians are much sought-after and employed around the

world.BothFirstGasandSPOIhavehadtocompetewithglobalemployers

inordertoemploythebestpeopleinitspowerplants.Wehavemanagedto

competewellandconsequentlyhaveaverycapableandenthusiasticworkforce.

Asaresult,ourpowerplantsoperateatlevelsof availabilityandreliabilitythat

otherscanonlyaspirefor.

Page 23: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

21

Firstimpressionsarealwayslastingimpressions.

In this regard, not only do the plants perform

well,theyalsolookwell.Ihaveseenmanyplants

thatmaybeonlythreetofiveyearsold,butlook

as if they are already ten or fifteen years old.

Thisisaresultof thedriveto“sweat”theasset

as much as possible, spending very little along

theway.Suchastrategyalmostalwaysresultsin

decliningperformancefigureswithinafewyears

of commercial operations. Fortunately, this is

notthecasewithFirstGenplants.

Colin FlemingO&M General Manager

Q. In your experience, how do First Gen plants

compare with those in other countries?

A. I’veseengoodpowerplantsandbadpower

plantsinmycareer.SantaRitaandSanLorenzo

rankamongthebestpowerplantsIhaveworked

on based on the quality of plant design and

construction.

Operationally, both plants are performing at

world-class levels of availability and reliability.

Thislevelof performancecanonlybeachieved

by employing quality staff and applying sound

operational and maintenance management

practices.

Q. How long have you been in the power

business?

A. I have worked within the power industry

throughout my career. I spent fourteen years

working on power plants in Southeast Asia,

specifically in Hong Kong, China, Taiwan,

and Vietnam. I’ve also worked in the United

KingdomandinEurope.

Myexperienceismostlyinpowerplantoperations

and maintenance in both the utility and IPP

environments. I’ve also gained experience in

plantdesignandindustryservicesonbehalf of

powerplantcontractors.

Page 24: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

22

Finance

First Gen maintained its outstanding performance of the previous years,

bringinginrevenuesof Php37billionandnetincomeof almostPhp5billionin

2004.Revenuesfromthesaleof electricityincreasedduemainlytoincreases

infuelchargesinSantaRitaresultingfromhighernaturalgasprices,capacity

charges,andfixedoperationsandmaintenance(O&M)chargesforSantaRita

and San Lorenzo due to improvements in net dependable capacity (NDC).

However, revenue gains were slightly offset by declines in variable O&M

chargesandfuelchargesinSanLorenzo,resultingfromloweraveragedispatch

in2004to58%from67%.

Costsandexpensesduringtheyearwerelikewisehigherowingtoincreasesin

powerplantO&Mexpenses.Fuelexpensesincreasedastheplants’averagegas

pricesroseto$5.7589/GJin2004from$5.3785/GJin2003.AsactualNDC

results surpassed expectations, bonuses paid to Siemens Power Operations

Inc. (SPOI), the plant operator, also grew. Further, both the Santa Rita

andSanLorenzoplantsbegantopaylocalbusinesstaxesin2004following

the expiration of their six-year exemptions counted from the date of their

registrationwiththeBoardof Investments(BOI).Theone-timegainfromthe

disposalof PanayPowerCorporationin2003alsoledtoacomparativelylower

FirstGennetincomein2004.

RevenuesfromFirstGasPowerCorporation(FGPC),operatingcompanyof

the1000MWSantaRitapowerplant,continuedtomakeupthebulk(60%)

of FirstGen’snetincome.Onitssecondfullyearof operations,FGPCorp.,

operating company of the 500MW San Lorenzo power plant, contributed

Php1.65 billion to the net income of First Gen. At yearend, First Gen’s

consolidated assets stood at Php83.4 billion, and stockholders’ equity at

Php13.85billion,upby25%fromPhp11.1billion.

The dollar-denominated debt of First Gas projects currently stands at $737

million, down from the previous year’s $805 million. At the project level,

FGPC’soutstandingdollar-denominateddebtdroppedto$462millionfrom

$504.4million,whilethatof FGPCorp.’sdroppedto$275.4millionfromlast

year’slevelof $301.8million.

In line with the company’s growth aspirations for the coming years, our

finance team in2004carefullyconsidered several financingoptions. Itwas

recommended that the company undertake a bond issuance and an Initial

Public Offering (IPO) of its shares in 2005-2006. In December 2004, the

company’s Board of Directors passed a resolution authorizing the issuance

of peso-denominatedbondsuptotheaggregateamountof Php3billion(later

increasedtoPhp5billion).Theboardlikewiseauthorizedpreparationsforthe

listingandregistrationof oursecuritieswiththePhilippineStockExchange

and Securities and Exchange Commission, including the selection and

appointmentof underwriters,issuemanagers,advisors,counselors,andother

agentsinconnectionwiththeIPO.Thenetproceedsfromtheproposeddebt

andequityofferingwillbeusedtoexpandandimproveourplants,investin

greenfieldprojects,andacquiregovernment-ownedpowerassetsbeingsoldby

NPCinitsprivatizationscheme.

FirstGenforeseesseveralopportunitiesforgrowthinthepowerindustryinthe

comingyears.Weareconfidentthatthecompanyhasthefinancialandother

resourcestoenhanceitspositionasamajorplayerinthebusiness.

Page 25: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

23

Giles PunoSenior Vice President and

Chief Financial Officer

Q. With the highly successful project finance

structure of Santa Rita and San Lorenzo,

why is First Gen now looking at tapping the

capital markets for future projects?

A.Duringthepastyears,opportunitieshave

openedtothecompanyduetothesuccessof

thegasprojects.FirstGenplanstoleverage

onthestrengthsandsuccessesforourgrowth

aspirations.Wecontinuetopreferfinancing

growthonaprojectfinanceorlimited

recoursebasisbutalsorealizethatwiththe

powerindustrychanging,FirstGenwillneed

tobeflexibleabouthowwefinancefuture

investments.Weareparticularlyinterestedin

tappingthedomesticbondandpublicequity

marketsandareworkingonwaystoincrease

potentialinvestors’awarenessof thetrack

recordandcapabilitiesof ourcompany.

InfinancingSantaRitaandSanLorenzo,

FirstGenreliedonitsparent,FirstPhilippine

HoldingsCorporation.Wenolongerhave

thatluxury.Tappingthecapitalmarketsis

nowthemostlogicalnextstepforFirstGen

tofunditsfutureinvestmentsonitsown,after

havingearnedasuccessfultrackrecordin

thepowergenerationbusiness.Ourexisting

investmentsareinfullcommercialoperations

andgeneratingsteadycashflowtherebygaining

areputablecreditstanding.Futureprojectscan

befundedbyacombinationof newdebtand

equityofferings,aswellasinternally-generated

funding.

Thecapitalmarketsofferuniqueadvantages

whichwillnotonlyallowsomeof ourexisting

investorstorealizegainsonceoursharesare

listed,butenableFirstGentoraisenewmoney

tofundgrowthplans.

Oneadvantageisdepth.Boththepublicequity

anddebtmarkets,withtheirsizeanddiversity

of investors,havethepotentialtoprovidea

war-chestwhichthecompanycanquicklytap

shouldapromisingassetcomeintothemarket.

Moreover,theavailableliquidityinthecapital

marketsmakesitpossibleforFirstGentore-

tapthePesoorUSDollarbondmarketsand

possiblyuseitsstockascurrencyformergerand

acquisitionopportunities.

Anotheradvantageisflexibility.Capitalmarket

investorsdonotrequiretherestrictivecovenants

requiredunderprojectfinancedebtandthe

investmentconditionstypicallyrequiredin

privateequityfunding.Apubliclistingof our

shares,withourcommitmenttotransparency

andgoodgovernance,wouldmakeFirstGenan

attractiveinvestmenttobothinstitutionaland

retailinvestors.

Page 26: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

24

BusinessDevelopment

FirstGenhadachallengingyear,asmostof itscontractswentthroughaprocess

of careful scrutiny. Our business development team that was responsible

for negotiating the original contracts was deployed to protect and enhance

shareholdervalue for existingprojects. The companycontinued todeliver

its commitments to its shareholders and lenders, despite dispute resolution

processeswithSiemensandtheShell-Chevron-PNOCconsortium.ThePower

PurchaseAgreements(PPA)reviewwithourofftakerManilaElectricCompany

(Meralco)was finalizedafter17negotiationsessions,andanagreementhas

beensubmittedtotheEnergyRegulatoryCommission(ERC)forapproval.

Our contracts that were negotiated and crafted eight to ten years ago have

stooduptoscrutiny.In1997,theprojectagreementsforthe1000MWSanta

Ritaprojectattractedover$4billioninprojectfinancedebtoffers,eventhough

funds of only $700 million were needed. This over-subscription is a good

indication of our contracts’ structural integrity and global lenders’ general

opinion that risks were efficiently allocated away from the company. The

contractshavewithstoodothertests.TheagreedamendmentstothePPAwent

throughlendervettingandwerefoundacceptable.Settlementdiscussionson

theGasSaleandPurchaseAgreements(GSPA)disputesareprogressingwell.

FirstGen’scontractdisputewithSiemensisalsoapproachingfinalresolution.

Thesecontractshavegonefullcirclefromnegotiationtoimplementation,and

nowtonegotiation,implementationandsettlementyetagain.Ourpeoplehave

madeallthispossible.

GOING FOR GROWTH

Ourgoalissimple:todoublethebusinessinfiveyearsorless.FirstGenhas

a deep bench of experienced and talented developers that have delivered

greenfield projects as well as mergers and acquisitions in an industry that

provides distinct areas for growth. These include acquisitions from the

privatization process and existing energy investors selling down in the next

threeyears,andmarket-testedgreenfielddevelopment.

ThePhilippinegovernment,throughthePowerSectorAssetsandLiabilities

Management Corporation (PSALM), intends to privatize another 4,000

ormoreMWfortheyear2005. FirstGenwill takeaviewonthestrategic

positioningof theseassetsincludingfuelcostandefficiency,availability,plant

conditionand rehabilitation requirements, contingent liabilitiesandexisting

contracts, transmission capacity, environmental and other project issues.

First Gen will participate in the bidding if and when an asset proves to be

acompellinginvestmentbasedonconservativeassumptions,bankability,and

returnrequirements.

Over time, foreign players in the Philippine power market have decided to

exit foravarietyof reasons.Theassetsof these foreignplayersenjoyedthe

protectionof strongcontractualarrangementsthatweresuccessfullyproject-

financed.FirstGenwillconsideracquiringtheseassetsafterstrategic, legal,

operational,andfinancialreviews.

InitsPowerDevelopmentPlan2005-2014,theDepartmentof Energyprojects

asupplyshortageby2008tohittheLuzongrid,whereFirstGenoperatesits

keyassets.While it is lookingatprivatizationandacquisition,FirstGen is

committed to participate in addressing the additional capacity needs of the

country.Ithasbegunthegroundworkforgreenfieldprojectsinareasadjacent

to the Santa Rita and San Lorenzo power plants that will help bridge the

Page 27: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

25

Ricky TantocoSenior Vice President for

Business Development

Q. What are the components of a success

project in the power industry?

A.Betweenanideaandarealizedprojectliesa

greatchasm.Foraprojecttoachievecompletion

andcommercialattractiveness,customerand

marketneedshavetobemet,projecteconomics

havetobesound,therightresourceshavetobe

available,andastrongdevelopmentteamhasto

beinplacetoexecuteanddeliverthebusiness.

Inthepowerindustry,wherevaluesatrisk

rangeinthebillionsof pesos,thisdevelopment

teamshouldpossessflawlesslocal-levelsite

executionskillswhileatthesametimehave

theinternational-levelcommercialcapabilityto

negotiatewiththebestandtoughestcounterparts

intheworld.

FirstGen’steamisseasonedandproven,several

timesover,anditsresourcessoonequippedwith

proceedsfromtheplannedpesobondoffering

andInitialPublicOffering(IPO)of itsshares,

aswellasinternally-generatedfunds.FirstGen

hastheteam,systems,andresourcestoseize

significantgrowthprospectsavailableinthe

powerindustrytoday.

Itisreallyquitestraightforward–theright

people,adequatefinancialresources,andthe

rightsystemsandbusinessprocesses–arewhat

generateandsustainsuccess.Themostcriticalof

theseishavingtherightpeople.WeatFirstGen

areproudof ourhighlyexperiencedteam,our

“deepbench”aswecallit,whichtakesthelead

inallaspectsof projectdevelopment,execution

anddelivery.Wetrulybelieveourpeopleare

secondtonone.

supplygapinthe2009-2010timeframe.

FirstGenisinauniquepositiontocapitalizeonthegrowthprospectsinthe

power sector. Clear market opportunities, strong supply gap fundamentals,

credibilitywithinternationalcreditors,atestedteam,andaprovencreditworthy

contractualtemplateareamongthestrengthsthatFirstGenwill leverageto

achieveitsgoal.

Page 28: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

FirstGenmaintained

itspositionintheindustryasthethirdlargestIndependent

PowerProducer.

Page 29: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

27

IndustryReviewandOutlook

ThePhilippinepowergenerationsectorcontinuedtolookpromisingin2004,

postingapreliminarygrowthestimatesof 6%. Although this is lower than

2003’s growth figure of 9%, this is the fifth year in a row that the country

postedanincreaseingrosspowergeneration.Thecountry’sgrossgeneration

figurestoodat55,957GWhfortheyear2004.

The Philippine electricity grid is divided into three main grids: Luzon,

Visayas, and Mindanao. The Luzon grid accounted for the biggest share

of grossgenerationwith39,853GWh,equivalent to71%of thePhilippine

electricityoutput. TheVisayasgridcontributed16%,whiletheMindanao

gridsupplied13%.

First Gen maintained its position in the industry as the third largest

IndependentPowerProducer(IPP),with1,726MWof installedgenerating

capacity vis-à-vis the country’s total generation output of 15,548MW and

Luzon’s12,162MW.All threepowergenerationfacilitiesof FirstGenare

locatedintheLuzongrid.

FirstGenkilowatt-hoursaleswererelativelyflat,however,owingtothereduced

dispatchof theSantaRitaandSanLorenzopowerfacilitieslateintheyear.

The reduceddispatchwasa consequenceof constraints in the transmission

system as the National Transmission Corporation (TRANSCO) pursued its

upgrading works of the Dasmariñas-Biñan transmission line, and the tie-in

of thetwopowerfacilitiestotheMahabang-Parangline.Theseupgradeswill

pavethewayforasubstantialincreaseindispatchof theSantaRitaandSan

Lorenzoplantsbeginninginthefirstquarterof 2005.

Santa Rita and San Lorenzo delivered 8,264GWh to the Manila Electric

Company (Meralco) in 2004, down slightly from 8,603GWh in 2003. The

Bauang Plant, on the other hand, delivered 214GWh. Bauang has been

dispatchedintermittentlyduetotheincreasingcostof bunkerfuel.

Meralco, the country’s largest distribution utility, posted modest electricity

salesgrowthof 3.7%in2004,withSantaRitaandSanLorenzocollectively

contributing close to 30% of Meralco’s electricity purchases. Meralco

purchased41%of itselectricityrequirementsfromitsIPPs.Thisisexpectedto

increasesubstantiallyin2005astransmissionbottlenecksafflictingMeralco’s

IPPsareresolved.

ThePhilippinepowergenerationmixisuniquelydiversifiedusingseveralpower

technologies.Coalthermalplantscurrentlyholdthelargestshare,accounting

for30%of grosspowergeneration.Itisfollowedcloselybycombinedcycle

gasturbine(CCGT)powerfacilitiesusingnaturalgas,with22%.Completing

thePhilippinepowergenerationmixaregeothermal facilities (18%),hydro-

electricpowerfacilities(15%),andoil-baseddieselandthermalfacilities(15%).

CoalthermalplantsandnaturalgasCCGTfacilitiesalsodominatethegross

generationof theLuzongridwith39%and31%,respectively.

Page 30: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

28

THE POWER REFORM LAW AND ITS CHALLENGES

In June 2001, the Philippine Congress passed into law the Electric Power

IndustryReformActof 2001(EPIRA),pavingthewayforthederegulationand

fullprivatizationof thepowerindustry.EPIRAisexpectedtodisciplinethe

generationandretailsupplysectorsthroughcompetition,andthetransmission

and distribution sectors through performance-based rate regulation. The

privatization of National Power Corporation’s (NPC) generating assets is

expected to eliminate subsidies from the government, effectively freeing up

governmentfinancesforotherbasicneedssuchaseducation,health,andother

socialservices.EPIRAisalsoenvisagedtopromotetransparencythroughthe

WholesaleElectricitySpotMarket(WESM)andthroughtheunbundlingof

ratesandcharges.Withthis,itishopedthatelectricityrateswillfinallyreflect

truemarketprice.

Apotentialchallengetothepowersectoristhegovernment’seffortstoraise

additionalrevenueswiththere-impositionof ValueAddedTax(VAT)onthe

generationsector.Althoughthismayhaveaneutraleffectonindustryplayers,

itisexpectedtoaddfurtherpressureonelectricityrates,whichmayproveto

beadeterrentinreflectingNPC’struecostof power.IncreasingNPC’spower

ratetoitstruelevelwillsubstantiallyaidinsecuringmaximumreturnsforthe

governmentasitprivatizesNPC’sgenerationassets.

The reform measures gained momentum following the conclusion of the

presidential elections in mid-2004. The investment climate in the power

generation sector took apositive turnwhen thegovernmentdecided to lift

thePhp0.40/kWhcaponthePurchasedPowerAdjustment(PPA)mechanism

imposedonNPC’ssellingrate.ElectricityratesintheVisayasandMindanao

grids, however, remained below the marginal cost of new entrants, despite

shortagesbeingexperiencedinthesegrids.

ThePowerSectorAssetsandLiabilitiesManagementCorporation(PSALM)

jump-startedtheprivatizationof NPCbybiddingoutfourmini-hydroelectric

facilities, one of which was won by First Gen. PSALM capped the year

by successfully bidding out the 600MW Masinloc coal thermal plant as a

merchantplant.Inordertomeetitsmandateof privatizing70%of NPCassets,

PSALMadoptedanacceleratedprivatizationschedulewhichisscheduledto

becompletedbyend-2005.Whiletheprivatizationof transmissionassetsand

functionswasnoteffectedin2004,itrecentlygainedsubstantialinterestfrom

variousinvestors.FirstGencontinuestoremainupbeatontheprospectsof

theindustry.

TheEnergyRegulatoryCommission(ERC)madesignificantstridesparticularly

in lifting the Generation Rate Adjustment Mechanism (GRAM) and

Page 31: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

29

IncrementalCurrencyExchangeRecoveryAdjustment(ICERA)ruleswhich

itimplementedin2003,andrevertingtotheautomaticadjustmentmechanism

fortherecoveryof purchasedpowercosts.Thenewruleeffectivelyrelieved

distributionutilities fromtheburdenof financing increases in itspurchased

power costs. ERC also successfully commenced the removal of inter-class

cross-subsidy,particularly in theMeralco franchisearea.Cross-subsidiesare

expectedtobeeliminatedbyend-2005.

First Gen started the year by signing amendments to the Power Purchase

Agreements(PPAs)of thetwoFirstGasfacilities.Theamendmentswerefiled

withtheERCforapproval,andERCconductedhearingsonthematter.When

approved by ERC, the amendments will greatly benefit Meralco customers

andensurethehighestlevelof dispatchfortheSantaRitaandSanLorenzo

powerprojects.Bauang,forone,hascomeclosetoconcludingitsownseries

of negotiationswithNPC.

OPPORTUNITIES FOR THE FUTURE

First Gen sees abundant opportunities under the new regulatory regime,

particularly with the continued tightening of the demand-supply gap.

ShortagesarealreadybeingexperiencedinVisayasandMindanao.Without

newcapacityinLuzon,FirstGenprojectsthatashortagemayoccurasearly

as2008.Consideringthatafour-to-fiveyearleadperiodisneededforpower

plant construction, immediate action is needed to forestall the impending

powercrisis.

FirstGenhasundertakensubstantialdevelopmentworkinpursuitof another

500MWgreenfieldnaturalgascombinedcycleprojecttobeknownastheSan

GabrielProject.FirstGenisbankingonitssolidtrackrecordindeveloping

andconstructinggreenfieldprojectstooperationalizeSanGabrielintimefor

theprojectedpowercrisis.

Likewisein2004,FirstGenparticipatedintwoprivatizationbiddingrounds:

Agusanand Masinloc. FirstGen won thebidding for the1.6MWAgusan

hydro-electric facility, but was unsuccessful in its attempt to acquire the

600MWMasinlocCoalPowerFacility. Despite thesetback,FirstGenwill

continuetoactivelypursueothervaluableNPCassets.

FirstGenseesabundantopportunitiesunderthenewregulatoryregime,particularlywiththecontinuedtighteningof thedemand-supplygap.

Page 32: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

30

Boardof Directors

1.OscarM.Lopez-Mr.LopezistheChairmanandCEOof FirstPhilippineHoldingsCorporation(FPHC)

andChairmanof BenpresHoldingsCorporation.Throughthesetwoassignments,Mr.LopezservesasChairmanof

theLopezGroupof Companies.Mr.LopezhasledFPHC’seffortsinotherbusinessesasidefromenergyandpower,

includingtollroadconstruction,industrialparkandrealestatedevelopment,andelectronicsmanufacturing.

2.PeterD.Garrucho,Jr.-Mr.GarruchoisManagingDirectorforEnergyof FPHCandVice-Chairmanand

CEOof itspowergenerationsubsidiary,FirstGenCorporation.Aspartof thoseresponsibilities,healsoservesas

ViceChairmanandCEOof FirstGasHoldings,FirstGasPower,andFGPCorp.HeisalsoPresidentandCEOof

FirstPrivatePowerandBauangPrivatePower.HewasafullprofessorattheAsianInstituteof Management,held

variousCabinetpositions,andhadservedasChairmanorPresidentof anumberof Philippinecorporations,business

andcivicassociations.

3.FedericoR.Lopez-Mr.LopezisPresidentandCOOof FirstGenCorporationandallFirstGas

subsidiaries.Mr.LopezisalsoaVicePresidentof FPHC.Hehasbeenamemberof FPHC’sEnergyTaskForce

since1993.Inadditiontohisresponsibilitiesinprojectdevelopment,hehasbeenanactiveparticipantineffortsto

introducemarketreformsinthepowerindustry.HeisalsoPresidentof FirstPhilippineConservation,Inc.

4.SteveE.Psinakis-Mr.PsinakisisSeniorConsultantof FPHC.Heisamemberof theboardof FirstGen’s

subsidiariessuchasFirstPrivatePowerandBauangPrivatePower.HewasthePresidentof FirstPrivatePowerand

BauangPrivatePowerfrom1993to1996.HealsoservedasSeniorVicePresidentof FPHCfrom1986to1996.

5.ElpidioL.Ibañez-Mr.IbañezisPresidentandCOOof FPHC.AsFPHC’sCOO,hemonitorsthe

company’sothersubsidiariesinmanufacturing,propertydevelopmentandtollroads.HeislikewisetheChief of

Staff of BenpresHoldingsCorp.andamemberof theboardof variousBenpres-affiliatedcompanies.

12

34 5

Page 33: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

31

ExecutiveCommittee

6.RichardB.Tantoco-Mr.TantocoisSeniorVicePresidentforbusinessdevelopmentof FirstGen

CorporationandtheFirstGasGroupof Companies.Mr.Tantocoisresponsibleforseekingopportunitiesto

developgreenfieldpowerprojectsaswellasdevelopdownstreamnaturalgastransmissionanddistributionnetworks.

Mr.Tantocoledthenegotiationsof majorprojectcontractsthatresultedinthedevelopmentof the1000MWSanta

RitaPowerProject,the500MWSanLorenzoProjectandthe8-kmTabangao-SantaRitagaspipeline.Priorto

joiningFirstGen,Mr.TantocoworkedwithmanagementconsultingfirmBooz,Allen&Hamilton,Inc.inNew

YorkandLondon.

7.FedericoR.Lopez-Mr.LopezisPresidentandChief OperatingOfficerof FirstGenCorporationand

allFirstGassubsidiaries.Mr.LopezisalsoaVicePresidentof FPHC.Hehasbeenamemberof FPHC’sEnergy

TaskForcesince1993.

8.PeterD.Garrucho,Jr.-Mr.GarruchoisChief ExecutiveOfficerof FirstGenCorporation.Healso

servesasViceChairmanandCEOof FirstGasHoldings,FirstGasPower,andFGPCorp.HeisalsoPresidentand

CEOof FirstPrivatePowerandBauangPrivatePower.Mr.GarruchoservedasSecretaryof TourismandSecretary

forTrade&Industryduringtheadministrationof PresidentCorazonC.Aquino.HewasExecutiveSecretaryunder

PresidentFidelV.Ramos.HeisChairmanof theEnergyCouncilof thePhilippines.

9.FrancisGilesB.Puno-Mr.PunoisSeniorVicePresidentandChief FinanceOfficerof FirstGen

CorporationandtheFirstGasGroupof Companies.HeledFirstGeninthefinancingof the1000MWSanta

Ritapowerprojectandthe500MWSanLorenzopowerproject.Mr.PunoledFirstGenintwomajormerger

andacquisitiondealswiththeentryof AIDECandSumitomoasinvestorsandthesaleof PanayPower.Priorto

joiningFirstGen,Mr.PunoworkedasVicePresidentwiththeGlobalPowerandEnvironmentalGroupforChase

ManhattanBankbasedinSingapore.

10.ErnestoB.Pantangco-Mr.PantangcoisExecutiveVicePresidentandChief OperatingOfficerof

FirstPrivatePoweranditsmajorasset,BauangPrivatePower.Hewasresponsibleforthedevelopment,financing,

construction,andoperationof the225MWBauangand72MWPanaypowerplants.Mr.PantangcoisPresident

of thePhilippineIndependentPowerProducersAssociation(PIPPA).

6 78

910

Page 34: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

32

ManagementCommittee

1.JonathanC.Russell-Mr.Russellhasanextensive13-yearexperienceinprojectdevelopmentof energy

projectscovering2,220MWof gas-firedcapacity.HeplaysakeyroleinFirstGen’scontractnegotiations.

2.AnaReginaB.Go-Ms.Gosupervisesaccounting,treasuryandfinanceoperationsof Bauang.Shealso

handlesriskmanagementandinformationtechnology.

3.VictorB.Santos,Jr.-Mr.Santoshasparticipatedindiscussionswithvariedgovernmentagenciesonthe

passageof theElectricPowerIndustryReformActof 2001(R.A.9136)anditsregulations.

4.DanielH.Valeriano,Jr.-Mr.Valerianoisresponsibleforprovidingtechnicalservicessuchastechnology

andsiteevaluation,feasibilitystudies,andinterfacewithgovernmentunitsforpowerprojects.

5.EmmanuelP.Singson-Mr.Singsonisprimarilyinvolvedinthefund-raisingactivitiesof the

FirstGengroup.

6.ColinJ.D.Fleming-Mr.Flemingisamechanicalengineerandhasworkedinthepowerindustry

throughouthiscareer.HejoinedtheFirstGengroupin2003.Mr.FleminghasworkedwithALSTOM,China

Light&PowerCo.,JohnBrownEngineeringLtd.andPhuMy3BOTCompanyLimited.

7.JesusA.Dimal-Mr.DimalwaspreviouslytheOperationsandPlantManagerforBauangPrivatePower

(1993).Hehasbeeninvolvedinthepowerindustryforover20years.

8.NestorH.Vasay-Mr.VasayisresponsibleforloanadministrationandfinancialcontrolsforFirstGenand

FirstGas.Mr.VasayisaCertifiedPublicAccountant.

1

2

3

4

5

6

7

8

Page 35: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

33

CorporateOfficers

1.RodericoV.Puno-Mr.PunoisaPartnerof Puno&PunoLawOfficesandHeadof itsCorporateLawand

SpecialProjectsPractice.In2001hejoinedtheLopezGroupof CompaniesasVicePresidentforFPHC.Hehas

actedasleadcounselinmajorenergyandinfrastructureprojectsfromconceptualization,development,financing,

constructionandoperation.

2.PerlaT.Catahan-Ms.CatahanisaVicePresidentof FPHC.SheheadstheManagementInformation

SystemforFPHC’sComptrollershipUnit.

3.RodolfoR.Waga,Jr.-Mr.WagaisaVicePresidentof FPHC.HeheadstheLegalDepartmentof FPHC

andactsastheCorporateSecretaryorAsst.Corp.Secretaryof FPHC’ssubsidiariesandaffiliates.

9.RicardoB.Yatco-Mr.YatcoheadsFirstGen’srenewablebusinessarm,FirstGenRenewables,Inc.

10.RamonJ.Araneta-Mr.AranetaservedastheDeputyProjectManagerof theSantaRitaPowerProject

fromthetimeitcommenceditsconstructionin1997.Hesupervisescommunityrelationsprograms.

11.LeonidesU.Garde-Mr.Gardehandlesthefuellogisticsbusiness-FirstPhilippineIndustrialCorp

(FPIC)-thatis60%ownedbyFPHC.

910

11

1

2

3

Page 36: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Thecompanyiscommittedtodoingmoreincontributingto

nation-building,inadditiontoensuringresponsiblebusinessoperations.

Page 37: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

35

CorporateSocialResponsibility

FirstGenisawarethatasacorporatecitizen,ithasasignificantimpactonsociety

andtheenvironment.Thecompanyiscommittedtodoingmoreincontributing

tonation-building,inadditiontoensuringresponsiblebusinessoperations.The

companyfulfillsitssocialresponsibilitybylendingitssupportandassistanceto

thefollowingprojects:

1. Rapid Biodiversity Assessment of Greater Sipit Watershed, Mt. Makiling

Forest Reserve

Mt. Makiling is one of the few remaining forest areas in the country with a

largeportionof intactnaturalforestswithahighdiversityof floraandfauna.

The Greater Sipit Watershed portion of Mt. Makiling covers 873 hectares of

theforestreserveandistheleaststudiedareaduetoitsruggedtopography.To

formulateaneffectiveprotectionandconservationprogramforthearea,arapid

assessmentof its floraand faunawasconductedbyUPLosBaños (UPLB) -

Makiling Center for Mountain Ecosystems and funded by First Gen through

First Philippine Conservation Inc. (FPCI). The results of the study are now

beingusedtodeveloparehabilitationandprotectionplanthatFirstGenintends

topursuewithUPLBandotherstakeholdersin2005.

2. Tarsier Conservation Program

APhp2millionpesograntwascoursedthroughPhilippineTarsier

Foundationinsupportof thePhilippineTarsierConservation

Program.Aportionof thegrantwasusedtofundastudy

conducted by Dr. Irene Neri-Arboleda of De La Salle

University, entitled “The Molecular Pyelography of

Philippine Tarsiers: Implications for Biodiversity

AssessmentandConservation.”

3. First Gen Forest at La Mesa Watershed

Thecompanyadopted100hectareswithinLaMesaWatershed’s2700hectaresto

beknownasthe“FirstGenForest.”Thisisinsupportof ABS-CBNFoundation,

Inc.’sBantayKalikasanproject.FirstGen’spledgeof Php5millionwasusedto

plantseedlings,providethenecessaryfirebreaks,andensureplantsurvivalduring

thenextthreecrucialyears.Theprojectwaslaunchedwiththeplantingof 1000

seedlings.

4. Verde Island Ecosystem Management Program

Verde Passage, where Verde Island is located, is considered an important

areaintermsof itsrichcoastalandmarineecosystem. It isalsosociallyand

economicallyimportantasitishosttomarine-basedtourism,andtransportation

and international port facilities. First Gen partnered with Conservation

International Philippines and FPCI to develop and implement an ecosystem-

based management (EBM) program that aims to maintain and protect the

ecosystem.Majorprogramactivitiesincludebiologicalaswellassocioeconomic

assessment, institutionalstrengtheningandcapacitybuildingof theIslaVerde

Sanctuary Management Board, fishery councils and

local government units, and planning for an EBM

approach for the broader marine corridor of Verde

IslandPassage.

5. Knowledge Channel

ThroughKnowledgeChannelFoundation, Inc.,FirstGen

donated Php2 million to provide cable/satellite Knowledge

Channel television access to twenty-seven schools in Batangas

province. The company also gave an additional Php0.4 million for

Page 38: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

36

“LakadMo,PangarapKo–AWalkfortheEmpowermentof theYouththrough

Education.”DonationswerealsomadetotheAteneoScholarshipFoundation

andtheDLSUScienceFoundationbythedifferentsubsidiaries.BauangPrivate

PowerCorp.(BPPC)alsolauncheditsscholarshipprogramincoordinationwith

DonMarianoMarcosMemorialStateUniversityinAugust2004.

Inaddition to specificCSRprojects, thecompany isalso involved invarious

activities.

Corporate Giving. Inpromotionof corporate social responsibility,FirstGen

donatedPhp0.5milliontotheLeagueof CorporateFoundationstoassistinthe

holdingof theAnnualCSRweek.FirstGenanditssubsidiariesalsodonated

atotalof Php6milliontotheABS-CBNFoundation,Inc.forrelief operations

conducted after four successive storms hit the country in December 2003.

ThecompanydonatedPhp0.5milliontotheCorporateNetworkforDisaster

Responseforthecreationof anemergencyassistancefundfortyphoonvictims.

First Gen employees donated Php136,000 in cash, a substantial number of

goods,andconvertedtheirunusedleavestocashforthispurpose.

For the Department of Energy’s ER 1-94, BPPC contributed Php58 million,

FGPC contributed close to Php171 million, and FGP Corp. contributed

Php61 million. ER 1-94 financial benefits include missionary electrification,

reforestationanddevelopment,andlivelihoodprograms.Arecentprojectunder

ER1-94istheconstructionof aseawallforBarangaySantaRitaAplaya,oneof

thehostcommunitiesinBatangas.

Promoting Employee Volunteerism. Corporate efforts were also matched by

employeeefforts. Thepowerof FirstGenemployeeswasunleashedas they

engagedinactivitiesoutsideof theirnormalwork.

A sponsorship agreement for three years was signed with Hands On Manila

Foundation,Inc.whichwillassistindevelopingFirstGen’semployeevolunteer

program. Employees spent twoSaturdayswith streetchildrenduring the last

quarterof 2004,participatingintheBreakfastClubactivityof PangarapShelter

bysponsoringtheirbreakfastmeals.FortheLakadMo,PangarapKocampaign

of Knowledge Channel, there were close to one hundred participants from

FirstGen.BPPCemployeesalsotookpartintheDepartmentof Education’s

Brigada Eskwela program, where volunteers replaced old pipes of the water

systemofthePayocpocElementarySchool.Employeesalsoheldapicnicatthe

MakilingBotanicalGardensinUPLB,wheretheyplantedtreestosymbolizethe

commitmentof FirstGenanditsemployeestopreservationandconservation

efforts.Overall,suchemployeeactivitiesledtoanincreasedawarenessof social

concernsandabetterappreciationof therolesof boththeindividualandthe

corporationinsocietyandtheenvironment.

Page 39: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

stG

en2

004

Ann

ualR

epor

t

37

Environment,Safety&Health(ExcellenceinPerformance)

First Gen continued its pursuit of excellence, with its companies reaping

awardsandaccolades.

The 2004 Lopez Achievement Award (LAA) for Operations Management

andCorporateImage-BuildingwasconferredontheIntegratedManagement

System(IMS)CertificationTeamof theFirstGasGroupof Companies(First

Gas Holdings Corporation, First Gas Power Corp., FGP Corp., and First

GasPipelineCorporation). TheLAAwasgiven toFirstGas forachieving

ISO 9001:2000 (Quality Management), ISO 14001:1996 (Environmental

Management), and OHSAS 18001:1999 (Occupational Health and Safety

Management) certifications simultaneously without prior certification

experiencetoaninternationalstandard.FirstGasisthefirstcompanywithin

theLopezGroup,aswellasamongBGassetsworldwide,tobecertifiedonits

firstattempt.

InNovember,theFirstGasIMSwasrecommendedforContinuedCertification

against the requirements of ISO 9001:2000, ISO 14001:1996, and OHSAS

18001:1999byAngloJapanAmerican(AJA)RegistrarsInc.undertheUnited

KingdomAccreditationServices(UKAS).

First Gas won second place in the 2004 BG Chairman’s Award for its

mangroverehabilitationproject,bestingeighty-oneentriesfromBGcompanies

worldwide.TheBGChairman’sAwardencouragesinnovationinthedrivefor

continuousimprovementinhealth,safetyandenvironmentalperformance.

FirstGasHoldingsCorporation,FirstGasPowerCorporation,FGPCorp.,

BauangPrivatePowerCorporation,andFirstPhilippineIndustrialCorporation

alsoindividuallyearnedthehighestratingamongallLopezGroupcompanies

audited under the Environment, Safety and Health (ESH) Management

AssessmentandRatingSystem(MARS)Program,andwererecipientsof the

Founder’s Award. Moreover, the Department of Labor and Employment

(DOLE)citedFirstGasHoldingsCorporationforcomplyingwiththecriteria

forthefourthGawadKaligtasanatKalusugan(GKK).

In February, Bauang Private Power Corporation was recognized as one of

thecountry’sTop20Corporationsamonghighest incometaxpayers,and in

Decemberwasnamedoneof theTop10CentennialAwardeesundertheBIR’s

Centennial Taxpayer Recognition Program (CTRP) for complying with the

program’srequiredincometaxgrowthrates.

Finally, First Philippine Industrial Corporation marked another milestone

whenitwascertifiedtoSA-8000internationalstandardsasameasurableindex

of social accountability. This is in addition to the company’s certifications

to ISO9001, ISO14001andOHSAS18001 international standards. FPIC

remainscustomer-focusedwithaCustomerSatisfactionIndexof 4.8in2004,

onascaleof 5.0.

Page 40: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

38

Statement of Management’s Responsibility

Securities and Exchange Commission

SEC Building, EDSA Greenhills

Mandaluyong City, Metro Manila

The management of First Generation Holdings Corporation is responsible for all information and representaions contained in the consolidated financial statements for the year

ended December 31, 2003. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the Philippines and reflect

amounts that are based on the best estimates and informed judgement 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 Board of Directors reviews the consolidated financial statements before such statements are approved and submitted to the stockholders of the company.

SyCip, Gorres, Velayo & Co., the independent auditors and appointed by the stockholders, have examined the consolidated financial statements of the company in accordance with

auditing standards generally acepted in the PHilippines and have expressed their opinion on the fairness of presentaion upon completion of such examination, in their report to

stockholders.

Oscar M. Lopez Francis Giles B. Puno Peter D. Garrucho, Jr.

Chairman Senior Vice President Vice Chairman

& Chief Finance Officer & Chief Executive Officer

March 24, 2004

Page 41: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

39

The Stockholders and the Board of Directors

First Gen Corporation

3rd Floor, Benpres Building

Exchange Road corner Meralco Avenue

Pasig City

We have audited the accompanying consolidated balance sheets of First Gen Corporation (formerly First Generation Holdings Corporation) and Subsidiaries as of December 31,

2004 and 2003, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the

responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the Philippines. Those standards require that we plan and perform the audit to obtain

reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and

disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the

overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Gen Corporation and Subsidiaries as of

December 31, 2004 and 2003, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the

Philippines.

PTR No. 9404036

January 3, 2005

Makati City

April 4, 2005

Report of Independent Auditors

Page 42: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

40

Consolidated Balance Sheets(Amounts in Millions)

December 31 2003 2004 (As restated - Note 2)ASSETS Current Assets Cash and cash equivalents (Notes 4 and 12) P11,546 P11,270Receivables (Notes 5, 15 and 21) 4,825 3,942Inventories - at cost (Note 6) 626 670Other current assets (Note 7) 691 546 Total Current Assets 17,688 16,428Noncurrent Assets Investments in shares of stock (Note 8) 874 843Property, plant and equipment - net (Notes 9, 12 and 21) 45,557 46,780Input value added taxes - net of allowance for possible losses of P131 in 2004 and P128 in 2003 (Note 23) 2,064 2,094Deferred tax assets - net (Notes 2 and 19) 121 8Other noncurrent assets - net (Notes 10, 12, 21 and 23) 17,097 12,434 Total Noncurrent Assets 65,713 62,159 P83,401 P78,587 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities Accounts payable and accrued expenses (Notes 11, 15 and 21) P7,968 P8,358Due to stockholders and affiliates (Note 15) 386 534Income tax payable 2 41Current portion of long-term debt (Notes 9 and 12) 4,618 3,794 Total Current Liabilities 12,974 12,727Noncurrent Liabilities Long-term debt - net of current portion (Notes 9 and 12) 36,926 41,015Deferred tax liabilities - net (Notes 2 and 19) 93 108Other noncurrent liabilities (Note 21) 12,567 7,631 Total Noncurrent Liabilities 49,586 48,754Minority Interests 6,994 5,986Stockholders’ Equity Capital stock (Notes 13 and 14) 477 477Additional paid-in capital 4,611 4,611Share in cumulative translation adjustments of an associate (Note 8) (25) (35)Retained earnings (Notes 2 and 8) Appropriated 1,000 – Unappropriated 7,784 6,067 Total Stockholders’ Equity 13,847 11,120 P83,401 P78,587

See accompanying Notes to Consolidated Financial Statements.

Page 43: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

41

Years Ended December 31 2003 2004 (As restated - Note 2)REVENUES Revenue from sale of electricity (Notes 3 and 21) P36,929 P36,298Others (Note 15) 111 137 37,040 36,435

COST AND OPERATING EXPENSES Power plant operations and maintenance (Note 21) 21,931 21,115Depreciation and amortization (Note 16) 2,123 2,193Staff costs (Notes 17 and 18) 317 264Others 1,979 1,896 26,350 25,468

INCOME FROM OPERATIONS 10,690 10,967

OTHER INCOME (CHARGES) Interest expense and financing charges (Notes 9 and 12) (3,020) (3,152)Equity in net earnings of an associate (Notes 3 and 8) 375 402Amortization of debt issuance costs (185) (185)Interest income 148 118Amortization of goodwill (54) (54)Gain on sale of a subsidiary (Note 3) _ 318Others - net (25) (1) (2,761) (2,554)

INCOME BEFORE INCOME TAX AND MINORITY INTERESTS 7,929 8,413

PROVISION FOR (BENEFIT FROM) INCOME TAX (Notes 2, 19 and 20) Current 5 50Deferred (128) (76) (123) (26)

INCOME BEFORE MINORITY INTERESTS 8,052 8,439

MINORITY INTERESTS 3,092 3,111

NET INCOME P4,960 P5,328

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Income(Amounts in Millions)

Page 44: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

42

Years Ended December 31 2003 2004 (As restated - Note 2)CAPITAL STOCK (Notes 13 and 14) Redeemable preferred stock - P100 par value Balance at beginning of year P364 P408 Redemption of shares – (44) Balance at end of year 364 364Common stock - P10 par value 113 113 477 477

ADDITIONAL PAID-IN CAPITAL Balance at beginning of year 4,611 4,899Redemption of preferred stock – (288)Balance at end of year 4,611 4,611

SHARE IN CUMULATIVE TRANSLATION ADJUSTMENTS OF AN ASSOCIATE (Note 8) Balance at beginning of year (35) – Foreign currency translation adjustments 10 (35) Balance at end of year (25) (35)

RETAINED EARNINGS (Notes 8 and 13) Appropriated: Balance at beginning of year – – Appropriation for the year 1,000 – Balance at end of year 1,000 –Unappropriated: Balance at beginning of year: As previously reported 6,132 6,250 Effect of change in accounting policy for income taxes (Note 2) (65) (90) As restated 6,067 6,160 Net income 4,960 5,328 Cash dividends: Preferred stock - average of P132.24 per share in 2003 – (482) Common stock - average of P198.36 per share in 2004 and P436.84 per share in 2003 (2,243) (4,939) Appropriation for the year (1,000) – Balance at end of year 7,784 6,067 P13,847 P11,120

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Changes in Stockholders’ Equity(Amounts in Millions, Except Par Value and Per Share Amount)

Page 45: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

43

Consolidated Statements of Cash Flows(Amounts in Millions)

Years Ended December 31 2003 2004 (As restated - Note 2)CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax and minority interests P7,929 P8,413Adjustments for: Interest expense and financing charges 3,020 3,152 Depreciation and amortization 2,123 2,193 Equity in net earnings of an associate (375) (402) Amortization of debt issuance costs 185 185 Interest income (148) (118) Amortization of goodwill 54 54 Provision for possible losses on input value added taxes 3 128 Gain on sale of a subsidiary – (318) Net unrealized foreign exchange loss – 9Operating income before working capital changes 12,791 13,296Decrease (increase) in: Receivables (785) 1,802 Inventories (2) (253) Other current assets (144) (31) Input value added taxes 47 (257)Decrease in accounts payable and accrued expenses (488) (2,418)Net cash generated from operations 11,419 12,139Interest received 148 118Income taxes paid (44) (10)Net cash provided by operating activities 11,523 12,247CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (510) (154)Dividends received from an associate 388 494Proceeds from disposal of property and equipment 71 –Decrease in other noncurrent assets 28 361Proceeds from sale of a subsidiary - net of cash disposed (Note 3) – 959Additional investment – (1)Net cash provided by (used in) investing activities (23) 1,659CASH FLOWS FROM FINANCING ACTIVITIES Payments of: Long-term debt (3,858) (3,012) Interest (3,049) (3,062) Cash dividends (2,243) (5,629)Payments of dividends to/decrease in minority interests (2,084) (2,549)Increase (decrease) in due to stockholders and affiliates (150) 47Proceeds from availments of long-term debt – 1,458Redemption of preferred shares – (332)Net cash used in financing activities (11,384) (13,079)

(Forward)

Page 46: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

44

Years Ended December 31 2003 2004 (As restated - Note 2)EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS P160 P448NET INCREASE IN CASH AND CASH EQUIVALENTS 276 1,275CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 11,270 9,995CASH AND CASH EQUIVALENTS AT END OF YEAR P11,546 P11,270

See accompanying Notes to Consolidated Financial Statements.

Page 47: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

45

Notes to Consolidated Financial Statements(Amounts of Pesos and United States (US) Dollars, Stated in Millions)

1. Corporate Information

First Gen Corporation (the Parent Company) was incorporated in the Philippines

on December 22, 1998. The Parent Company and its subsidiaries (collectively

referred to as the First Gen Group) are involved in the power generation business.

All subsidiaries are incorporated in the Philippines.

The Parent Company is an 88.44%-owned subsidiary of First Philippine Holdings

Corporation (FPHC), also incorporated in the Philippines.

On March 9, 2005, the Philippine Securities and Exchange Commission (SEC)

approved the change of the Parent Company’s corporate name from First

Generation Holdings Corporation to First Gen Corporation.

On a consolidated basis, the number of employees was 102 and 99 as of December

31, 2004 and 2003, respectively. The registered office address of the Parent

Company is 3rd Floor, Benpres Building, Exchange Road corner Meralco Avenue,

Pasig City.

The accompanying consolidated financial statements of the First Gen Group were

approved and authorized for issue by the Board of Directors (BOD) on April 4,

2005.

2. Summary of Significant Accounting Policies

The principal accounting policies adopted in preparing the consolidated financial

statements of the First Gen Group are as follows:

Basis of Preparation

The accompanying consolidated financial statements have been prepared in

conformity with accounting principles generally accepted in the Philippines under

the historical cost convention.

Use of Estimates

The preparation of the consolidated financial statements in conformity with

generally accepted accounting principles requires management to make estimates

and assumptions that affect the amounts reported in the consolidated financial

statements and accompanying notes. The estimates and assumptions used in the

accompanying consolidated financial statements are based upon management’s

evaluation of relevant facts and circumstances as of the date of the consolidated

financial statements. Actual results could differ from such estimates.

Changes in Accounting Policies

On January 1, 2004, the Parent Company and its subsidiaries adopted the following

Statements of Financial Accounting Standards (SFAS)/International Accounting

Standards (IAS):

• SFAS 12/IAS 12, “Income Taxes,” prescribes the accounting treatment

for current and deferred income taxes. The standard requires the use of

the balance sheet liability method in accounting for deferred income taxes.

Adoption of this standard resulted in the recognition of deferred tax assets

and liabilities for all temporary differences expected to be recovered or

settled. Previously, operating subsidiaries, namely FGP Corp. (FGP) and

First Gas Power Corporation (FGPC), did not recognize deferred tax assets

and liabilities on temporary differences expected to reverse beyond the income

tax holiday periods. The change in policy was reflected in the consolidated

financial statements on a retroactive basis and the consolidated financial

statements for 2003 have been restated. The restatement increased net income

by P25 in 2003. Retained earnings decreased by P65 and P90 as of January 1,

2004 and 2003, respectively.

• SFAS 17/IAS 17, “Leases,” prescribes the accounting policies and disclosures

for finance and operating leases. The respective Power Purchase Agreements

(PPAs) of FGP and FGPC with Manila Electric Company (Meralco), and

the Project Agreement of Bauang Private Power Corporation (BPPC), an

associate, with National Power Corporation (NPC) under a build-operate-own

scheme and build-operate-transfer scheme, respectively, are now accounted for

as contracts containing operating lease arrangements. Accordingly, revenues

arising from the fixed capacity fees and fixed operating and maintenance fees

derived from the PPAs and Project Agreement are recognized on a straight-

line basis over the terms of the agreements.

Adoption of this standard also resulted in the recognition of lease payments

under operating leases on a straight-line basis. Previously, all lease payments

under operating leases were expensed based on the terms of the lease

agreements.

The change in accounting for operating leases has no effect on the

consolidated financial statements since the contract capacity rate and

operating and maintenance rate per kilowatt-hour are fixed throughout the

terms of the agreements. Also, the upward revision of the rental charges

Page 48: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

46

under the lease agreements are agreed by the First Gen Group and the lessor

at the end of each year.

New Accounting Standards Effective in 2005

New accounting standards based on IAS and International Financial Reporting

Standards, referred to as Philippine Accounting Standards (PAS) and Philippine

Financial Reporting Standards (PFRS), respectively, will become effective in 2005.

The First Gen Group will adopt the following new accounting standards that are

relevant to the First Gen Group effective January 1, 2005:

• PAS 19, “Employee Benefits,” prescribes the use of the projected unit credit

method in measuring retirement benefit expense and a change in the manner

of computing benefit expense relating to past service cost and actuarial

gains and losses. It requires a company to determine the present value of

defined benefit obligations and the fair value of any plan assets with sufficient

regularity that the amounts recognized in the financial statements do not

differ materially from the amounts that would be determined at the balance

sheet date. Upon adoption of this standard, the transition retirement liability

under the First Gen Group’s defined benefit plan will be adjusted retroactively

and will decrease retained earnings and increase noncurrent liabilities as of

January 1, 2005 (see Note 18).

• PAS 21, “The Effects of Changes in Foreign Exchange Rates,” prohibits

the capitalization of foreign exchange losses. The practice of the major

subsidiaries and an associate of the First Gen Group has been to capitalize

foreign exchange adjustments arising from foreign currency-denominated

obligations used to finance the construction of their respective power plants.

As of December 31, 2004 and 2003, undepreciated capitalized foreign

exchange losses included in the cost of property, plant and equipment,

excluding the amount eligible for capitalization as part of borrowing costs,

amounted to P6,252 and P6,114, respectively (see Note 9).

PAS 21 further requires a company to determine its functional currency and

measure its results of operations and financial position in that currency. The

Parent Company and certain subsidiaries have determined the US Dollar as

their functional currency in accordance with the guidance under PAS 21.

The Philippine SEC, in SEC Memorandum Circular No. 14, Series of 2003,

Guidelines on Preparation of Functional Currency Financial Statements,

gives qualified companies the option to file functional currency financial

statements covering periods ending on or after October 31, 2003, subject to

compliance with certain criteria. On January 3, 2005, the First Gen Group

filed an application with the SEC to be allowed to file US Dollar functional

currency financial statements. Subsequently, on January 25, 2005, the SEC

approved the application of the First Gen Group for the use of US Dollar in

the primary financial statements beginning January 1, 2005. Upon adoption

of PAS 21 and SEC Memorandum Circular No. 14, the presentation currency

of the First Gen Group will be changed from Philippine Pesos to US Dollars

on a retroactive basis and prior years consolidated financial statements

presented will be restated. The capitalized foreign exchange differences

arising from the US dollar-denominated obligations will then be eliminated in

the translation process without negatively affecting retained earnings.

• PAS 32, “Financial Instruments: Disclosure and Presentation,” covers the

disclosures and presentation of all financial instruments. The standard

requires more comprehensive disclosures about a company’s financial

instruments, whether recognized or unrecognized in the financial statements.

New disclosure requirements include terms and conditions of financial

instruments used by the company, types of risks associated with both

recognized and unrecognized financial instruments (market risk, price risk,

credit risk, liquidity risk, and cash flow risk), fair value information of both

recognized and unrecognized financial assets and financial liabilities, and the

company’s financial risk management policies and objectives. The standard

also requires financial instruments to be classified as liabilities or equity in

accordance with its substance and not its legal form. Required disclosures, as

applicable, will be included in the 2005 consolidated financial statements.

• PAS 39, “Financial Instruments: Recognition and Measurement,” establishes

the accounting and reporting standards for the recognition and measurement

of a company’s financial assets and financial liabilities. The standard requires

a financial asset or financial liability to be recognized initially at fair value.

Subsequent to initial recognition, a company should continue to measure

financial assets at their fair values, except for loans and receivables and held-

to-maturity investments, which are to be measured at cost or amortized cost

using the effective interest rate method. Financial liabilities are subsequently

measured at cost or amortized cost, except for liabilities classified as “at fair

value through profit and loss” and derivatives, which are subsequently to be

measured at fair value.

PAS 39 also covers the accounting for derivative instruments. This standard

has expanded the definition of a derivative instrument to include derivatives

(and derivative-like provisions) embedded in non-derivative contracts.

Page 49: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

47

Under the standard, every derivative instrument is recorded in the balance

sheet as either an asset or liability measured at its fair value. Derivatives

that do not qualify as hedges are adjusted to fair value through income. If

a derivative is designated and qualify as a hedge, depending on the nature

of the hedging relationship, changes in the fair value of the derivative are

either offset against the changes in fair value of the hedged assets, liabilities,

and firm commitments through earnings, or recognized in stockholders’

equity until the hedged item is recognized in earnings. A company must

formally document, designate and assess the hedge effectiveness of derivative

transactions that receive hedge accounting treatment.

Adoption of PAS 32 and PAS 39 is expected to have operational and financial

statement impact to the First Gen Group which is not presently quantifiable.

Volatility in the financial statements is anticipated because of the requirement

to fair value most financial instruments, including derivative financial

instruments. The First Gen Group plans to undertake certain detailed

activities, which include, among others, the following:

1. Review of contracts for the purpose of identifying and, where required,

bifurcating derivatives that are embedded in both financial and non-

financial contracts;

2. Development of a financial instruments policy that will cover accounting

for financial instruments, to include the preparation of hedge accounting

guidelines and requirements for derivatives that are designated and

qualify as hedges;

3. Evaluation of the proper classification of financial instruments,

including determining whether a financial instrument should be

accounted for as debt or equity; and

4. Assessment of required process and systems changes.

In 2005, the impact of adopting PAS 39 will be retroactively computed, as

applicable, and adjusted to the January 1, 2005 retained earnings. Prior years’

consolidated financial statements will not be restated as allowed by the SEC.

• PFRS 2, “Share-Based Payments,” will result in a charge to net income for

the cost of share options granted. The First Gen Group currently does not

recognize an expense from share options granted but discloses required

information for such options. The First Gen Group still has to develop

policies and procedures to quantify the stock option value on grant date to

determine the impact of adopting this standard.

• PFRS 3, “Business Combination,” will result in the cessation of the

amortization of goodwill and a requirement for an annual test for goodwill

impairment. Any resulting negative goodwill after performing reassessment

will be credited to income. Moreover, pooling of interests in accounting for

business combination will no longer be permitted. Upon effectivity of PFRS

3, the First Gen Group will reassess the impairment of goodwill amounting to

P455 as of December 31, 2004 (see Notes 8 and 10).

The First Gen Group will also adopt the following standards in 2005:

• PAS 1, “Presentation of Financial Statements,” provides a framework within

which an entity assesses how to present fairly the effects of transactions and

other events; provides the base criteria for classifying liabilities as current or

noncurrent; prohibits the presentation of income from operating activities

and extraordinary items as separate line items in the statement of income;

and specifies the disclosures about key sources of estimation, uncertainty

and judgments that management has made in the process of applying the

entity’s accounting policies. It also requires changes in the presentation of

minority interest in the balance sheet and statement of income. Adoption of

this standard in 2005 is not expected to have a material impact to the First

Gen Group. The changes in the financial statement presentation as well

as required disclosures will be included in the 2005 consolidated financial

statements, as applicable.

• PAS 8, “Accounting Policies, Changes in Accounting Estimates and Errors,”

removes the concept of fundamental error and the allowed alternative to

retrospective application of voluntary changes in accounting policies and

retrospective restatement to correct prior period errors. It defines material

omission or misstatements, and describes how to apply the concept of

materiality when applying accounting policies and correcting error. Adoption

of this standard will not have a material impact to the First Gen Group.

• PAS 10, “Events After the Balance Sheet Date,” provides a limited

clarification of the accounting for dividends declared after the balance sheet

date. Adoption of this standard will not have a material impact to the First

Gen Group.

• PAS 16, “Property, Plant and Equipment,” provides additional guidance and

Page 50: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

48

clarification on recognition and measurement of items of property, plant and

equipment. It also provides that each part of an item of property, plant and

equipment with a cost that is significant in relation to the total cost of the item

shall be depreciated separately. FGP, FGPC and BPPC currently account

for their respective power plants as a single asset and depreciate them over 15

to 25 years. FGP, FGPC and BPPC have not yet determined the significant

parts of its power plant asset. Annual depreciation, however, is expected to

increase because of a shorter estimated life of certain significant parts of the

power plant.

The standard also requires that the cost of an item of property, plant and

equipment should include the costs of its dismantlement, removal or

restoration, the obligation for which the entity incurs when it installs or uses

the assets.

Under the PPA, FGP and FGPC may have constructive obligations to

decommission or dismantle their power plant assets at the end of their

useful lives. If it is eventually determined that FGP and FGPC are liable

for such costs, adoption of this standard would result in an increase in the

net book value of property, plant and equipment and in the recognition of

the related dismantlement or restoration liability. The difference between

the increase in the net book values of property, plant and equipment and

the amount of dismantlement or restoration liability would be adjusted to

beginning retained earnings. Subsequent annual depreciation would increase

and an accretion expense would be recognized to bring the dismantlement

or restoration liability to the required cash outflows at the expected time of

decommissioning or dismantlement.

Under the Project Agreement of BPPC, it is required to transfer to NPC

all its rights, titles and interest in the power plant complex at the end of the

cooperation period in good working condition. Accordingly, BPPC has no

obligation to dismantle, remove or restore the power plant complex.

• PAS 17, “Leases,” provides a limited revision to clarify the classification of a

lease of land and prohibits the expensing of initial direct costs in the financial

statements of the lessors. Adoption of this standard will not have a material

impact to the First Gen Group.

• PAS 24, “Related Party Disclosures,” provides additional guidance and clarity

in the scope of the standard, the definitions and disclosures for related parties.

It also requires disclosure of the total compensation of key management

personnel and by benefit types. New disclosures required by this standard will

be included in the 2005 consolidated financial statements, as applicable.

• PAS 27, “Consolidated and Separate Financial Statements,” reduces

alternatives in accounting for subsidiaries in consolidated financial statements

and in accounting for investments in the separate financial statements of a

parent, venturer or investor. Investments in subsidiaries will be accounted

for either at cost or in accordance with PAS 39 in the separate financial

statements. Equity method of accounting will no longer be allowed in the

separate financial statements. This standard also requires strict compliance

with adoption of uniform accounting policies and requires the parent

company to make appropriate adjustments to the subsidiary’s financial

statements to conform them to the parent company’s accounting policies for

reporting like transactions and other events in similar circumstances.

• PAS 28, “Investments in Associates,” reduces alternatives in accounting

for associates in consolidated financial statements and in accounting for

investments in the separate financial statements of an investor. Investments in

associates will be accounted for either at cost or in accordance with PAS 39 in

the separate financial statements. Equity method of accounting will no longer

be allowed in the separate financial statements. This standard also requires

strict compliance with adoption of uniform accounting policies and requires

the investor to make appropriate adjustments to the associate’s financial

statements to conform them to the investor’s accounting policies for reporting

like transactions and other events in similar circumstances.

When the Parent Company adopts PAS 27 and PAS 28 in 2005, its

investments in subsidiaries and associate will be accounted for under the cost

method in the separate or parent company financial statements. Accordingly,

this will reduce the retained earnings by P2,870 and P1,397 as of January 1,

2005 and 2004, respectively. The carrying amount of investments will also

be reduced by P2,846 and P1,362 as of December 31, 2004 and 2003. Net

income will be reduced by P1,473 and P1,229 in 2004 and 2003, respectively.

The following standards will also be adopted in 2005 but are expected to have no

material impact to the First Gen Group:

• PAS 2, “Inventories,”

• PFRS 1, “First-time Adoption of PFRS,” and

• PFRS 5, “Noncurrent Assets Held for Sale.”

Page 51: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

49

Basis of Consolidation

The consolidated financial statements include the financial statements of the

Parent Company and the following subsidiaries:

Percentage of Ownership

2004 2003

First Gen Renewables, Inc. [FGRI (formerly First

Philippine Energy Corporation)] 100 100

Unified Holdings Corporation (Unified)

and Subsidiary* 100 100

First Gas Holdings Corporation (FGHC)

and Subsidiaries** 60 60

* This pertains to FGP.

** This includes FGPC, First Gas Pipeline Corporation and FGLand Corporation.

A subsidiary is consolidated from the date control is transferred to the Parent

Company and ceases to be consolidated from the date control is transferred out

of the Parent Company. Acquisition of subsidiaries is accounted for using the

purchase method of accounting.

As a result of the sale of the Parent Company’s investment in Panay Power

Corporation (PPC) (see Note 3), the related accounts have been deconsolidated

in 2003. The 2003 consolidated statements of income and cash flows include the

results of operations and cash flows of PPC for the period January 1, 2003 to June

26, 2003.

Consolidated financial statements are prepared using uniform accounting policies

for like transactions and other events in similar circumstances. Intercompany

balances and transactions, including intercompany profits and unrealized income

and losses, are eliminated.

Minority interests represent the interests in FGHC and Subsidiaries, FGP and PPC

not held by the Parent Company. As discussed in Note 3, the Parent Company

sold its investment in PPC on June 26, 2003.

Cash and Cash Equivalents

Cash includes cash on hand and in banks. Cash equivalents are short-term, highly

liquid investments that are readily convertible to known amounts of cash with

original maturities of three months or less and that are subject to insignificant risk

of change in value.

Receivables

Trade receivables are recognized and carried at original invoice amount less

allowance for any uncollectible amount. Other receivables are stated at face value

less allowance for any uncollectible amount. An estimate for doubtful accounts is

made when collection of the full amount is no longer probable.

Inventories

Inventories are carried at the lower of cost and net realizable value. The net

realizable value of fuel inventories of FGP and FGPC is the fuel cost charged to

Meralco, under the respective PPAs of FGP and FGPC with Meralco (see Note

21a), which is based on weighted average cost of actual fuel consumed. Costs are

determined using the weighted average cost method.

Investments in Shares of Stock

The Parent Company’s 40% investment in First Private Power Corporation (FPPC)

and Subsidiary is accounted for under the equity method of accounting. An

associate is an investee in which the Parent Company has significant influence

and which is neither a subsidiary nor a joint venture of the Parent Company.

The investment in an associate is carried in the consolidated balance sheets at

cost plus post-acquisition changes in the Parent Company’s share in net assets

of the associate (including share in cumulative translation adjustments) less any

impairment in value. The consolidated statements of income reflect the Parent

Company’s share in the results of operations of an associate.

An assessment of the carrying value of the Parent Company’s investment is

performed when there is an indication that the investment has been impaired.

Unrealized intercompany profits arising from the transactions with the associate

are eliminated. The Parent Company’s investment includes goodwill (net of

accumulated amortization) on acquisition.

The share in cumulative translation adjustments of an associate is shown under the

“Stockholders’ Equity” section of the consolidated balance sheets.

Other investments are carried at cost less any significant and apparent permanent

decline in value.

Property, Plant and Equipment

Property, plant and equipment, except land, are carried at cost less accumulated

depreciation and any impairment in value. Land is carried at cost less any

impairment in value.

Page 52: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

50

The initial cost of property, plant and equipment consists of the purchase price

including import duties, borrowing costs (during the construction period) and

foreign exchange adjustments, and any costs directly attributable to bringing the

asset to its working condition and location for its intended use. Expenditures

incurred after the property, plant and equipment have been put into operation, such

as repairs, maintenance and overhaul costs, are normally charged to income in the

period the costs are incurred. In situations where it can be clearly demonstrated

that the expenditures have resulted in an increase in the future economic benefits

expected to be obtained from the use of an item of property, plant and equipment

beyond its originally assessed standard of performance, the expenditures are

capitalized as additional costs of property, plant and equipment. When assets are

sold or retired, the cost and related accumulated depreciation and any impairment

in value are removed from the accounts and any resulting gain or loss is included in

the consolidated statements of income.

Depreciation is computed using the straight-line method over the following

estimated useful lives of the assets:

Power plant complex 25 years

Other property and equipment 3 to 10 years

The useful life and depreciation method are reviewed periodically to ensure that

the period and method of depreciation are consistent with the expected pattern of

economic benefits from items of property, plant and equipment.

Goodwill

Goodwill represents the excess of the acquisition cost over the fair value of

identifiable net assets of subsidiaries and an associate at the date of acquisition.

The goodwill on investments in subsidiaries is included in “Other noncurrent

assets” account in the consolidated balance sheets. The goodwill on investment in

an associate is included in the carrying amount of the related investment.

Goodwill is stated at cost less accumulated amortization and any impairment in

value. Goodwill is amortized on a straight-line basis over a 10-year period. It is

reviewed for impairment whenever events or changes in circumstances indicate that

the carrying amount may not be recoverable.

Pipeline Rights

Pipeline rights (included in “Other noncurrent assets” account in the consolidated

balance sheets) represent the construction cost of the natural gas pipeline facility

connecting the natural gas supplier’s refinery to FGP’s power plant including

incidental transfer costs incurred in connection with the transfer of ownership of

the pipeline facility to the natural gas supplier. Pipeline rights cost is amortized

over the estimated useful life of the natural gas pipeline or the term of the Gas Sale

and Purchase Agreement (GSPA) which is approximately 22 years, whichever is

shorter, from the start of commercial operations.

Prepaid Gas

Prepaid gas (included in “Other noncurrent assets” account in the consolidated

balance sheets), consists of payments to Gas Sellers for unconsumed gas, net of

adjustment. The prepaid gas is recoverable in the form of future gas deliveries in

the order that it arose and can be consumed within a 10-year period. If it should

be determined at some future date that the likelihood of any amount of gas usage

or delivery is remote, then the relevant amount deemed no longer realizable will be

written off against earnings.

Asset Impairment

Long-lived assets are reviewed for impairment whenever events or changes

in circumstances indicate that the carrying amount of an asset may not be

recoverable. Whenever the carrying amount of an asset exceeds its recoverable

amount, an impairment loss is recognized in the consolidated statements of

income. The recoverable amount is the higher of an asset’s net selling price or

value in use. The net selling price is the amount obtainable from the sale of an

asset in an arm’s-length transaction less cost to dispose, while value in use is the

present value of estimated future cash flows expected to arise from the continuing

use of an asset and from its disposal at the end of its useful life. Recoverable

amounts are estimated for individual assets or, if it is not possible, the cash-

generating unit to which the asset belongs.

Reversal of impairment losses recognized in prior years is recorded when there is

an indication that the impairment losses recognized for the asset no longer exist

or have decreased. The reversal is recorded as income. However, the increase in

carrying amount of an asset due to a reversal of an impairment loss is recognized

to the extent that it does not exceed the carrying amount (net of accumulated

depreciation) that would have been determined had no impairment loss been

recognized for that asset in prior years.

As an exception, an impairment loss recognized for goodwill is not reversed in a

subsequent period unless the impairment loss was caused by a specific external

event of an exceptional nature that is not expected to recur and subsequent external

events have occurred that reverse the effect of that event.

Page 53: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

51

Debt Issuance Costs

Expenditures incurred in connection with the availment of long-term debt are

deferred (included in “Other noncurrent assets” account in the consolidated

balance sheets) and amortized over the terms of the related debt.

Research Costs

Research costs are expensed as incurred.

Provisions

Provisions are recognized when the First Gen Group has a present obligation

(legal or constructive) as a result of a past event, it is probable that an outflow of

resources embodying economic benefits will be required to settle the obligation,

and a reliable estimate can be made of the amount of the obligation. If the effect

of the time value of money is material, provisions are determined by discounting

the expected future cash flows at a pre-tax rate that reflects current market

assessment of the time value of money and, where appropriate, the risks specific

to the liability. Where discounting is used, the increase in the provision due to the

passage of time is recognized as an interest expense.

Revenue Recognition

Revenue is recognized when it is probable that the economic benefits associated

with the transaction will flow to the First Gen Group and the amount of the

revenue can be reliably measured.

Revenue from sale of electricity is composed of capacity fees, fixed and variable

operating and maintenance fees, fuel, wheeling and pipeline charges, sales tax and

supplemental fees. Fixed capacity fees and fixed operating and maintenance fees

are recognized on a straight-line basis, based on the actual capacity tested/proven,

over the terms of the respective PPAs. Variable operating and maintenance fees,

fuel, wheeling and pipeline charges, sales tax and supplemental fees are recognized

monthly based on the actual energy delivered.

Interest income is recognized as it accrues, taking into account the effective yield

on the asset.

Operating Leases

Leases where the lessor retains substantially all the risks and benefits of ownership

of the asset are classified as operating leases. Operating lease payments are

recognized as expense in the consolidated statements of income on a straight-line

basis over the lease terms.

Retirement Costs

The First Gen Group provides for the annual retirement costs in accordance with

SFAS 24, “Retirement Benefits Costs.” The obligations and costs of retirement

benefits are actuarially computed by professionally qualified independent actuaries

using the projected unit credit method. This method reflects services rendered

by employees to the date of valuation and incorporates assumptions concerning

employees’ projected salaries. Retirement costs include current service cost plus

amortization of past service cost, experience adjustments and changes in actuarial

assumptions over the expected average remaining working lives of the covered

employees.

Borrowing Costs

Borrowing costs include interest charges and other costs incurred in connection

with the borrowing of funds, including exchange differences arising from foreign

currency borrowings used to finance the project to the extent that they are regarded

as an adjustment to interest costs, net of interest income.

Borrowing costs are generally expensed as incurred. Borrowing costs are

capitalized if they are directly attributable to the construction of a qualifying asset.

Capitalization of borrowing costs commences when the activities to prepare the

asset are in progress and expenditures and borrowing costs are being incurred.

Borrowing costs are capitalized until the asset is substantially ready for its intended

use. If the resulting carrying amount of the asset exceeds its recoverable amount,

an impairment loss is recognized.

Derivative Financial Instrument

FGP uses an interest rate swap agreement to manage its floating interest rate

exposure on its foreign currency-denominated obligations. Accruals of interest on

the receive and pay legs of the interest rate swap are recorded as adjustments to the

interest expense on the related foreign currency-denominated obligations. Current

accounting practice does not require that the interest rate swap be marked to fair

value. The fair value of such financial instrument is presented on the related notes

to consolidated financial statements for disclosure purposes only.

Foreign Currency Transactions

Foreign currency transactions are recorded in Philippine peso by applying to the

foreign currency amounts the spot exchange rates prevailing at transaction dates.

Monetary assets and liabilities denominated in foreign currencies are restated

using the closing exchange rate at balance sheet date. Foreign exchange gains or

losses arising from the settlement or restatement of monetary items at exchange

rates different from those at which they were initially recorded during the period

Page 54: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

52

or presented in previous consolidated financial statements, are recorded in the

consolidated statements of income.

Major subsidiaries and an associate of the First Gen Group capitalize to property,

plant and equipment the foreign exchange adjustments arising from foreign

currency-denominated borrowings directly related to the construction of such

assets.

Income Tax

Deferred income tax is computed using the balance sheet liability method.

Deferred income tax assets and liabilities are recognized for the: (a) future tax

consequences attributable to temporary differences, (b) carryforward benefit of the

excess of the minimum corporate income tax (MCIT) over the regular corporate

income tax; and (c) net operating loss carryover (NOLCO). Deferred income tax,

however, is not recognized when it arises from the initial recognition of an asset or

liability in a transaction that is not a business combination and, at the time of the

transaction, affects neither the accounting profit nor taxable profit or loss.

Deferred tax liabilities are not provided on non-taxable temporary differences

associated with investments in domestic subsidiaries and associates.

The carrying amount of deferred income tax assets is reviewed at each balance

sheet date and reduced to the extent that it is no longer probable that sufficient

taxable profit will be available to allow all or part of the deferred income tax asset

to be utilized.

Deferred income tax assets and liabilities are measured at the tax rate that is

expected to apply to the period when the asset is realized or the liability is settled,

based on tax rate (and tax laws) that has been enacted or substantively enacted at

the balance sheet date.

Contingencies

Contingent liabilities are not recognized in the consolidated financial statements.

These are disclosed unless the possibility of an outflow of resources embodying

economic benefits is remote.

Contingent assets are not recognized in the consolidated financial statements but

disclosed when an inflow of economic benefits is probable.

Subsequent Events

Post year-end events that provide additional information about the First Gen

Group’s financial position at the balance sheet date (adjusting events) are reflected

in the consolidated financial statements. Post year-end events that are not adjusting

events are disclosed in the notes to consolidated financial statements when

material.

3. Sale of PPC

On June 26, 2003, the Parent Company sold its 50% direct interest in common

shares of PPC for a total consideration of P1,090, resulting in a net gain of P318.

In 2003, PPC generated revenue from sale of electricity of P369 and had net

income of P132 up to the date of disposal.

The detailed effect of the disposal on 2003 financial position and net cash flows is

as follows:

Amount

Cash and cash equivalents P131

Receivables 305

Inventories 91

Other current assets 20

Input value added taxes 28

Property, plant and equipment - net 3,167

Accounts payable and accrued expenses (153)

Accrued importation costs (175)

Long-term debt (1,870)

Minority interest (772)

Net identifiable assets and liabilities 772

Gain on disposal 318

Consideration received 1,090

Cash disposed of 131

Net cash inflow P959

Simultaneously on the same date, FPPC, an associate, also sold its 20% equity

interest in common shares of PPC. The Parent Company’s share in resulting gain

is recorded as part of the equity in net earnings of FPPC in 2003.

Page 55: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

53

8. Investments in Shares of Stock

2004 2003

Investment in an associate - at equity

Acquisition cost P741 P741

Accumulated equity in net earnings

Balance at beginning of year 124 216

Equity in net earnings (net of

goodwill amortization of P10) 375 402

Cash dividends (354) (494)

Balance at end of year 145 124

Share in cumulative translation adjustments

Balance at beginning of year (35) –

Foreign currency translation adjustments 10 (35)

Balance at end of year (25) (35)

861 830

Others - at cost 13 13

P874 P843

The carrying value of the investment in FPPC and Subsidiary exceeded the Parent

Company’s equity in net assets by P52 and P62 as of December 31, 2004 and 2003,

respectively.

a. Share in cumulative translation adjustments

Effective January 1, 2003, BPPC, the subsidiary of FPPC, adopted the

pertinent provisions of IAS 39, “Financial Instruments: Recognition and

Measurement,” on hedging of foreign currency risks on highly probable

forecasted transactions. Currently, there is no local accounting standard

covering the accounting for such transactions. Under Rule 68 of the SEC, in

the absence of a specific accounting standard or interpretation issued by the

Accounting Standard Council, reference can be made to IFRS issued by the

International Accounting Standards Board.

IAS 39 permits a non-derivative foreign currency-denominated liability to

be designated as a hedge of a foreign currency risk on a highly probable

forecasted transaction. Consequently, BPPC designated its US dollar-

denominated senior secured notes as cash flow hedges of highly probable

future US dollar revenue streams, particularly its capacity fees. The First

Gen Group’s share in foreign currency translation losses on these designated

US dollar-denominated senior secured notes are deferred under the

4. Cash and Cash Equivalents

2004 2003

Cash on hand and in banks (see Note 12) P152 P168

Short-term investments (see Note 12) 11,394 11,102

P11,546 P11,270

Cash in banks earns interest at the respective bank deposit rates. Short-term

investments are made for varying periods of up to three months depending on

the immediate cash requirements of the First Gen Group, and earn interest at the

respective short-term investment rates.

5. Receivables

2004 2003

Trade (see Note 21a) P4,466 P3,441

Others (see Note 15) 359 501

P4,825 P3,942

6. Inventories

2004 2003

At cost:

Fuel inventories P625 P667

Spare parts and supplies 1 3

P626 P670

7. Other Current Assets

2004 2003

Prepaid expenses P657 P534

Others 34 12

P691 P546

Page 56: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

54

“Stockholders’ Equity” section of the consolidated balance sheets as share in

cumulative translation adjustments, which represents the effective portion of

the cash flow hedge.

b. Accumulated equity in net earnings of investees

The Parent Company’s accumulated equity in net earnings of investees

(including consolidated subsidiaries) amounting to P2,870 and P1,397 (as

restated) as of December 31, 2004 and 2003, respectively, are included as part

of retained earnings. These retained earnings are not available for dividend

distribution until such time that the Parent Company receives the dividends

from the investees.

c. Following is the condensed consolidated financial information of FPPC and

Subsidiary:

2004 2003

Current assets P1,605 P1,408

Noncurrent assets 3,070 3,649

Current liabilities 1,264 1,191

Noncurrent liabilities 1,211 1,751

Revenues 2,951 2,851

Net income 962 1,031

9. Property, Plant and Equipment

December 31, December 31,

2003 Additions Disposals 2004

Cost:

Land P769 P4 P– P773

Power plant complex 50,787 851 – 51,638

Other property and equipment 502 90 (81) 511

52,058 945 (81) 52,922

Accumulated depreciation:

Power plant complex 5,167 2,046 – 7,213

Other property and equipment 111 51 (10) 152

5,278 2,097 (10) 7,365

Net book value P46,780 (P1,152) (P71) P45,557

Capitalized foreign exchange losses amounting to P435 and P1,702 for the years ended December 31, 2004 and 2003, respectively, are part of additions to power plant complex.

The accumulated capitalized foreign exchange losses (net of accumulated depreciation) amounted to P8,923 and P8,910 as of December 31, 2004 and 2003, respectively. The

Page 57: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

55

foreign exchange losses (net of accumulated depreciation) regarded as adjustments

to borrowing costs that were capitalized as part of power plant complex amounted

to P2,671 and P2,796 as of December 31, 2004 and 2003, respectively.

No borrowing costs were capitalized in 2004 and 2003.

Property, plant and equipment with net book values of P45,458 and P46,618 as of

December 31, 2004 and 2003, respectively, have been pledged as security for long-

term debt.

10. Other Noncurrent Assets

2004 2003

Receivables from Meralco (see Note 21c) P12,567 P7,631

Restricted cash deposits (see Notes 12 and 23c) 1,654 1,617

Debt issuance costs - net of amortization 1,471 1,656

Prepaid gas (see Note 21c) 509 509

Pipeline rights - net of amortization 485 511

Goodwill - net of amortization 403 457

Others 8 53

P17,097 P12,434

Pipeline rights represent the construction cost of the natural gas pipeline facility

connecting the natural gas supplier’s refinery to FGP’s power plant, including

incidental transfer costs incurred in connection with the transfer of ownership

of the pipeline facility to the FGP’s natural gas supplier, pursuant to a Deed

of Transfer executed with the Gas Sellers under the Gas Sales and Purchase

Agreements.

Movements of goodwill and pipeline rights are as follows:

December 31, December 31,

2003 Additions 2004

Cost:

Goodwill P565 P– P565

Pipeline rights 541 – 541

1,106 – 1,106

Accumulated amortization:

Goodwill 108 54 162

Pipeline rights 30 26 56

138 80 218

P968 P80 P888

11. Accounts Payable and Accrued Expenses

2004 2003

Trade P1,896 P2,336

Accrued construction costs (see Note 21b) 5,585 5,517

Accrued interest and others (see Note 15) 487 505

P7,968 P8,358

Page 58: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

56

12. Long-term Debt

This account consists of US dollar-denominated borrowings of FGP and FGPC availed from various lenders to partly finance the construction of their power plant complexes.

Nature

Foreign currency-denominated loans payable to foreign financing institutions at various interest rates ranging from 2.69% to 8.79%

US Private Placements with annual interest based on the applicable Treasury Yield plus 2.5%

HERMES Covered Facility Agreement with annual interest at commercial interest reference rate of 7.48%

Commercial Loan Credit (ECGD) Facility Agreement with annual interest at 3 month to 6 month London Interbank Offered Rate (LIBOR)plus 2.15%

Foreign Currency Deposit Unit (FCDU) loans payable to local banks with interest at LIBOR Plus 2.875%

GKA Covered Facility Agreement with annual interest at 6 month LIBOR plus 1.4% with option to convert into fixed interest rate loan

Total

Less current portion

2003

P14,067(US$253)

8,894(US$160)

6,792(US$122)

P5,860(US$105)

5,075(US$91)

4,121(US$74)

44,809(US$805)

3,794(US$68)

P41,015(US$737)

2004

P13,112(US$233)

9,015(US$160)

6,258(US$111)

5,399(US$96)

3,904(US$69)

P3,856(US$68)

41,544(US$737)

4,618(US$82)

P36,926(US$655)

Facility Amount

US$360

US$160

US$133

US$115

US$110

US$77

Repayment Schedule

Back-ended and annuity style repay-ment to be made in various semi-annual installments from 2001 up to 2012

Repayment to be made in various semi-annual installments from 2005 up to 2012

Repayment to be made in 24 equal semi-annual installments from 2003 up to 2014

Repayment to be made in 24 equal semi-annual installments from 2003 up to 2014

Back-ended repayment to be made in 15 unequal semi-annual installments from 2001 up to 2007

Repayment to be made in 27 equal semi-annual installments from 2003 up to 2016

Outstanding Balance

Page 59: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

57

FGPC has available undrawn committed borrowings amounting to US$32

from its KFW Facility as of December 31, 2004 and 2003, and US$50 from its

Revolving Credit/Working Capital Facility as of December 31, 2003, as to which

all conditions precedent had been met. The availability period of the Revolving

Credit/Working Capital Facility has ended on November 18, 2004.

Under certain project financing facility agreements, FGPC is required to pay to

certain foreign lenders a commitment fee ranging from 0.375% to 0.5% based on

the undrawn and uncancelled portion of the principal amount of the financing

facilities. In addition, a guarantee fee to a certain facility is also required to be paid

to the guarantors at the rate of 1.5% a year on the outstanding principal amount.

Such fees are payable semi-annually.

The common terms of the project financing facility agreements (Common Terms

Agreements) contain covenants concerning restrictions with respect to, among

others: maintenance of specified debt-to-equity ratio; acquisition or disposition of

major properties; pledging present and future properties; change in ownership; any

acts that would result in a material adverse effect on the operations of the power

plants; and maintenance of good, legal and valid title to the site free from all liens

and encumbrances other than permitted liens. As of December 31, 2004, FGP and

FGPC are in compliance with the terms of the said agreements.

FGP and FGPC have entered into separate agreements in connection with their

financing facilities as follows:

• Mortgage, Assignment and Pledge Agreements whereby a first priority lien on

most of FGP’s and FGPC’s real and other properties, including revenues from

the operations of the power plants, have been executed in favor of the lenders.

In addition, the shares of stock of FGP and FGPC were pledged as part of

security to the lenders.

• Inter-Creditor Agreements, which describe the administration of the loans.

• Shareholder Contribution Agreements, which cover additional equity

contribution to FGP and FGPC in order to meet the debt-to-equity ratio

requirement under the Common Terms Agreements.

• Trust and Retention Agreements with the lenders’ designated trustees.

Pursuant to the terms and conditions of the Trust and Retention Agreements,

the Security and Co-Security Trustees have established various security

accounts where inflows and outflows of proceeds from loans, equity

contributions and project revenues are monitored. Disposition of cash

deposits on these security accounts require the prior approval of the Inter-

Creditor agents acting on the instructions of the lenders.

The balance of FGP’s and FGPC’s security accounts included as part of “Cash and

cash equivalents” account in the consolidated balance sheets as of December 31,

2004 and 2003 amounted to P9,951 (US$180) and P10,167 (US$186), respectively,

while the balance included as part of “Other noncurrent assets” account in the

consolidated balance sheets as of December 31, 2004 and 2003, amounted to

P1,654 (US$29) and P1,617 (US$29), respectively.

FGP has an interest rate swap agreement with ABN AMRO Bank NV to hedge

half of its floating rate exposure on its ECGD Facility Agreement. Under the

interest rate swap agreement, FGP pays a fixed rate of 7.475% and receives a

floating rate of US LIBOR plus spread on a semi-annual basis simultaneous with

interest payments on the loan. The original term loan was priced against the

benchmark 3 to 6 month LIBOR plus 215 basis points. As of December 31, 2004

and 2003, the outstanding notional amounts of the interest rate swap agreement

amounted to US$47.9 and US$52.7, respectively. The mark-to-market value of the

outstanding interest rate swap, as confirmed by the counterparty bank, amounted

to an unrealized loss of P146.2 for 2004 and P205.9 for 2003. Such mark-to-

market losses are not included in determining the net income for the respective

years.

13. Capital Stock/Retained Earnings

a. Changes in the number of shares of the Parent Company’s capital stock are as

follows:

2004 2003

Redeemable preferred stock - P100 par value

Authorized 15,000,000 15,000,000

Page 60: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

58

2004 2003

Issued:

Balance at beginning of year P3,643,204 P4,076,872

Redemptions of shares – (433,668)

Balance at end of year 3,643,204 3,643,204

Common stock - P10 par value

Authorized 15,000,000 15,000,000

Issued 11,307,110 11,307,110

b. Redeemable preferred stock

All redeemable preferred stock are of equal rank, preference and priority and

shall be identical in all respects regardless of series, except as to terms, which

may be specified by the Parent Company’s BOD. The redeemable preferred

shares shall be non-cumulative, non-participating and shall have no voting

rights and are convertible to 10 common shares based on par value, at the

option of the stockholders and with the consent and approval of the BOD; or

solely at the option of the stockholders under certain conditions as provided

in the Shareholders’ Agreements. The redeemable preferred stocks shall be

redeemed at issue value in equal proportion among all series.

On December 9, 2004, the BOD of the Parent Company approved the following

resolutions: (a) to issue Philippine Peso Bonds up to the aggregate amount of

P3,000; (b) to authorize the Parent Company’s management to prepare/proceed

with the recapitalization of the Parent Company and start the process of planned

Initial Public Offering listing of the Parent Company with the Philippine Stock

Exchange, Inc. as well as with the SEC; and (c) to appropriate P1,000 from the

retained earnings for the acquisition of additional power generating assets and/or

equity.

On February 24, 2005, the stockholders of the Parent Company approved the

issuance and registration of Philippine Peso Bonds up to the aggregate amount of

P3,000.

On April 4, 2005, the BOD and the stockholders of the Parent Company approved

the amendments to the Parent Company’s Articles of Incorporation for the

restructuring of capital stock as follows: (a) common stock split from par value of

P10 per share to P1 per share; (b) reclassification of 10 million authorized preferred

redeemable shares with par value of P100 per share to 1 billion authorized

common shares with par value of P1 per share; and (c) declaration of 300% stock

dividends to existing common shareholders as of April 4, 2005 after the approval

by the SEC of items (a) and (b).

14. Executive Stock Option Plan

The Parent Company has an Executive Stock Option Plan (the Plan), which

entitles the option grantees to acquire the common shares of the Parent Company,

which shares shall not at any grant date exceed 4% of the total issued and

outstanding common shares of the Parent Company. A total of 452,285 common

shares of the Company’s unissued shares have been reserved for the grantees.

Options under the Plan vest within a five-year period but cannot be exercised prior

to the initial public offering of the Parent Company’s shares. If award is granted

prior to initial public offering, the purchase price is fixed in accordance with the

Plan, subject to adjustments in certain cases. If award is granted after initial

public offering of the Parent Company’s shares, the purchase price is fixed at the

option grant date at the average closing price of the Parent Company’s common

shares at the stock exchange for 20 market days prior to the grant, subject to

discount, but in no way shall the purchase price be less than par value. The terms

of the Plan include, among others, a one-year holding period from the date of

award of an option, a limit as to the number of shares an executive and employee

may purchase and settlement by payment in cash or check of the full amount of the

price of the shares over which the option is exercised.

On July 1, 2003, a total of 409,757 common shares were granted to certain officers

and employees under the Plan. As of December 31, 2004, options have started to

vest but have not been exercised. Exercise price of the option is set at P528.00 per

share.

15. Related Party Transactions

The significant transactions with related parties are as follows:

a. The advances from stockholders and affiliates represent noninterest-bearing

US dollar and Philippine peso-denominated emergency loans to meet working

capital and investment requirements of the Parent Company.

b. The Parent Company has a Management Contract (Contract) to render

Page 61: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

59

management services to BPPC under certain terms and conditions, in

consideration of the payment of management fee based on BPPC’s income

from operations after certain adjustments. The Contract is effective for a

period of five years until December 31, 2005. Management fees amounted to

P91 and P87 in 2004 and 2003, respectively.

16. Depreciation and Amortization

2004 2003

Property, plant and equipment P2,097 P2,170

Pipeline rights 26 23

P2,123 P2,193

17. Staff Costs

2004 2003

Salaries, wages and other benefits P310 P255

Retirement costs (see Note 18) 7 9

P317 P264

18. Retirement Costs

The First Gen Group, except for FGRI, has no formal retirement plan for its

regular employees. Based on the latest actuarial valuation dated December 31,

2002, the unfunded present value of retirement costs amounted to P36.8. The

principal actuarial assumptions used to determine retirement costs were investment

yield of 4% to 10% annually and salary increases of 8% to 14% annually. Actuarial

valuations are made at least every three years.

Retirement costs charged to operations amounted to P7 and P9 for the years ended

December 31, 2004 and 2003, respectively.

19. Income Tax

Deferred tax assets and liabilities that are expected to reverse beyond the income

tax holiday periods of FGP and FGPC are recognized.

The components of the deferred tax assets and liabilities as of December 31, 2004

and 2003 are as follows:

2003

(As restated -

2004 see Note 2)

Foreign exchange differentials:

Capitalized - net of accumulated depreciation (P2,619) (P2,498)

Unrealized 2,411 2,274

NOLCO 224 117

Unamortized portion of preoperating expenses

and project development costs 35 35

Capitalized costs and losses during commissioning

period of power plants (35) (35)

Accrual for retirement costs 7 5

MCIT 5 2

P28 (P100)

The above amounts are reported in the consolidated balance sheets as follows:

2003

(As restated -

2004 see Note 2)

Deferred tax assets P121 P8

Deferred tax liabilities (93) (108)

P28 (P100)

The deductible temporary differences of certain balance sheet items and the

carryforward benefits of NOLCO and MCIT of certain subsidiaries for which no

deferred tax asset has been recognized consist of the following:

2003

(As restated -

2004 see Note 2)

NOLCO P404 P368

Unamortized portion of preoperating

expenses and project development costs 36 43

Allowance for possible losses on

input value added tax 13 9

Accrual for retirement costs 9 7

MCIT 5 5

Others 2 1

P469 P433

Page 62: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

60

NOLCO amounting to P32 incurred in 2001 was applied against taxable income

in 2004. NOLCO amounting to P61 incurred in 2001 expired in 2004. MCIT

amounting to P1 incurred in 2001 expired in 2004.

The balance of NOLCO as of December 31, 2004 may be used by the Parent

Company and certain subsidiaries as additional deductions against their respective

future taxable income. Similarly, the MCIT balance as of December 31, 2004 may

be applied as credit against future income tax liabilities of the respective Parent

Company and certain subsidiaries. The balances of NOLCO and MCIT, with their

respective expiry dates, are as follows:

Year Incurred Expiry date NOLCO MCIT

2002 2005 P237 P3

2003 2006 404 3

2004 2007 463 4

P1,104 P10

A reconciliation between the statutory income tax rate and effective income tax

rates follows:

2003

(As restated -

2004 see Note 2)

Statutory income tax rate 32.00% 32.00%

Income tax effect of:

Income tax holiday incentives (30.71) (30.81)

Equity in net earnings of an associate (1.51) (1.53)

Gain on sale of a subsidiary – (1.21)

Others (1.33) 1.24

Effective income tax rates (1.55%) (0.31%)

20. Registrations with the Board of Investments (BOI)

FGP and FGPC are registered with the BOI under the Omnibus Investments Code

of 1987. Under the terms of registrations, these subsidiaries, among others, should

maintain a base equity of at least 25%.

As registered enterprises, these subsidiaries are entitled to certain tax and nontax

incentives which include, among others, income tax holiday. Total incentives

availed of by these subsidiaries amounted to P2,435 and P2,592 for the years ended

December 31, 2004 and 2003, respectively.

21. Commitments and Contingencies

a. Power Purchase Agreements (PPAs)

FGP and FGPC have existing PPAs with Meralco, the largest power

distribution company in the Philippines and the sole customer of both

subsidiaries. Under the PPAs, Meralco will purchase in each contract year

from the start of commercial operations, a minimum number of kilowatt-

hours of the net electrical output of FGP and FGPC for a period of 25 years.

Billings to Meralco under the PPAs are substantially in US dollars and a small

portion billed in Philippine pesos.

On November 15, 2002, the Supreme Court (SC) rendered a decision ordering

Meralco to refund to its customers P0.167 per kilowatt-hour starting with

Meralco’s billing cycles beginning February 1994 until February 1998 or

correspondingly credit the same against future consumption. Meralco filed

a Motion for Reconsideration but the SC denied it with finality on April 30,

2003.

On January 7, 2004, Meralco, FGP and FGPC signed the Amendment to

their respective PPAs. The negotiations resulted in a package of concessions

including FGP and FGPC shouldering community taxes at current tax

rate, while conditional concessions include increasing discounts on excess

generation, paying higher penalties for non-performance up to a capped

amount, recovery of accumulated deemed delivered energy until 2011

resulting in non-charging of Meralco of excess generation charge for such

energy delivered beyond the contracted amount but within a 90% capacity

quota. The effectivity of the amended terms of the respective PPAs of FGP

and FGPC is subject to certain conditions, including Energy Regulations

Commission (ERC) approval.

BPPC has an existing Fast Track Build, Operate and Transfer Project

Agreement (Project Agreement) with NPC. Under the Project Agreement,

NPC supplies all fuel inventory to generate electricity, with all electricity

generated purchased by NPC, BPPC is entitled to payment of fixed capacity

and operations and maintenance fees based on the nominated capacity as

well as energy fees from the delivery of electric power to NPC. The Project

Agreement will be for a period of 15 years up to 2010. Upon expiration

of the 15-year period, BPPC shall transfer to NPC all its rights, titles and

interests in the power plant complex, free of liens created by BPPC and

without any compensation.

Page 63: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

61

b. Engineering, Procurement and Construction (EPC) Contracts

FGPC entered into a Turnkey EPC Contract with Siemens AG, Siemens

Power Generation, and Siemens, Inc. (collectively, “Siemens”) for the

construction of the 1,000 Megawatt (MW) Combined Cycle Power Plant (the

“Power Plant” or “Project”).

A dispute has arisen with Siemens relating to Siemens’ construction of

FGPC’s Power Plant, pursuant to the EPC Contract. Siemens and its

subcontractors incurred delays in project completion, resulting in amounts

of approximately US$99 owing from Siemens to FGPC under the EPC

Contract. Pursuant to the EPC Contract, FGPC withheld approximately

US$96 (P5,408) of its milestone payments, inclusive of variation orders, to

Siemens.

In December 2002, Siemens submitted a Request for Arbitration to the

International Chamber of Commerce in London against FGPC arising

out of alleged delays to the construction of the Project. In the Request for

Arbitration, Siemens claims payment for certain milestones achieved in the

Project, which FGPC has withheld in lieu of liquidated damages amounting

to approximately US$96. Also, Siemens claims an additional sum in the

amount of US$64 for prolongation costs and miscellaneous matters, which

are yet to be quantified by Siemens.

FGPC has counterclaimed in the arbitration in relation to the alleged defects

in the works in the sum of approximately US$215. Both Siemens and FGPC

claim interest from each other and the legal costs involved in pursuing claims

and counterclaims. The Tribunal will consider Siemens’ claims and the

liquidated damages issues at a hearing in March/April 2005. The hearing of

FGPC’s counterclaims will be heard in September 2005.

FGPC plans to contest vigorously all of Siemens’ claims, among other things.

c. Gas Sale and Purchase Agreements (GSPAs)

GSPA of FGP

FGP has a GSPA with Shell Philippine Exploration B.V., Shell Philippines

LLC, Chevron Texaco Malampaya, LLC and PNOC Exploration

Corporation (collectively, “Gas Sellers”), for the supply of natural gas in

connection with the operations of the power plant. The GSPA, now on its

third Contract Year, is for a total period of approximately 22 years.

Total cost of natural gas purchased amounted to US$106 (P5,958) and

US$114 (P6,238) for the years ended December 31, 2004 and 2003,

respectively.

The Gas Sellers are claiming Annual Deficiency payments amounting to

approximately US$55 (P3,100) as of December 31, 2004 and US$20 (P1,095)

as of December 31, 2003 for unconsumed gas volumes below the Take-or-

Pay Quantity under the GSPA (referred to as “Annual Deficiencies”) from

Contract Years 2003 to 2004. Such Annual Deficiencies can be consumed

within a period of 10 years in the order that it arose.

The GSPA obligates FGP to pay certain fees to Gas Sellers for failure to

commence commercial operations of the plant at the Start Date (July 2, 2002)

amounting to US$10 (P509), shown as prepaid gas, net of adjustment (see

Note 10).

A dispute has arisen with Gas Sellers under the GSPA relating to FGP’s

position that Gas Sellers have breached the terms of the “Most Favored

Nations Clause” contained in the GSPA by failing to notify and offer certain

pricing terms and conditions that Gas Sellers have previously offered to

National Power Corporation (NPC) in connection with NPC’s 1,200 MW

Ilijan power plant. Gas Sellers offered a deferred payment facility to NPC

to finance payment for NPC’s take-or-pay obligations under its GSPA with

the Gas Sellers for the Ilijan power plant. Gas Sellers have not offered the

complete Ilijan Price Terms to FGP including a deferred payment facility.

FGP is also claiming force majeure relief from the Annual Deficiency

payments being claimed by the Gas Sellers for its inability to consume natural

gas at the Base Take-or-Pay quantity level.

With respect to 2002, FGP is of the view that it has fully complied with its

obligations under the GSPA and is, therefore, not liable to Gas Sellers for any

take-or-pay obligations in connection with Gas Sellers’ invoice amounting

to approximately US$13. In any case, had the Gas Sellers provided FGP a

deferred payment facility, whatever Annual Deficiency payments deemed

owed by FGP to the Gas Sellers would be deferrable under such deferred

payment facility. Consequently, the Annual Deficiency payments claimed by

the Gas Sellers are the subject of a bona fide dispute between FGP and Gas

Sellers.

If the dispute is resolved in the Gas Sellers’ favor, the amount deemed owed

by FGP shall be paid in accordance with the procedures set forth in the

Page 64: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

62

GSPA. Under the PPA between FGP and Meralco, all fuel-related costs,

including Annual Deficiency payments, are borne by Meralco and are billed

on a pass-through basis.

The Gas Sellers have also invoiced FGP for interest in connection with the

disputed Annual Deficiency payments of approximately US$2 in 2004 and

US$1 in 2003. Given that FGP is disputing the amounts being claimed by

the Gas Sellers, it believes that any interest, if FGP is found to actually owe

any Annual Deficiency payments, should be computed using a lower rate as

stipulated in the GSPA. Given the Company’s position that it is not liable for

any take-or-pay obligations in connection with Gas Sellers’ invoice for 2002

of approximately US$13, the Company is of the position that it is not liable

for any interest payments on the said amount. However, if the Company

is deemed to owe the US$20 amount claimed by the Gas Sellers pertaining

to the 2003 disputed gas take-or-pay obligation, the interest at the lower

rate for bona fide dispute would amount to approximately US$1 (P26) as of

December 31, 2004. Under the terms of the GSPA, such interest is not due

for payment until such time that the dispute is resolved.

FGP and the Gas Sellers are presently negotiating a commercial settlement

of the GSPA dispute and are targeting to finish the negotiations within 2005.

Should the settlement discussions fail, FGP will continue to vigorously pursue

its dispute with the Gas Sellers under the GSPA. Management, based on the

advice of its legal counsel, as arbitration proceedings have not commenced,

does not expect the resolution through arbitration of said disputes to happen

within the next 12 months.

GSPA of FGPC

FGPC also has a GSPA with Gas Sellers, for the supply of natural gas in

connection with the operations of the power plant. The GSPA, now in its

fourth Contract Year, is for a total period of approximately 22 years.

Total cost of natural gas purchased amounted to US$236 (P13,238) and

US$223 (P12,223) for the years ended December 31, 2004 and 2003,

respectively.

The Gas Sellers are claiming Annual Deficiency payments amounting to

approximately US$163 (P9,207) as of December 31, 2004 and US$116

(P6,462) as of December 31, 2003 for unconsumed gas volumes below the

Take-or-Pay Quantity under the GSPA (referred to as “Annual Deficiencies”)

from Contract Years 2002 to 2004. Such Annual Deficiencies can be

consumed within a period of 10 years in the order that they arose.

A dispute has arisen with Gas Sellers under the GSPA relating to FGPC’s

position that Gas Sellers have breached the terms of the “Most Favored

Nations Clause” contained in the GSPA by failing to notify and offer certain

pricing terms and conditions that Gas Sellers have previously offered to NPC

in connection with NPC’s 1,200 MW Ilijan power plant. Gas Sellers offered

a deferred payment facility to NPC to finance payment for NPC’s take-or-

pay obligations under its GSPA with the Gas Sellers for the Ilijan power

plant. FGPC is of the position that the Gas Sellers are obligated to offer the

complete Ilijan Price Terms, which include a deferred payment facility, to

FGPC pursuant to the provisions of the “Most Favored Nations Clause.”

FGPC is also claiming force majeure relief from the Annual Deficiency

payments being claimed by the Gas Sellers for its inability to consume natural

gas at the Base Take-or-Pay quantity level. Had the Gas Sellers provided

FGPC a deferred payment facility, whatever Annual Deficiency payments

deemed owed by FGPC to the Gas Sellers would be deferrable under such

deferred payment facility. Consequently, the Annual Deficiency payments

claimed by the Gas Sellers are the subjects of a bona fide dispute between

FGPC and Gas Sellers.

If the dispute is resolved in the Gas Sellers’ favor, the amount deemed owed

by FGPC shall be paid in accordance with the procedures set forth in the

GSPA. Under the PPA between FGPC and Meralco, all fuel-related costs,

including Annual Deficiency payments, are borne by Meralco and are billed

on a pass-through basis.

The Gas Sellers have invoiced FGPC for interest in connection with the

disputed Annual Deficiency payments of approximately US$10 as of

December 31, 2004. Given that FGPC is disputing the amounts being

claimed by the Gas Sellers, it believes that any interest, if FGPC is found to

actually owe any Annual Deficiency payments, should be computed using

a lower rate as stipulated in the GSPA. If FGPC is deemed to owe the full

$163 amount claimed by the Gas Sellers, the interest at the lower rate for bona

fide disputes would amount to approximately US$4 (P234) as of December

31, 2004 and US$1(P74) as of December 31, 2003. Under the terms of the

GSPA, such interest is not due for payment until such time that the dispute is

resolved.

FGPC and the Gas Sellers are presently negotiating a commercial settlement

of the GSPA dispute and are targeting to finish the negotiations within 2005.

Page 65: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

63

Should the settlement discussions fail, FGPC will continue to vigorously

pursue its dispute with the Gas Sellers under the GSPA. Management,

based on the advice of its legal counsel, as arbitration proceedings have

not commenced, does not expect the resolution through arbitration of said

disputes to happen within the next 12 months.

The disputed amounts, including accrued interest, are presented as “Other

noncurrent liabilities” account in the consolidated balance sheets and the

corresponding receivables from Meralco, including accrued interest, are

presented as part of “Other noncurrent assets” account in the consolidated

balance sheets. The details of disputed amounts, including accrued interest,

are as follows:

2004 2003

Peso Peso

US Dollar Equivalent US Dollar Equivalent

FGP

Annual deficiency 55 3,100 20 1,095

Interest 1 26 – –

56 3,126 20 1,095

FGPC

Annual deficiency 163 9,207 116 6,462

Interest 4 234 1 74

167 9,441 117 6,536

Total

Annual deficiency 218 12,307 136 7,557

Interest 5 260 1 74

223 12,567 137 7,631

d. Lubricating Oil Supply Agreement

BPPC entered into a supply contract with Shell, whereby the latter will supply

lubricating oil for a period of 15 years until 2010 at the agreed price indicated

in the contract. The price is subject to adjustments twice a year based on

various conditions, such as changes in the cost or rates of the product, among

others.

e. Operation and Maintenance (O & M) Agreements

FGP and FGPC have separate O & M Agreements with Siemens Power

Operations, Inc. mainly for the operation, maintenance, management

and repair services of their respective power plants. Based on the current

operating regime, it is estimated that the O & M Agreements will expire in

2010. Total operations and maintenance costs amounted to US$46 (P2,592)

and US$45 (P2,437) for the years ended December 31, 2004 and 2003,

respectively.

f. Substation Interconnection Agreement

FGPC has an agreement with Meralco and NPC for: (a) the construction of

substation upgrade at the NPC substation in Calaca and the donation of such

substation upgrade to NPC; (b) the construction of a dedicated 35-kilometer

transmission line from the power plant to the NPC substation in Calaca and

donation of such transmission line to NPC; (c) the interconnection of the

power plant to the NPC Grid System; and (d) the receipt and delivery of

energy and capacity from the power plant to Meralco’s point of receipt.

As of December 31, 2004, FGPC is still in the process of transferring the

substation upgrade in Calaca, as well as the 230 KV Santa Rita to Calaca

transmission line, to NPC.

On June 25, 2003, FGPC received various Notices of Assessment and

Tax Bills dated April 15 and 21, 2003 from the Provincial Government

of Batangas, through the Office of the Provincial Assessor, imposing an

annual real property tax (RPT) on steel towers, cable/transmission lines and

accessories (the “T-Line”) amounting to P11. FGPC, claiming exemption

from said RPT, has appealed the assessment to the Provincial Local Board

of Assessment Appeals (LBAA) and filed a Petition on August 13, 2003,

praying for the following: (1) that the Notices of Assessment and Tax Bills

issued by Provincial Assessor be recalled and revoked, and (2) that the Office

of the Provincial Assessor of Batangas City drop from the Assessment Roll

the 230 KV transmission lines from Sta. Rita to Calaca in accordance with

Section 206 of the Local Government Code (LGC). FGPC argued that the

T-Line does not constitute real property subject to tax, and assuming that

the T-Line is regarded as real property, FGPC is still not liable for RPT as it

is NPC/ Transco, a government owned and controlled corporation (GOCC)

engaged in the generation and/or transmission of electric power, which has

actual, direct and exclusive use of the T-Line. Pursuant to Section 234 (c) of

the LGC, a GOCC engaged in the generation and/or transmission of electric

power which has actual, direct and exclusive use thereof, is exempt from RPT.

The case is now pending before the LBAA.

g. Interim Interconnection Agreement

FGP has an agreement with NPC and Meralco whereby NPC will be

responsible for the delivery and transmission of all energy and capacity from

FGP’s power plant to Meralco’s point of receipt.

Page 66: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

64

h. Land Titling Cases

As of December 31, 2004, there are a number of land titling cases filed by

FGP and FGPC. Management believes the resolution of these cases will not

materially affect the consolidated financial statements.

i. Contingencies

FGPC

FGPC was assessed by the Bureau of Internal Revenue (BIR) on July 19,

2004 for deficiency income tax for taxable years 2001 and 2000. FGPC filed

its Protest Letter to the BIR on October 5, 2004. Management believes that

the resolution of this assessment will not materially affect First Gen Group’s

consolidated financial statements.

FGHC

FGHC has a pending claim for refund and protest of a local tax assessment

as of December 31, 2004. Thereafter, FGHC initiated the appropriate

legal action, challenging the validity of the assessment. Management,

in consultation with its legal counsel, believes that these matters will be

resolved in FGHC’s favor. Accordingly, no provision has been set up in the

consolidated financial statements.

BPPC

There are on-going cases involving NPC’s petition for declaration of BPPC’s

machinery and equipment as exempt from real property tax and a case filed

by BPPC against the local government of La Union in order to prevent the

latter from levying on BPPC’s machinery and equipment in connection with

a real property tax assessment made thereon from 1995 to 1999. Based on

the revised assessment issued by the Municipal Assessor of the Municipality

of Bauang, La Union on July 15, 2003, the maximum tax liability for the

period 1995 to 2003 is about P775, based on the maximum 80% assessment

level imposable on privately-owned entities and a tax rate of 2%. In addition,

interest on the unpaid amounts (2% per month not exceeding 36 months) has

reached a total amount of P489. The Project Agreement between the BPPC

and NPC specifically provides that NPC shall be responsible for the payment

of all real estate taxes and assessments in respect of the site and machinery

and equipment of the power plant complex.

An assessment for unpaid franchise taxes, including surcharges and penalties,

for period 2000 to 2003 from the local government of La Union was also

made to BPPC amounting to P32. BPPC has contested the assessment on the

ground that BPPC is not a public utility which is required by law to obtain

a legislative franchise before operating and is subject to franchise taxes. On

the other hand, BPPC believes that the Project Agreement with NPC allows

BPPC to claim from NPC any new imposition, including taxes, incurred

by BPPC not originally contemplated when it entered into the Project

Agreement.

j. Lease Commitments

The First Gen Group has a non-cancelable lease agreement with INAEC

Development Corporation (INAEC) on its occupied office space. The term

of the lease is for a period of five (5) years retroactive to August 1, 2003

or upon occupancy of the leased premises, whichever is earlier, and shall

automatically expire on July 31, 2007. The lease agreement includes a clause

to enable upward revision of the rental charges at a rate agreed-upon by the

Company and INAEC at the end of each year.

FGPC has a non-cancelable annual offshore lease agreement with the

Department of Environment and Natural Resources (DENR) for the lease

of a parcel of land in Sta. Rita, Batangas where the power plant complex is

located. The term of the lease is for a period of 25 years starting May 26,

1999 for a yearly rental of P3 and renewable for another 25 years at the end

of the term. The land will be appraised every 10 years and the annual rental

after every appraisal shall not be less than 3% of the appraised value of the

land plus 1% of the value of the improvements, provided that such annual

rental cannot be less than P3.

Future minimum rental payments under the non-cancelable operating leases

with INAEC and the DENR are as follows:

Amount

Within one year P18

After one year but not more than five years 36

After five years 38

P92

22. Foreign Currency-Denominated Monetary Items

The First Gen Group’s net foreign currency-denominated monetary liabilities

amounted to US$586 as of December 31, 2004 with peso equivalent of P33,009

computed using the exchange rate of P56.341 to US$1.00; and US$660 as of

December 31, 2003 with peso equivalent of P36,711 computed using the exchange

rate of P55.586 to US$1.00.

Page 67: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

65

23. Other Matters

a. Electric Power Industry Reform Act (EPIRA)

Republic Act No. 9136, otherwise known as the EPIRA, and the covering

Implementing Rules and Regulations (IRR) provides for significant changes

in the power sector, which include among others: the unbundling of the

generation, transmission, distribution, and supply and other disposable assets

of a company, including its contracts with independent power producers and

electricity rates; creation of a Wholesale Electricity Spot Market (WESM);

and open and nondiscriminatory access to transmission and distribution

systems.

EPIRA requires public listing of not less than 15% of common shares of

generation and distribution companies within five years from the effectivity

of the EPIRA. However, generation and distribution companies whose

respective holding companies are already listed in the Philippine Stock

Exchange are deemed in compliance. Pursuant to EPIRA’s objective of

lowering electricity rates to end-users, sales of generated power by generation

companies have been classified as value added tax zero-rated.

EPIRA also provides several restrictions on the generation sector: (i) absolute

cross-ownership restriction between generation and transmission companies;

(ii) cap on the concentration of ownership to 30% of a grid’s installed

generating capacity and/or 25% of the national installed generating capacity;

and (iii) cap amounting to 50% of total demand of a distribution utility on its

purchases from associated generation companies, except for contracts entered

into prior to the effectivity of the EPIRA.

Pursuant to the EPIRA’s mandate and that of its IRRs, FGP, FGPC nd BPPC

have filed its application for the issuance of a Certificate of Compliance

(COC) for the operation of its power plant. On June 4, 2003 and November

5, 2003, ERC issued the COC of BPPC and FGPC, respectively, which is

required for all generation companies under the EPIRA. FGPC and BPPC’s

COCs will be effective for a period of 5 years subject to further renewal. FGP

does not expect any adverse action on its applications as under the IRR of the

EPIRA, an applicant operating an existing generation facility shall be issued a

COC by the ERC upon making a complete submission of the requirements.

Based on FGP, FGPC and BPPC’s assessments, they are in the process of

complying with the provisions of the EPIRA and its IRR.

b. Clean Air Act

On November 25, 2000, the IRR of the Clean Air Act took effect. The IRR

contain provisions that have an impact on the industry as a whole, and on

the Parent Company’s subsidiaries and investee in particular, that need to

be complied with within 44 months (or July 2004) from the effectivity date,

subject to approval by the DENR. The power plants of FGP and FGPC use

natural gas as fuel and have emissions that are way below the limits set in the

National Emission Standards for Sources Specific Air Pollution and Ambient

Air Quality Standards. Based on FGP and FGPC’s initial assessments of

their power plants’ existing facilities, they believe that they comply with the

applicable provisions of the IRR of the Clean Air Act. On the other hand,

BPPC believes that the Project Agreement specifically provides that it is not

contractually obligated to bear the financial cost of complying with the new

law. The Department of Energy, NPC and DENR are still negotiating the

terms of compliance to the Clean Air Act of all NPC IPPs.

c. Reclassification of Accounts

The following accounts in the December 31, 2003 consolidated financial

statements have been reclassified to conform with the 2004 consolidated

financial statements presentation:

Nature

Reclassification of input value added taxes

from current assets to noncurrent assets P2,094

Reclassification of restricted cash deposits

from current assets to noncurrent assets 1,617

As mentioned in Note 23a, the sale of generated power is subject to zero-

rated value added tax under the EPIRA. The balance of input value added

taxes will be converted to tax credits through a tax refund process which

management estimates to be over one year. Accordingly, the “Input value

added taxes” account, which was previously classified as part of current

assets, has been reclassified as part of noncurrent assets in 2004 and 2003.

The expected release of the restricted cash deposits depends on the resolution

of the land titling cases filed by FGP and FGPC (see Note 21h) which

management estimates to be over one year. Accordingly, the restricted cash

deposits, which were previously classified as part of “Other current assets”

account, have been reclassified as part of “Other noncurrent assets” account

in 2004 and 2003.

Page 68: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Fir

st G

en 2

004

Ann

ual R

epor

t

66

d. Newly Acquired/Incorporated Subsidiaries

AlliedGen Power Corp. (APC)/First Natgas Power Corporation (FNPC)

On January 31, 2005, the BOD of the Parent Company approved a resolution

to establish, formally organize and to register with the SEC a wholly owned

subsidiary to be known as AlliedGen Power Corp. (APC). APC, a holding

company for a planned project, will have an authorized capital stock of

P100. Of the total authorized capital stock, P25 will be allocated out of the

Company’s funds for the subscription of shares in APC.

On February 14, 2005, and March 10, 2005, APC and FNPC, the operating

company for the planned project of APC, was incorporated in the Philippines.

FG Bukidnon Power Corporation (FG Bukidnon)

The Parent Company participated and won the bid for the 1.6 megawatt

Agusan Mini-hydro Power Plant (Agusan) conducted by the Power Sector

Assets and Liabilities Management Corporation (PSALM) on June 4, 2004

in connection with the privatization of NPC’s assets. On July 5, 2004, the

Parent Company entered into an Asset Purchase Agreement (APA) with

PSALM for the purchase of Agusan for a total consideration of US$1.5. On

March 29, 2005, all the closing conditions for the execution of the APA were

satisfied and the purchase was effected.

FG Bukidnon, a company incorporated by FGRI on February 9, 2005, will

take over the operations and maintenance of Agusan in 2005.

Page 69: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring

Corporate Directory

FIRST GEN CORPORATION

3rd Floor, Benpres Building

Exchange Road cor. Meralco Avenue, Pasig City

Philippines 1600

Trunkline No. (632) 449-6400

Fax No. (632) 910-4846

FIRST GAS POWER CORP.

Corporate Office

3rd Floor Benpres Building

Exchange Road cor. Meralco Avenue, Pasig City

Philippines 1600

Tel. No. (632) 449-6286

Fax No. (632) 635-2322

Plant Site

Sta. Rita, Batangas City

Batangas, Philippines 4200

Tel. No. (6343) 723-9138

Fax No. (6343) 723-9048

FGP CORP.

3rd Floor Benpres Building

Exchange Road cor. Meralco Avenue, Pasig City

Philippines 1600

Tel. No. (632) 449-6286

Fax No. (632) 910-0253

Plant Site

Corporate Office

Sta. Rita, Batangas City

Batangas, Philippines 4200

Tel. No. (6343) 723-9142

Fax No. (6343) 723-9048

FIRST PRIVATE POWER CORP.

3rd Floor Benpres Building

Exchange Road cor. Meralco Avenue, Pasig City,

Philippines 1600

Tel. No. (632) 449-6400

Fax No. (632) 637-1969

BAUANG PRIVATE POWER CORP.

Corporate Office

3rd Floor Benpres Building

Exchange Road cor. Meralco Avenue, Pasig City

Philippines 1600

Tel. No. (632) 449-6403

Fax No. (632) 637-1969

Plant Site

Km. 255, Ba. Payocpoc Sur

Bauang, La Union

Philippines

Tel. No. (079) 705-2077

Fax No. (632) 637-1967

FIRST GEN RENEWABLES, INC.

3rd Floor, Benpres Building

Exchange Road cor. Meralco Avenue, Pasig City

Philippines 1600

Tel. No. (632) 631-6458

Fax No. (632) 631-3103

Independent Public Accountants

SYCIP, GORRES, VELAYO & CO.

SGV Building

6760 Ayala Avenue

Makati City, Philippines 1226

Tel. No. (632) 891-0307

Fir

st G

en 2

004

Ann

ual R

epor

t

Page 70: Our Vision - First Gen...2005/03/15  · We are now on the 3rd year since the Electric Power Industry Reform Act of 2001 (EPIRA) was passed into law. EPIRA will result in the restructuring