Alsons Consolidated Resources Stead Fast For Mindanao

Investor Information

To our valued shareholders,

I am proud to report to you your company's performance for the year 2016. The period that passed was another milestone year for your company, as it saw the official start of operations for the first of two 105MW sections of the circulating fluidized-bed coal-fired power plant of your subsidiary company, Sarangani Energy Corporation (SEC) in April 2016; and the full expiration of all of ACR's Energy Conversion Agreements (ECAs) with the national government.

The year that passed was a challenging year for ACR due to the strong performance of the US Dollar against the Philippine Peso. This affected the pricing index for our energy revenues as well as some direct costs in our operations. While there was some erosion in the gains your company acquired for the year, we remain confident that our long term prospects and commercial viability in our chosen market remains robust.

The completed SEC Section 1 is the tangible outcome of years of hard work, planning, and implementation of dedicated individuals working towards a common goal. Although the realization of this project faced some concrete challenges, your company understood the importance of a project such as this, and diligently addressed each issue, keeping in mind to actively look for equitable solutions. In the end, your company was able to deliver a power plant that is in line with strict international standards, accepted by the community, and capable of producing energy in the safest, most reliable, and affordable way possible.

This project increased the attributable power capacity of your company to 363MW, a considerable 41% growth in capacity from the 258MW total contributed by the diesel plants of Western Mindanao Power Corporation (WMPC), Southern Philippines Power Corporation (SPPC), and Mapalad Power Corporation (MPC) in previous years.

This is consistent with ACR's medium-term target to raise our total attributable capacity to 608MW by 2023, ready to provide around 25% of Mindanao's projected peak power demand for that year. To further achieve this, your company is currently working on the remaining ACR Key Projects we have set to implement. Namely, the construction and operation of SEC Section 2, San Ramon Power, Inc. (SRPI), Siguil Hydro Power, Inc. (SHPI), and a solar energy facility in Sarangani Province.

These upcoming projects are going to compliment your company's existing power generating assets, creating an inventory of projects that are set to further cement the identity of your company as a major player in the growing Mindanao energy market. Upon completion, these projects will contribute a varied mix of energy sources to your company's portfolio of available capacity, which comes with some inherent advantages and marketability, providing ACR with a unique leverage versus competitors in our traditional markets.

Financial Performance

The impact of SEC Section 1 start of commercial operations to your company's financials for 2016 was noteworthy, increasing consolidated revenues by 42% from Php5.02 billion last year, to Php7.11 billion within an 8-month period for the year. This jump was accompanied by a corresponding increase in cost of services of 52%, from Php3.07 billion in 2015 to Php4.68 billion in 2016. These also include additional fuel costs now being recorded by WMPC and SPPC upon the expiration of their ECAs with the national government. Nevertheless, gross profit improved 24% to Php2.42 billion for this reporting period.
Even with a 22% increase in general and administrative expenses for the year, operating profit improved 25% in 2016 to Php1.89 billion. As a measure of operating performance, your company closely looks at our earnings before interest, taxes, depreciation and amortization (EBITDA), which jumped 52% from 2015 value of Php1.78 billion to Php2.69 billion in 2016.

With the interest expense incurred on the SEC Section 1 project loan now capitalized as part of project cost and fully recognized as an expense, finance charges increased by 167% from Php324 million to Php865 million for the year. At the same time, your company decided to recognize an impairment loss of Php245 million on goodwill, resulting in higher net other charges for 2016 at Php155 million.

All of these activities resulted in a consolidated net income for your company of Php636 million, a slight 8% dip from last year's Php691 million. Income attributable to Parent, however, recorded an improvement of 69%, from Php188 million in 2015 to Php317 million in 2016. Your company also posted strong earnings per share, which increased from Php0.03 last year to Php0.05 for this period.

Charged with Oppotunities

Looking ahead, your company's outlook for the short and medium term is charged with opportunities. As we are starting to see the returns of our investment from the operation of SEC Section 1, we are even more adamant in expanding our total generating capacity through the implementation of our remaining ACR Key Projects. Momentum is on our side as the next two projects are virtually identical to SEC Section 1, optimistically resulting in a shorter and more efficient construction period.

The second 105MW section of SEC (SEC Section 2) is already in the early stages of construction; SRPI in Zamboanga City and SHPI in Sarangani are both in the final stages of project development, with potential EPC contractors set to submit their bids by the 2nd half of 2017. The solar energy project is also in development, bringing in 15MW of renewable energy to your company's energy mix.

On the other hand, securing the continued commercial operation of the three operating diesel generating plants and SEC Section 1 are vital to ensure your company's financial performance in the short term is able to support the remaining ACR Key Projects in the medium and long term.

Your company took stock of the existing organization and assessed how it could be improved and maximized in order to contribute towards reaching our planned goals and vision, that of a company whose primary business is to provide energy and power to Mindanao. We have live options for growth and we are studying the best course to take and preparing for that certain eventuality.

Changing Business Landscape

Your company's portfolio of assets have changed considerably in the year that passed. Our three diesel generating units, WMPC, SPPC, and MPC, all now serve as merchant plants for the Mindanao grid; and our first coal-fired plant, SEC Section 1, has started commercial operations. This brought in new and different working parameters to your company and initiated a more determined management review of procedures, functions, planning, and budget.

The landscape itself where we operate in is changing. More competitors are increasingly entering our traditional markets. Your company is maintaining open communication lines and closely monitoring and safeguarding the power service agreements (PSAs) between our generating assets and customers. It has never been more important for your company to develop value-added services to our customers, grounded on the specific set of generating assets under our portfolio.

I have the conviction that your company is well poised to face these changes in the market, adapting and improving operations in the process. These changes will push us to become more efficient in our procedures, more thorough in our preparations, and more appreciative of the support of you our partners and shareholders.

What will remain constant is your company's Corporate Social Responsibility (CSR) program's steadfast support of education and the environment. We believe in creating self-reliant and empowered communities, with equitable access to quality education and a commitment to nurture a sustainable environment, as a catalyst for a peaceful and progressive Mindanao.

Thank you for your unwavering support through the years. Now that we are reaping some early harvest of our hard work, may it serve as encouragement for us to continue working hard towards our next goals.

Chairman & President