Dear shareholders,

I recall when we at First Philippine Holdings Corporation (FPH) declared our decision to forego any investment in coal-fired power years ago. At the time, we were an outlier or an outsider in our field because the growth in the country’s energy supply was likely to be powered by the perceived low cost of electricity supply coming from coal even when players understood its impact on the environment and human health. Growth in coal was enabled by supporting policies and incentives pursued by established power producers as well as new entrants attracted to make large capital investments required by the industry in exchange for reasonable and predictable long-term returns.

The FPH Group’s thoughtful deliberation to refrain from coal was highly influenced by Typhoon Haiyan (or Super Typhoon Yolanda) in November 2013 with over 6,300 casualties with wind speeds that reached 315 kph that caused significant physical and costly damage to our geothermal facilities in Leyte. Our decision was further concretized in the wake of the 2016 United Nations Climate Change Conference—or COP21—when energy industry players were still adjusting to the reality of the climate crisis and the use of fossil fuels was very much the norm to drive economic growth.

The writing on the wall couldn’t be any clearer. The global energy future would firmly shift in favor of clean, low-carbon sources and that renewable energy would somehow need to eventually dominate new supply of power enabled by the need for massive funding support. For us at FPH, this was an opportunity to pivot the energy landscape in the Philippines to favor renewable energy and stay ahead of competition. It was reinforced by the fact that our country has limited locally available fossil fuel reserves like coal, oil, and natural gas.

Much has changed since. A recent study conducted by the Pew Research Center showed that overall, more people from developed countries were highly concerned about the personal effects of climate change in 2021 as compared to 2015. As the global attitude towards the climate crisis gained increasing awareness, so did the plans of how key players responded.

Come 2021, the international community moved to recalibrate the Paris Agreement’s initial goal of limiting global warming to below 2 degrees Celsius, with 1.5 degrees as an aspirational target. The Glasgow Climate Pact signed during COP26 now set the bar for reaching net zero by 2050 and pushed for the need to limit global warming to below 1.5 degrees Celsius.

The energy industry gained additional pressure to act on the climate crisis with the Pact’s goal to end the use of coal—something we at FPH avowed to years prior in 2016. 

While the call to decarbonize is a tall order for developing countries like the Philippines, we have already been experiencing the catastrophic effects of a damaged planet, like Super Typhoons Yolanda in 2013 and Odette in December 2021, which will worsen unless we undergo genuine behavioral change. This is supported by the fact that the Philippines is the 4th most affected by climate change in the last twenty years (2000-2019) in the 2021 Global Climate Risk Index.

The energy sector of the Philippines contributes up to 47 percent of the country’s greenhouse gas (GHG) emissions, setting expectations for an immediate response and scaling up in terms of climate action. Understandably, our economy and, by definition, our carbon emissions grew through the years from new fossil fuel-based capacity that resulted in an ever increasing reliance on imported coal and maxing out the potential of locally available natural gas from Malampaya.

There are, however, the makings of a decarbonization pathway on the domestic front.

In 2020, the Department of Energy revised its Philippine Energy Plan (PEP) and officially declared a moratorium on the construction of new coal plants and promoted a future with more renewable energy which is compatible with the Philippines’ Nationally Determined Contribution (NDC) goal. Specifically, the PEP sets a target to increase the share of renewable energy in the energy mix to 35 percent by 2030 and subsequently, increase that further to 50 percent by 2040. This is certainly moving forward in the right direction.

In April 2021, President Rodrigo Duterte signed the Philippines’ Nationally Determined Contribution as part of the country’s commitment to the Paris Agreement. Through the NDC, the country committed to reduce its GHG emissions by 75 percent by 2030 contingent upon the support of climate finance, technologies, and capacity development. This lofty goal will need to be achieved in less than a decade from now.

As the Philippines and other countries around the world race to reach net zero, one cannot help but feel the gravity of this crisis—a crisis that climate scientists and environmental experts have long been warning us about. Many (but not all) countries now feel the full weight of mankind’s responsibility to avert catastrophe with the urgency to carry out decarbonization plans for the benefit of future generations.

DESCENT FROM CARBON PEAK TO CARBON NEUTRALITY

The world has now reached the peak or “summit” of its carbon emissions. Since 1998, global GHG emissions have been on the rise, accompanied, of course, by the warmth of the planet, unpredictable weather patterns and geological hazards of increasing intensity. 

Humanity stands at the precipice of greenhouse gases that have grown to mountainous proportions and it is crucial to human survival that we find our way back down.

After you climb a mountain, the manner of descending is sure to be different and at times more challenging. The same applies to the decarbonization pathway that the Philippines is to follow towards net zero by 2050. Whatever actions and trends have moved our economy and energy industry forward must change to favor carbon-neutral industrialization.

One key difference in the landscape of the past two years that changed the way we descend from the summit is the COVID-19 pandemic. It caused the country’s first major recession since the 1990s and will greatly affect the path to economic recovery the Philippines is to take. At the same time, it turned the public eye towards the far-reaching consequences that a climate catastrophe will have on their personal lives.

FPH fared well amid the pandemic, avoiding the increased prices for coal that the majority of energy players suffered. On an operational level, we continued to protect our people through our COVID-19 programs and Shelter-in-Place accommodations.

The general message is that these issues will continue to evolve and disrupt the way we live until we ourselves decide to change the way we do things for the better prepared with resilience in mind.

This serves as both a challenge and opportunity for FPH. There is a lot of work to be done in achieving decarbonization and regeneration as we search for solutions that are bespoke to the Philippine context.

First, we must consider coal’s current energy share. While there has been progress with the moratorium on new coal-fired plants, coal continues to dominate with a share of 56 percent in the Philippines’ power generation mix as of 2020. This is followed by natural gas at nearly 27 percent. Malampaya, the country’s largest gas field, is expected to run out of its reserves in the next five years.

Second, we continue to need additional investments in new supply of electricity to march forward as a developing economy but our archipelago is more than ever before frequented by more damaging natural calamities that intensify as climate change worsens.

This is notably different from the geography of landlocked nations whose power grids do not often cross the sea. The accessibility and availability of electricity through interconnected power lines will be costly and be a key factor as power disruptions occur due to intensifying natural calamities. Here, there is the challenge of weaning off of fossil fuels and an opportunity for investments in renewable energy sources to satisfy the demand for electricity.

Third, decarbonization actually implies increased electrification especially when it makes more and more sense for transport and other key industrial activities to shift to electricity.

Fortunately, the Philippine plans for decarbonization serve as favorable winds behind our sails in contrast to the head winds and resistance we used to face as clean energy becomes a shared solution that most stakeholders today agree with. The industry projections that are described in the PEP are clearly in favor of a growing renewable energy sector, with a projected 50 percent increase by 2040.

THE PATH TO REGENERATION AND DECARBONIZATION

Recrafting FPH’s mission statement in 2020 was a declaration of our business’ resolve in dealing with the climate emergency. We focus on decarbonization because it is key to regeneration. We need to urgently reduce carbon emissions for the planet to recover so that it can deliver nature’s services to both business and communities.

In 2021, as we marked FPH’s 60th year of operations, we committed to continue this mission as we prepare ourselves to descend from the peak with ambition and urgency. The Philippine decarbonization plans will require massive efforts on the part of the public and private sectors. The rate of descent to meet these goals must essentially be much faster given our current state. FPH’s chosen path, applied across all of our businesses, guides our response.

Given our country’s heavy reliance on coal, there is a need for a cleaner fuel as well as a broad spectrum of variable renewable energy—of which, our energy businesses will lead the transition.

First Gen Corporation (First Gen) provides clean energy through the grid to its markets. Our natural gas plants facilitate the penetration of variable renewable energy by balancing their intermittency. This role of natural gas as a transition fuel will help smoothen the country’s transition to renewable energy as prioritized by the PEP.

First Philec Inc. (First Philec), our energy solutions subsidiary, supports low-carbon energy further by providing systems and products that reduce energy losses, increase asset life, and build digital infrastructure that enables reliable power connection directly to customers and lead to a low-carbon future.

But efforts to decarbonize are not confined to the energy sector alone. A broad range of other human activity can be attributed to climate change. Therefore, the path to decarbonization should also address other industries and segments.

Living and commercial spaces, as the settings of most of our daily activities, have the potential to foster practices that benefit communities and the environment. On the other hand, industrial spaces can elevate the experiences of its locators and in turn, the customers they cater to. The goal of our real estate arm is to tap into this potential by promoting spaces that are inclusive and innovative.

Rockwell Land Corporation (Rockwell Land), mostly known for its vertical communities, is now also exploring horizontal developments. This caters to the market’s growing demand for residential lots and fosters more independent living, decongesting the metro and building communities in emerging cities.

Our industrial real estate arm, First Philippine Industrial Park (FPIP), attracts foreign investments and operations to the country, providing livelihood opportunities to locals and growing the trust in our capabilities as a manufacturing hub.

Human life should also be protected by resilient structures that benefit decarbonization by enhancing efficiency, mobility, and accessibility. Our construction business contributes to this by building to support the government and developing key infrastructures across the country.

First Balfour’s public works projects, such as the Cebu-Cordova Link Expressway (CCLEX), aims to reduce traffic, while water conveyance infrastructure such as the Novaliches-Balara Aqueduct 4 (NBAQ4) project connecting the La Mesa Reservoir to the Balara Filtration System through an 8-kilometer tunnel allows for greater consumer access to basic needs.

FINANCIAL PERFORMANCE

FPH closed 2021 with a consolidated attributable Recurring Net Income (RNI) of PHP10.1 billion, up by 6.9% from last year. This, as mentioned, was primarily driven by the recovery and significant growth in the revenue streams of our major operating subsidiaries whose operations picked up as the economy reopened and community quarantine restrictions eased.

Real estate, construction, and energy solutions were our main drivers of growth for the year. The respective contributions of all our business segments are as follows:

•  First Gen’s attributable RNI remained flat at PHP12.4 billion

     • The Avion plant reported stronger income contribution in 2021 on the back of higher electricity sales generated from its Ancillary Services Procurement Agreement (ASPA) with the National Grid Corporation of the Philippines (NGCP). Likewise, the Santa Rita and San Lorenzo plants registered an increase in earnings following reduced finance costs from lower interest rates and lower income tax rates after the effectivity of the CREATE Law.

     •  Improvements in the aforementioned plants were tempered by the weaker results of the San Gabriel plant which experienced curtailment of natural gas supply resulting in higher generation costs from higher replacement power purchases further aggravated by the expiration of its income tax holiday incentive.

     •  EDC reported a decline in earnings primarily due to steam supply issues and unplanned outages during the year.

•  First Philec posted a record-breaking net income of PHP495.2 million in 2021, a significant 50.4% growth from the previous year. This was primarily driven by the increase in sales volume across most of the market segments it serves.

•  Net income attributable to Rockwell Land climbed by 54.6%, from 2020’s PHP1.1 billion to PHP1.7 billion in 2021, mainly reflecting the upturn of revenues from the higher sales bookings and construction completion of residential development projects. Rockwell Land likewise recognized revenues from its new projects, namely Arton, Aruga Mactan, and Rockwell South. The topline growth was further supplemented by lower interest charges and income taxes.

•  FPIP’s net income improved by PHP11.8 million or 10.5% to PHP123.8 million from higher Ready Built Factory (RBF) leasing and water and park revenues. Despite the pandemic, FPIP maintained an average RBF occupancy rate of 94% and successfully implemented a water tariff adjustment effective August 2021.

•  First Balfour and ThermaPrime’s annual combined earnings for 2021 reached a record-high of PHP462.7 million, a significant jump of PHP413.1 million from last year’s combined bottomline of PHP49.6 million driven by the recovery of revenues from construction projects and drilling activities.

     •  First Balfour registered a significant increase of PHP311.3 million in net income following higher revenues and improved margins recognized from its new construction contracts with EDC and First Gen, as well as its ongoing projects including the near-completed CCLEX.

     •  ThermaPrime posted a PHP101.8 million improvement in net income attributable to the resumption of rig operations compared to its standby status in 2020.

FORGING ON IN A CHANGING WORLD

Reflecting on the past 25 years since I joined the company, it is easy to say that much has been accomplished and changed for both FPH and the world we operate in. We have nurtured strongly committed leadership, management and support teams in the parent and subsidiaries that have: (1) built the most impressive portfolio of clean, low-carbon, and renewable energy power assets; (2) built highly sought-after curated livable and job-centered communities; (3) built key infrastructure like roads, bridges, tunnels, power stations, water treatment plants, and factories necessary for nation building; (4) manufacture electrical components necessary for resilient power distribution to electricity consumers; and (5) see opportunities to nurture new businesses in best-in-class affordable healthcare and education.

However, one of the most obvious changes we have witnessed through the years is of course the damage that has been dealt to the planet due to irresponsible human activity. We spent the past years studying the destructive impact of the climate crisis on people and communities, on infrastructure, on businesses and the economy in order to understand our purpose as a company until we finally cemented this in our mission statement.

We found meaning in collaboration through the concerted efforts of states, scientists, environmentalists, and international organizations who came together to put a name to this disaster and devised a plan to mitigate it. It was within this grand, global movement that we decided on our niche and the role our company would play.

At a glance, the goal of regeneration and decarbonization seems to be a lofty one—but the combination of purpose and ambition has to translate to engagement and passion to give rise to the best of our organization’s capabilities. This requires us to face up and confront the brutal facts with humility and honesty. This requires us to have a deep belief in striving for continuous improvement rather than suffering from arrested development. This purpose and ambition is applicable to all our businesses in power  generation, energy solutions, real estate, construction, as well as health and education.

As we celebrate our 60th anniversary, we at FPH will continue to innovate as we navigate a changing world. We continue to identify significant opportunities across the industries we are involved in as paradigms shift beyond sustainability and look further into regeneration.

I find it akin to industries at their sunrise phase with its constant flow of new opportunities. The industrialization and development that popularized coal use has, over the  course of decades, begun to take a turn towards renewable energy and away from fossil fuels.

Initially, First Gen was solely focused on delivering electricity from indigenous energy sources. However, the near-depletion of the Malampaya gas field coupled with the  importance of natural gas as a transition fuel has influenced our pursuit of offshore liquefied natural gas (LNG) terminal projects to import natural gas which we believe plays an important role in the energy transition.

On the renewables side, the installation cost of variable energy sources combined with battery storage and smarter infrastructure continues its downward trajectory.

For real estate, properties are now being planned and utilized in relation to climate change and emerging lifestyle trends. Rockwell, for example, is now focused on both  established major city centers like Metro Manila and Cebu as well as developing communities in emerging cities such as Bacolod, Lipa, and Angeles.

Lastly, for construction, we are experiencing a period that the national government has claimed to be the golden age of infrastructure. Supported by government programs, private developers like First Balfour continue to build roads, bridges, water treatment facilities, and even transportation systems.

Our recrafted mission of forging pathways towards decarbonization and regeneration is pivotal in how we see FPH’s businesses flourish in the future. It crystalizes our view  of playing more offense than defense. It enables our leadership and our management team to refine and elevate their ambition with exciting opportunities that are out there. It most certainly creates a positive outlook for the future. But it is an outlook that has to take into account that we are capable of capturing these opportunities for growth, but must do so with the elevated concern on its impact on the environment. In the next 29 years towards the big 2050 net zero goal, FPH will certainly play a leadership role in the country’s decarbonization pathway while building on our mission of regeneration as well.

For now, I am grateful for the progress we have made and the support we have received as we pursue our mission. I would like to thank our stakeholders: our consumers, employees, shareholders, and host communities, whose growth we wish to see alongside our own. Join us in this urgent journey to a decarbonized and regenerative future.

Francis Giles B. Puno                    

President and COO