Alsons Consolidated Resources Stead Fast For Mindanao

Investor Information

To our valued shareholders,

It was another year of milestones for your company in 2017. Your company marked the start of the year with a double milestone event that celebrated the formal Switch On Ceremony of Sarangani Energy Corporation's (SEC) Phase 1 of the 105MW Coal-fired Power Plant and simultaneously, the formal Groundbreaking for SEC's Phase 2, the second 105MW plant at the same site. No less than His Excellency, President Rodrigo R. Duterte led the proceedings for both ceremonies, while our partners in government, business, and the local community attended as a strong show of support for the project. This Double Celebration marked an important point in your company's medium term goals, and mirrors the current status of your Energy and Power business unit. On one hand, your company has a portfolio of existing and operational power generating assets located in key cities in Mindanao, and at the same time, new power projects are being developed with some construction already underway. The beginning of SEC Phase 2 construction highlights the work ahead for your company in completing all other Key Projects in the Energy and Power business segment of ACR.

Consolidating Resources

The year under review was the first full year of commercial operations for SEC Phase 1, having begun its operations in April 2016. This new unit generated revenues of Php4.17 billion or 64% of the total revenue for ACR for 2017. SEC Phase 1 performance in the coming years is forecasted to remain strong, having already secured the market for its capacity via long-term Power Sales Agreements (PSAs) with various distribution utilities. A similar strategy of securing PSAs has been implemented in the upcoming Key Projects, namely SEC Phase 2, San Ramon Power Inc. (SRPI), and Siguil Hydro Power Corporation (SHPC). The diesel power plants of Western Mindanao Power Corporation (WMPC), Southern Philippines Power Corporation (SPPC), and Mapalad Power Corporation (MPC) all have PSAs with various distribution utilities serving the island of Mindanao. The year under review saw a contraction of the diesel units' revenue by 26%, down to Php2.74 billion due to multiple factors ranging from the commercial decision of customers to sluggish action by regulatory agencies on needed approvals. This was a major challenge for the diesel operating subsidiaries which has required closer attention by your management. Indeed, plans have been studied and are being set in motion as countermeasures to these setbacks, with the goal of addressing each subsidiary unit's concerns to improve its business standing and profitability. Maintaining a robust portfolio of multiple key projects both in operation and under development is still considered to be the most suitable way to secure your company's medium term viability and minimize risks in the long term. Another means which your company employed to minimize future risk is to forge linkages with partners who are experts in their own field and leaders in their market. It is with this spirit that your company came into signing an agreement with Global Business Power (GBP), as equity partner in the Coal Unit holding subsidiary level, Alsons Thermal Energy Corporation (ATEC). This union combines GBP's technical competencies and strengths in the Visayas with your company's years of experience in Mindanao as its first independent power producer.

Financial Performance

The resulting financial performance of your company from the aforementioned developments for the year was a modest increase in core revenues at Php6.52 billion from last year's Php6.38 billion. It should be noted however, that the 2016 total revenues also includes a one-time gain related to the development of SEC Phase 1 amounting to Php719.1 million, which brings the total consolidated revenue reported in 2016 to Php7.11 billion. With this inclusion, consolidated revenues for 2017 ended up as 8% lower from the previous year. While cost of services declined 1% to Php4.61 billion from Php4.68 billion in 2016, gross profit also declined 20% from Php2.42 billion in 2016 to Php1.94 billion this year still due to 2016's extraordinary gain. General and administrative expenses in 2017 increased by 3% to Php544 million from Php531 million in 2016, while operating profit declined 26% to Php1.39 billion from Php1.89 billion as reported in the previous year. As a measure of operating performance, earnings before interest, taxes, depreciation and amortization (EBITDA) decreased slightly from Php2.69 billion to Php2.33 billion this year, still impacted by the one-time gain from SEC Phase 1. The interest expense incurred on the project loan to complete SEC Phase 1 was fully recognized as an expense after the project was completed and commenced operations. As such, finance charges increased to Php1.2 billion, 39% higher than the Php865 million incurred last year. Your company also realized a net other income of Php70 million for this year stemming from the divestment in Duta, Inc. All of these resulted in a consolidated net income of Php103 million, an 84% decline from last year's Php636 million. The income attributable to Parent posted a loss of Php21 million this year compared to the income of Php317 million in 2016 posting an earnings per share of (Php0.004) from Php0.050 last year.

Long Term Viability

Engaging in equity financing at the ATEC holding company level was a strategic decision engaged by your company in order to help secure its long term viability. The divestment might have diluted your company's direct ownership of the coal generating assets and sacrificed some short term profitability, but it opened your company to access to new capital for other projects under development and new markets with GBP as a partner. This ultimately, your company believes will result in higher returns in the long term. Your company is taking on this very forward-looking stance as it approaches another major milestone in the next reporting year. Namely, your company is celebrating its 25th Year Listing Anniversary with the Philippine Stock Exchange in 2018. The company that first listed its shares to trading those many years ago is a different company than what it is today. And undoubtedly, your company in the future will change from what we know and have today. It is management's responsibility to you our shareholders that your company retains its value and remains profitable. How it accomplishes that will depend on the careful planning of its management, the dedication of its workforce, and a clear direction from its leadership.

The Year Ahead

As you might have gathered, the year ahead will be as busy as ever for your company as it begins the next quarter century period of its publicly listed corporate life. Guided by a strong sense of mission, hopeful vision, and awareness of its responsibilities, I am hopeful that your company will endure and continue to succeed in the future. Your company's roots run deep in Mindanao. This is where your company is most familiar with and where we have focused to bridge the development gap in the most responsible manner as possible. However, your company has always been committed to providing the most opportunities where there is little or none, to create a path for which progress can come through. In all of this, your company is constantly aware of the weight of its responsibilities to the environment, to our communities, clients, and shareholders - a weight that we as a company will always be ready to take on. There is much work to be done, but let us remember to celebrate the many accomplishments that your company has achieved throughout its past and celebrate the opportunity to be able to accomplish so much more in the future. All this would not have been possible without your undiminished support, encouragement and cooperation. In the coming months, we will continue to count on these as we move to more exciting times.

Thank you and Mabuhay!

Chairman & President