Net Income Contribution to AEV (in Php millions)

Executing the Strategy

To thrive under today’s competitive business environment, companies must be armed with sound strategies that they can effectively execute with timely precision.

We, in the AEV Group believe we are well positioned to pursue further growth and success, backed as we are by clearly defined strategies that have served us remarkably well over the past decade. We have executed time-tested strategies that have ensured a consistently great bounty for us, especially in recent years.

Moving forward, we intend to increase our yield by growing our core businesses - power, banking, food, and land - to their maximum potential. We will also seek out major investment opportunities that build on our competencies. We too are working towards achieving the sustainability of our enterprise by aiming to strike the triple bottom line balance of People, Profit, and Planet.

Our teams are responsible for executing our strategies to achieve targeted results. We are proud of all our teams for their dedication and commitment to the enterprise. Their passion for better ways is stronger than ever. They continue to be driven: driven to lead, driven to excel, and driven to serve.

We know where we are headed, ready to take an exhilarating journey of more growth and expansion, driven by effective and sound strategies timely executed. Our execution of these strategies will be guided by the Aboitiz core values of integrity, innovation, responsibility and teamwork.

Report, which records the highlights of a rewarding year and reveals some of our plans for the future. This report signifies our unity as a business organization as we continue to carry out our mission to create long-term value for all our stakeholders.

At a Glance

Operating Revenues

2012

62,153

2011

54,426

2010

59,551
Cash Dividend Paid to Common

2012

11,332

2011

9,713

2010

2,208
EBITDA

2012

34,215

2011

32,846

2010

34,362
Cash and Cash Equivalents

2012

30,678

2011

23,392

2010

18.302
Net Income to Equity Holders of the Parent

2012

24.407
12,215

2011

21,608
11,332

2010

25,041
9,713

Dividends paid in succeeding years.

Total Assets

2012

163,272

2011

153,528

2010

134,557
Core Net Income

 

2012

23,702

2011

21,106

2010

24,428
Equity Attributable to Equity Holders of the Parent

2012

81,231

2011

68,558

2010

57,330
Market Capitalization

2012

271,900

2011

221,703

2010

228,853
Income Contribution Breakdown PER BUSINESS SEGMENT (in Php millions)
POWER

12

18,774

11

16,500

10

19,133
Equity Investment Breakdown PER BUSINESS SEGMENT (in Php millions)
POWER

12

62,506

11

52,452

10

43,883
BANKING

12

3,851

11

3,445

10

2,628
BANKING

12

25,931

11

22,147

10

17,757
FOOD

12

1,299

11

1,233

10

1,529
FOOD

12

3,767

11

3,259

10

2,412

Revenues

2012

81,0190

2011

71,997

2010

74.,551
Cash Dividend Paid to Common

2012

8,725

2011

8,725

2010

2,871
EBITDA

2012

40,816

2011

38,906

2010

40,030
Cash and Cash Equivalents

2012

33,731

2011

29,543

2010

26.097
Net Income to Equity Holders of the Parent

2012

23,929
11,044

2011

21,191
8,725

2010

21,865
8,725

Dividends paid in succeeding years.

Total Assets

2012

222,768

2011

200,992

2010

174,967
Core Net Income

 

2012

23,388

2011

20,835

2010

21,836
Equity Attributable to Equity Holders of the Parent

2012

91,552

2011

77,078

2010

64,313
Market Capitalization

2012

292,383

2011

221,703

2010

204,861

Our warm greetings to all of you!

This consolidated report of the AEV Group has been designed and written with you in mind. We encourage you to read it not only to enhance your knowledge of the Group but also to better appreciate our initiatives. You matter to us and we trust you will see our Group as an integral part of your future.

We will keep our reports short and will simply focus on the main events of 2012 and give concise outlooks for the future. Clarity is what drives trust the most. We will keep on working at improving the clarity of our messages to you.

This joint Chairmen’s message focuses on the larger picture and the softer, yet necessary, strategies starting from the very top - your Board of Directors.

Our country and our company are moving forward in many areas despite the lack of wind all over the world. The wind is beginning to blow a little stronger and that will help us into the future.

We are in the midst of a Philippine economy that is experiencing remarkable growth, posting a stellar 6.6% expansion in 2012, with a conservative forecast of 5-6% in 2013. Inflation in the past year has been kept in check at 3.3%, far below historical averages.

The Aquino administration’s fiscal strategy and policy reforms, backed by robust macroeconomic fundamentals, are making foreign investors take a renewed interest and a serious look at the country for possible investments. Local businessmen have also become even more bullish to take advantage of the growth trajectory.

All these positive developments have earned for the Philippines its first investment grade of BBB- with stable outlook from Fitch Ratings, a first in our history. Considered a seal of good housekeeping, an investment grade encourages investors to do big businesses in our country.

With the stronger peso and record-low interest rates, consumers are now more confident to spend, thus benefitting consumer-driven industries. We have a strong and vibrant stock market, and the debt and capital market has become more accessible. These are factors that make it attractive for companies to raise capital and further invest in the country.

The PSE index hit record highs in 2012, with investor participation sharply increasing at the stock market. AEV, AboitizPower and UnionBank stocks performed very well and we are inspired to see continued keen investor interest in our stocks.

The general business atmosphere has certainly become more competitive on the back of our healthy economic growth. A 6% GDP growth, although considered medium for an economy of our demographics and at our per capita level, is enough to bring us to US$3,000 per capita and to over a US$300 billion (bn) economy by 2014. We were at about US$100 bn a little over a decade ago.

Our economy today is being driven primarily by increased consumer spending and consumption boosted by government spending. The IT-BPO, real estate and housing industries are growing and significant gains are being made in tourism-related services. Growth is also supported by low and stable inflation, and increased inflows of overseas Filipinos’ remittances.

At these levels, the purchasing power of many millions of people living in the Philippines is unleashed and the world’s interest in us has accelerated.

Some fiscal restructuring in our country is now at play. The sin tax, particularly its indexing, is both structural and progressive. The RH bill puts de-facto economic facilitation in the hands of many of the poorer housewives of our economy. We hear nothing but good results about the government’s

Conditional Cash Transfer program as it seeks to narrow not just the poverty gaps of the weakest economically but also long-term educational gaps.

With bullishness, we await for the privatization of many major infrastructure projects, among them, the Mactan Cebu International Airport, the LRT 1, Cala X, the NLEx-SLEx Road Connector project, and of some of the remaining National Power Corporation (Napocor) assets. More privatization and other public-private partnerships (PPP) need to be done for our economy to continue growing and for increased and sustained confidence.

We, at Aboitiz, are preparing the structure of our enterprise as we expect GDP to double over the next seven to 10 years. That will bring us rapidly to a US$600-bn economy, and it will change things again. Our balance sheet is ready. Our cash flows could not be stronger. Our profits are healthy, so financially we are prepared.

Our enterprise has experienced exceptional growth in recent years, and as we continue to grow, we likewise strengthen our institutions and our governance. We adhere to sound business practices underpinned by fundamental Aboitiz values.

While we have come a long way in the area of governance, we believe that we can still enhance it.

Governance to us is abiding by a system of rules, practices and processes that guide us, and monitoring the actions of management and directors to ensure that we deliver what we promise into the future. And we are seriously committed to delivering on our promises.

Our efforts have not gone unnoticed. All our listed companies have earned their top rankings in corporate governance scorecards for public firms in the Philippines. The Asian region is taking notice too.

Brothers Ramon and Vidal Aboitiz led the Aboitiz enterprise through its evolution from a young shipping and trading firm to a highly diversified group of companies. Succeeding generations continue to pursue growth, executing strategies that are in step with the changing times.

In the recent Asian Excellence Recognition Awards 2013 given by Corporate Governance Asia, AEV was recognized as best in Investor Relations and Corporate Social Responsibility (CSR), while AboitizPower earned the award as best in environmental responsibility.

You will see the advances in our thinking about CSR later in this report. We want to evolve from simply being the neighbor of choice of our host communities to becoming a good example to others.

We not only want to build infrastructure but build intellectual capital as well. We will involve ourselves in projects that have long-term benefits in the lives of beneficiaries in the communities we serve.

We continue to strengthen our commitment to environmental responsibility and sustainability.

Aboitiz business units initiate or pursue projects guided by our five sustainability pillars: rejuvenate nature, re-use/recycle, reduce, utilize renewable energy and recharge communities.

This year, we are going to launch our re-articulated corporate values. These time-honored principles have shaped and guided our organization for over a century now. Values matter because they strengthen institutions and institutions make all the difference in the world.

Our values of integrity, innovation, responsibility and teamwork are lived day to day to the best of all our abilities. We need to better communicate these values so they are inculcated in all our team members across the Group.

Our Future

Moving forward and with everyone’s collective efforts, we will continue to work at making the AEV Group stronger, more successful, and a truly sustainable enterprise that will continue to thrive for future generations to come. We are an organization that is built to last, ready to pursue bountiful opportunities, with the flexibility to reshape ourselves for an even better strategic future.

We are excited about making even greater headway as we move the corporate headquarters of AEV and AboitizPower from Cebu to Manila. Being in the nation’s capital, we are confident this will have a significant positive impact on the future of our enterprise, allowing us to maximize opportunities for growth.

We are grateful to our team leaders and team members across the AEV Group for their valuable contributions, dedication and commitment to the organization. They continue to be driven: driven to lead, driven to excel, and driven to serve.

Our gratitude goes out to our customers, business partners, suppliers and communities for their continued partnership, trust and support.

The next message is that of our group CEO, Montxu, as many call him. He will talk to you about some strategic structural changes in investments like increased stakes, operational highlights and how far along we are in the execution of our strategy.

We wish you all a very prosperous Year of the Snake.

Jon and Endika shared with you our collective thoughts on the country’s political and economic highlights. They also discussed what we in the AEV Group are doing in the area of governance. For my part, I will touch on our 2012 operational highlights and some strategic initiatives that will hopefully give you a glimpse of our future.

2012 Results

Despite some challenges, 2012 turned out to be a good year for your company. The AEV Group ended the year with a consolidated net income of Php23.9 bn resulting to an earnings per share of Php4.33, 3% higher than in 2011. Our power business contributed the lion’s share equivalent to Php18.8 bn or 78%. Our banking units turned in Php3.9 bn or 16% of AEV’s total income. Our food subsidiary contributed the balance of Php1.3 bn.

Your investment in AEV yielded a Total Return to Shareholders (TRS) of Php80 bn, coming from the stock’s appreciation of 32% and the Php8.7 bn of cash dividends distributed in April 2013. This translates to a total return of 36% for the year.

We hope you are as pleased as we are with the performance of our businesses and your investment in AEV.

Executing our Strategy

The future of your company is clear in our minds. Your management has set in place strategic initiatives to optimize the potential of our core businesses. We will augment this growth by capitalizing on investment opportunities in other areas.

Over the past six years, we have made a lot of headway in our power business, especially on the generation side. The catalyst to this growth was the successful acquisition of power plants from the privatization of the Napocor. We expect the next chapter of our growth story to be the building of new capacity to support the economic growth that Jon and Endika talked about.

Together with our partners, AboitizPower will be investing about Php190 bn to build new power plants in the next five years bringing our attributable capacity to over 3,500 megawatts (MW), 50% more than what we have today. In 2012, we began the construction of the 300-MW Therma South, Inc. (TSI) baseload power plant in Davao; we expect it to be online by the first quarter of 2015.

We expect to commence the construction of two other base load facilities this year: a 600-MW plant in Subic and a 400-MW plant in Pagbilao, Quezon. In the planning board are another 300-MW power plant in Toledo, Cebu and the third 150-MW unit of the TSI facility in Davao. We are firming up soon the construction timelines of these facilities to ensure that they will be available to support the growth in electricity demand that we forecast for Visayas and Mindanao.

To augment these baseload facilities, we also expect to build another 100 MW of run-of-river hydros across the country, adding to our renewable energy mix.

Robust organic growth in electricity sales in our power distribution utilities is expected to accelerate with economic prosperity. We continue to invest in expanding the capacity of our distribution networks to be able to handle more electricity and improve efficiency.

As Open Access is implemented and the power of choice handed over to consumers, AboitizPower aims to expand its role and diversify its market base to include contestable customers.

As part of our strategic intent to build UnionBank into a great retail bank, AEV sold its holdings in CitySavings to UnionBank in early 2013. We remain very bullish in CitySavings’ business model and management team who have done a phenomenal job in expanding the bank. We believe their entry into the Luzon market will sustain the bank’s growth trajectory. Repositioning CitySavings under the UnionBank umbrella has numerous advantages and will ensure the effective execution of their plans.

Pilmico Foods continues to steadily build its flour, feed and swine businesses, to ensure that it retains its competitive advantage as a low-cost producer. New mooring facilities and dredging work completed in 2012 now allow Panamax vessels to dock at its Iligan port reducing freight costs. Expansion plans of Pilmico’s feed milling and swine-growing facilities are also ongoing.

As part of our efforts to augment earnings and the growth potential of our core businesses, we are looking at other investment opportunities that we believe can be built into sizeable businesses. With this in mind, we purchased from Aboitiz & Company 100% of AboitizLand for Php3.2 bn.

AboitizLand has an inventory of existing and potential projects, as well as access to a land bank that will ensure the continuity of development projects. It also has strong recurring income from its industrial estates.

Through AboitizLand, we formed a consortium with Ayala and ADC & HAS Airports, Inc. to bid for the rehabilitation and modernization project of the Mactan Cebu International Airport terminal. ADC & HAS has a proven track record of successfully developing and operating airports around the world.

The Mactan Airport project is our first venture in support of the government’s public-private partnership (PPP) program. It provides us with the opportunity to enter into a new business segment with significant growth potential that is crucial to developing the country’s transportation infrastructure and tourism potential.

In support of our sustainability philosophy, we are always on the lookout for businesses that are positive for the environment. We entered into a joint venture with UK company GazAsia Ltd. to build and operate plants to produce liquid bio methane fuel from organic waste to replace oil used in transportation.

GazAsia will provide the technical know-how, specialized equipment, and project management, while AEV will provide the core funding and marketing of the fuel. An estimated investment of US$150 million (mn) will be poured into building these facilities over the next five years.

Strengthening our Corporate Center

Alongside the growth of our businesses, we continue to strengthen our corporate center to support the Group’s operations. We remain cognizant of the need to clarify the corporate center’s role and how it adds value to the Group. We cannot be seen as overhead. Our role centers around: being the expert where it makes sense; instilling best practices and bringing everyone up to the same level of excellence; creating a culture of measuring and managing risk; protecting and enhancing the Aboitiz reputation; and attracting, retaining and optimizing our A-people.

Enterprise Risk Management is a major initiative across the Group and everyone is taking it seriously. We have also taken what we believe is a holistic approach to risk and reputation. With this in mind, we combined our Risk Management and Reputation teams under the same office, enforcing our philosophy that, together with our day-to-day activities and services, a key role of risk management is to build, protect and defend our reputation. We have also integrated strategy, budgeting, risk management, business continuity and audit under a single process.

Our passion for better ways continues to drive us to remain relevant and be ahead of the curve.

Riding on the back of a strong economy and a strong management team, we remain optimistic of the continued success and growth of the AEV Group. As we look to 2013 and the years ahead, what will differentiate the Group from other industry players is not just the soundness of our strategies, but the effectiveness and timeliness of our execution.

Our CFOs, Steve and Iker, will not only talk to you about our very encouraging numbers, but the strength of our balance sheet and cash flows that will ensure we have the financial resources to implement our ambitious expansion without putting your investment at risk.

Also coming up are more detailed operating reports from the CEOs of our business units as well as updates from the functional heads at our corporate center. We hope these reports reassure you of our efforts to continually strengthen our processes, systems and people.

In closing, I would like to thank all our stakeholders for your continued trust, confidence and partnership as we pursue our mission of creating value for all of you.

Montxu shared with you the highlights of AEV’s operating results in 2012, as well as our initiatives that are aligned with executing our business strategy. These strategic initiatives are aimed at ensuring an even more exciting future for the company.

For my part, I will talk about the AEV Group’s financial performance in 2012, and our readiness to pursue further growth.

I am pleased to report that AEV posted stellar results for the year ended December 2012, with a consolidated net income after tax of Php23.9 bn, yielding a Return on Equity of 31% and earnings per share of Php4.33.

All our major business segments showed better performances, contributing to a net income growth of 13% year on year. Stripping off the non-recurring items in 2012, which amounted to Php541 mn and originated mostly from our power generation business, AEV ended the year with a net income of Php23.4 bn, a 12% improvement from the prior year.

Cash flow remained healthy across the AEV group, with consolidated Earnings Before Interest Taxes Depreciation & Amortization (EBITDA) at Php40.8 bn, almost Php2 bn more than in 2011. Consequently, group cash balances rose to almost Php34 bn at yearend, even after the pre-payment of Php7.9 bn in long-term debt, which was done to minimize the negative carry on our debt versus the yields earned on our cash deposits.

However, at the subsidiary level, approximately Php11.7 bn of peso term financing was raised, at interest rates ranging between 5.6% and 6.5%, with tenors ranging between 5 and up to 12 years. Additional long-term financing amounting to US$43 mn was also arranged for a subsidiary, since its revenue stream is wholly denominated in that same currency.

Discussions were also initiated with various lenders for the project finance requirements of RP Energy, TSI, and the Therma Pagbilao 3 projects. Financial closure on these three transactions, which should exceed Php100 bn, is expected within 2013.

The group spent a total of Php18 bn in capital expenditures (capex), significantly lower than the amount projected at the beginning of the year. Delays in the start of construction of two large power plants in Luzon and Mindanao accounted for this lower spend.

For 2013, the group’s consolidated capex budget is Php59 bn, as we catch up on the delays experienced in 2012, and as a third large power plant is expected to break ground towards the end of this year. The major share of this group budget is allocated to the Power group. AEV’s beneficial share of this capex budget is approximately Php20 bn. The current low-interest-rate environment and the high degree of liquidity in the financial system offer us a great opportunity to pursue our various projects across the different businesses in the group.

Aligned with our overall risk management strategy and to mitigate interest rate and liquidity risk, our debt portfolio is structured such that, at the end of 2012, 94% of our total group debt is fixed-rate, while 95% is long-term. Our beneficial share of the group’s total long-term debt maturing over the period 2013 to 2015 amount to Php9.2 bn, Php8.3 bn and Php10.1 bn respectively, while at the parent company level, there are no long-term debt maturities in these three years.

Although we do have open positions in terms of foreign exchange, particularly in a couple of our power generation businesses, new power supply contracts have been signed, which will lessen this exposure considerably. We continue to hedge these open positions where it makes economic sense to do so. Annual Report 2012 17 AEV Group Capital Expenditures (billions)* * includes 100% of subsidiaries & affiliates YEAR 2009 2010 2011 2012 2013 projected CAPEX 46 16 25 18 59 Stephen Paradies Chief Financial Officer Aboitiz Equity Ventures, Inc. In April 2012, AEV paid out a total of Php8.7 bn in cash dividends (Php1.58 per share), equivalent to 41% of the prior year’s earnings and resulting in a dividend yield of 3.3%. Coupled with the appreciation in its stock price, the company yielded a Total Return to Shareholder (TRS) of 36%. Using the end of 2007 as the base, AEV has yielded an annual total return of 53% over the last five years. Market capitalization at yearend stood at Php292 bn. AEV’s gearing remained relatively low at yearend, with a net-debt-to-equity ratio of 0.45x, and a net-debt-to EBITDA of only 1.38x. Current ratio stood at 2.57:1.

In April 2012, AEV paid out a total of Php8.7 bn in cash dividends (Php1.58 per share), equivalent to 41% of the prior year’s earnings and resulting in a dividend yield of 3.3%. Coupled with the appreciation in its stock price, the company yielded a Total Return to Shareholder (TRS) of 36%. Using the end of 2007 as the base, AEV has yielded an annual total return of 53% over the last five years. Market capitalization at yearend stood at Php292 bn.

AEV’s gearing remained relatively low at yearend, with a net-debt-to-equity ratio of 0.45x, and a net-debt-to EBITDA of only 1.38x. Current ratio stood at 2.57:1.

In line with efforts to continuously promote transparency and good corporate governance, we strengthened our activities to reach out to the investing public. We conducted quarterly briefings on AEV’s performance as well as participated in select investor conferences around the globe.

We are pleased to note that both FinanceAsia and Corporate Governance Asia have recognized our efforts, citing AEV as one of the best in investor relations for the Philippines in 2012. We are also very encouraged about the positive sentiment shared by many foreign investment funds on the macro-economic fundamentals they see in the country today.

With the Philippines now having secured an investment grade rating, we are optimistic about the country’s prospects, and look forward to sustained economic growth, which should drive increasing demand for the different products and services AEV offers.

In the following report, Iker will talk about the good financial performance of AboitizPower, which remains the biggest contributor to AEV’s income. He will also reveal strategies that will further strengthen its balance sheet.

In closing, I wish to thank our many stakeholders - customers, suppliers, creditors, partners, and of course you, our shareholders - for your continued support and confidence in the entire Aboitiz team.

Earnings and Dividends (2009-2012)

2009

8,307
2,871

2010

21,865
8,725

2011

21,191
8,725

2012

23,929
11,044

Dividends Per Share (DPS) and Dividend Yield

2009

0.27
4.6%

2010

0.52
4.2%

2011

1.58
3.7%

2012

1.58
3.3%

2013

2.00
3.4%

Share Price Performance

2012

YTD
March 2013

AEV

32%

4%

PSE

33%

18%

AEV Stock Price (Peso/share)

HIGH

LOW

2012

54.80

40.20

2011

47.00

33.30

2010

40.50

9.00

Total Return to Shareholders (TRS)*

36%

1 year

 

53 %

5 years

* TRS is computed by combining share price appreciation and dividends paid to show total return to shareholder expressed as a compounded annual growth rate (CAGR)

Steve earlier reported to you AEV’s 2012 financial results, which had AboitizPower contributing the lion’s share of the Group’s total income.

I am pleased to report that AboitizPower’s top line net income in 2012 increased from Php21.6 bn to Php24.4 bn, a 13% increase from the previous year. Adjusted for nonrecurring gains and losses, core net income increased by 12%, from Php21.1 bn to Php23.7 bn.

Said non-recurring gains and losses were due to the following:

• Foreign exchange gains on foreign currency-denominated liabilities at both subsidiaries and associates

• Financing-related expenses arising from pre-payment of costly debt

• Write-off of deferred tax assets arising from expiring Net Operating Loss Carryover (NOLCO) and Minimum Corporate Income Tax (MCIT) at the parent and other holding companies

• Revenue-related reversals at a subsidiary due to tariff adjustments mandated by the Energy Regulatory Commission (ERC)

• Reimbursement to a steam supplier for prior period steam-related costs settled in 2012

Return on Equity on a top line coming in at 40% and on a recurring basis at 39% demonstrates the continued healthy returns that the company has committed to its shareholders.

The growth in profitability was led by the generation business, which registered a net income of Php22.8 bn versus the previous year’s Php20.4 bn. This increased profitability was mainly brought about by higher capacity sold factors, which, in turn was a result of the careful and steady implementation of AboitizPower’s long-term strategy of selling its capacity through well-structured de-risked bilateral contracts.

The distribution business likewise exhibited healthy growth in profitability from Php2.4 bn in 2011 to Php2.8 bn in 2012. This increase of 16% was brought on by increases in both margins earned and volume sold. Distribution margins increased from Php1.44 / kilowatthour (kWh) to Php1.60 / kWh on the back of the implementation of the expected regulator pre-approved tariff adjustments and the significant reduction of systems losses of VECO and Cotabato Light. Volume distributed increased by 6% from 3.7 bn kWh in 2011 to 3.9 bn kWh in 2012.

The strong performances by both the generation and distribution businesses resulted in strong cashflow that led to the early retirement of debt at the Parent level totaling Php7.8 bn. In addition, the AboitizPower Board decided to increase the dividend payout ratio this year from one-third to one-half of the previous year’s consolidated net income. This decision was made after a careful analysis of the company’s future cashflow and investment needs.

Given the above, the company’s balance sheet again exhibits the ability to support a higher dividend yield and fund the capex program over the next five years. AboitizPower, together with partners, will invest about Php190 bn to build new power plants over that period.

In 2013, the company will focus on raising the necessary capital to fund this expansion program that will increase our attributable capacity by 1,197 MW. Your finance team is in advanced talks with several banks in structuring groundbreaking debt structures that are designed to further increase equity returns by, not only taking advantage of the low interest rate environment, but stretching out debt tenors and carefully increasing leverage levels.

Debt to equity ratio improved from 1.19x to 0.97x in 2012 as equity increased from Php70.2 bn to Php82.1 bn in 2012 while total liabilities decreased from Php83.3 bn to Php80.5 bn.

The decrease in leverage managed to fund an increase in assets from Php153.5 bn to Php163.3 bn in 2012. This increase in assets was mainly brought on by investments into TSI for the 300-MW Davao Coal project and the increase in cash generated at both the parent and subsidiary levels.

The company is further decreasing risk and increasing the predictability of cash flows with SN Aboitiz Power (SNAP) new ancillary contract that de-links revenue from the volatile spot market.

Therma Luzon, Inc.’s new ancillary contract with the National Grid Corporation of the Philippines (NGCP) will further increase contracted capacity and again result in cash flows that are more predictable.

These two initiatives are in line with AboitizPower’ strategy to strengthen its balance sheet by contracting capacity through bilateral contracts with no volume risk and better revenue– cost matching.

With our strong balance sheet and healthy cash flow, the company can support future expansions of the business, and continue to strengthen its position to deliver greater value to all its stakeholders.

In the succeeding Results of Operations report, you can read more details of the operating highlights of AboitizPower’s generation and distribution groups.

Earnings and Dividends (2009-2012)

2009

8,307
2,871

2010

21,865
8,725

2011

21,191
8,725

2012

23,929
11,044

Dividends Per Share (DPS) and Dividend Yield

2009

0.27
4.6%

2010

0.52
4.2%

2011

1.58
3.7%

2012

1.58
3.3%

2013

2.00
3.4%

Share Price Performance

2012

YTD
March 2013

AP

24%

0.1%

PSEi

33%

18%

AP Stock Price (Peso/share)

HIGH

LOW

2012

37.50

28.75

2011

32.60

26.20

2010

35.80

8.60

Total Return to Shareholders (TRS)*

28%

1 year

 

50 %

5 years

* TRS is computed by combining share price appreciation and dividends paid to show total return to shareholder expressed as a compounded annual growth rate (CAGR)

The Magat Hydro Power Plant located at the border of Ramon, Isabela and Alfonso lista, Ifugao

It was a steady and productive 2012 for your company as we put to work the various acquisitions and investments that we have made over the years. Income from main business operations, excluding the impact of special items, reached Php23.7 bn, higher than Php21.1 bn in 2011. This core net income translated to earnings per share of Php3.32 compared to Php2.94 in the previous year.

A combination of higher volume and margin expansion drove your company’s profitability during the year. Power sales were up in 2012, thanks to a vibrant economy. Because of having the right mix of good strategy and timely execution, your company was able to maximize the impact of higher consumption and investments in the country.

After years of building our power generation business, we managed to ease our capital spending in 2012. This helped us end the year with a strong cash position and less debt, and put us in a better place where we can pour funds on new projects in 2013 and beyond.

Binga Hydro Power Plant located in Itogon, Benguet

For our generation business, revenues in 2012 reached Php62.5 bn, a 15% jump from 2011 figures as a result of robust growth in power sales and higher average selling price. With its solid earnings, the generation group’s income contribution to AboitizPower increased to Php22.8 bn from Php20.4 bn in 2011.

Power sales for 2012 rose 13% to 10,659 gigawatt-hours (GWh) from 2011 because of a 5% increase in the total Philippine peak demand for electricity, resulting in growth in energy sales from existing and new bilateral contracts. Capacity sales increased to 1,547 MW from 1,413 MW a year before, mainly as a result of additional bilateral contracts.

Our average selling price in 2012 was up 3% largely because of the 40% rise in average selling price of electricity at the Wholesale Electricity Spot Market (WESM).

In 2012, we signed 19 long-term contracts consisting of 654 MW. Out of the total 1,398 GWh that your company sold to the WESM, we directly traded 898.3 GWh that was produced from the Pagbilao coal plant and Tiwi and Makiling-Banahaw (MakBan) geothermal facilities.

Since the implementation of Open Access was deferred more than once, we sold some power through short-term contracts, and the rest to the spot market in preparation for the eventual introduction of the additional marketing channel. During the year, we maintained communication with contestable customers.

Over the past years, AboitizPower has been focused on expanding its power generation business through initiatives that will make power not only available, but also reliable and cost-efficient, while leaving a lighter impact on the environment. We concentrated on what we do best: finding a good mix of harnessing power from renewable and non-renewable sources to meet the country’s energy needs.

The Tiwi-MakBan geothermal assets in Southern luzon that we took over in 2009 proved to be a strategic acquisition. This move diversified our fuel type mix and provided us with base load capacity from renewable resources. During the year, we completed the rehabilitation of all units in Tiwi. MakBan is not far behind with their two remaining units scheduled for completion in 2013.

Energy sales from these geothermal plants rose 5% to 3,465 GWh in 2012. This translated to capacity sold factor of 85% against 82% in the previous year.

Attributable energy sales from hydroelectric power generation went up 4% to 1,131 GWh. This year, the NGCP purchased a smaller volume of ancillary services capacity to provide stability to the network. This moved ancillary revenues downward during 2012.

The geothermal facility in Makiling-Banahaw with a 467-MW combined capacity with Tiwi.

Consequently, the capacity sold factors of our large hydroelectric power plants were lower than expected, averaging 86% by the end of 2012. The 360-MW Magat Hydro plant, in particular, being our largest ancillary provider, experienced a 4-percentage point decline in its capacity sold factor, from 95% to 91%.

The luzon Hydro rehabilitation project, originally due to be completed in mid-May 2012, took four additional months to complete. The delay impacted cost and revenue of this business unit.

SNAP-Benguet completed the refurbishment of two units of its Binga Hydro facility expanding its capacity to 110 MW.

In 2012, the ERC decided on a set of Feed-In Tariffs (FIT) applicable to various renewable energy technologies that would be eligible for FIT. For AboitizPower, the immediately relevant rate is the tariff set for run-of-river hydroelectric plants, approved at Php5.9/kWh down from the rate of Php6.15/kWh applied for by the National Renewable Energy Board.

To boost our generation group’s reliability, our renewable assets are complemented with coal and oil-powered plants. Attributable energy sales from coal were up 21% to 5,142 GWh; and from oil, up 21% to 936 GWh.

In July 2012, the ERC ruled on the Motion for Reconsideration filed by a Mindanao distribution utility, which effectively reduced the rate charged by Therma Marine, Inc. (TMI) for its Ancillary Service Procurement Agreement with the NGCP. This also subsequently affected TMI’s electricity supply contracts with various utilities since the ERC has adopted a policy where rates are based on the cost parameters of a generation plant, rather than on the nature of the contracts themselves.

Even before the decision, TMI had already offered the lowest rates of any oil-fired plant in Mindanao, and with the reduction, can favorably compare with any oil-fired plant in the country.

Looking at the year ahead, we have lined up projects that will help strengthen our position of being a world-class organization.

In luzon, two hydro and two coal plants are set for completion between 2013-2017 to provide additional capacity of approximately 1,024 MW. In the Visayas, we envision our Cebu coal plant to supply 300 MW by 2017.

In Mindanao, there is an urgent need for additional capacity. To address this, Hedcor, Inc. commenced construction of two run-of-river plants that have a combined capacity of 14 MW. These plants are targeted to be online by 2015. Hedcor has likewise submitted applications for several other sites. Some of these run-of-river projects in the pipeline are expected to be FIT-eligible. The approved FIT rate should make many of the potential projects viable. The installation target set by the Department of Energy for this type of renewable energy resource is 250 MW for the first three years.

Meanwhile, TSI is currently building the 300-MW Davao coal plant. This plant aims to help balance the power generation mix in Mindanao, which relies heavily on hydroelectric power plants, resulting in severe energy shortfalls during the dry season. The supply of electricity from coal is not dependent on weather conditions. Coal generation also costs substantially lower per kWh than the fuel of oil power plants, which currently provide the capacity shortfall in Mindanao. Thus, a coal plant in the region will have the effect of bringing down average electricity rates. This baseload plant will be able to fulfill its fuel requirement, given the abundant supply of coal in nearby Kalimantan in Indonesia, while complying with stringent Philippine environmental standards. These projects aim to contribute to Mindanao’s potential as a destination for business, investment, and tourism.

The challenge for 2013 is to obtain timely approvals for the new power supply agreements of the new projects, especially the greenfield projects.

In the months ahead, we will continue executing our long-term strategy as we further improve the affordability, reliability, and availability of power in the country.

For our distribution business, revenues in 2012 rose 12% to Php27.7 bn as a result of increased electricity demand and improvement in gross margins. The distribution group turned in an income contribution of Php2.8 bn to AboitizPower, 16% higher than 2011.

The implementation of approved tariffs under the Performance Based Regulation (PBR) scheme resulted in an elevated gross margin for the group. The PBR is a rate-setting methodology that allows utilities to recover just and reasonable costs, and make reasonable returns.

Davao light linemen performing routine maintenance work

Based on a 12-month moving average, the gross margin per kWh sale was Php1.6 in 2012 against Php1.44 in 2011. Subic EnerZone started implementing the PBR in January 2012, while San Fernando Electric (SFElAPCO) began implementing the scheme in March that year. The two distribution utilities were the last from the AboitizPower group to shift to PBR.

The PBR process experienced some delays with the ERC changing its policies on procurement of the consultancy services that it needed to prepare the issues papers, and conduct the asset valuations. The adjustments to recover the revenues lost in the delays will increase the rates for subsequent years. This has been the norm for most utilities, as the ERC allowed more leeway in consumer engagement and participation in the process.

Following the commissioning of new substations in previous years, our distribution utilities became better equipped in dealing with higher electricity demand. In addition, the improvement in infrastructure during 2012 ensured that we did not fall behind industry standards. For instance, Cotabato light & Power Co. (Cotabato light) completed the rehabilitation of one of its substations while some EnerZones, particularly Mactan and Balamban, completed the maintenance of their substations.

With economic activity in the upswing, total beneficial power sales went up 6% to 3,934 GWh. The increase was led by the commercial and industrial segment including street light consumption with sales of 2,901 GWh, up 6% and residential segment with sales of 1,034 GWh, up 5%.

Improvements in our systems, processes, and services likewise bore fruit. During 2012, Davao light & Power Co. (Davao light) launched the on-site service application processing, and meter installation programs. Visayan Electric Co., Inc. (VECO), meanwhile, signed a five-year collective bargaining agreement in a clear manifestation of a healthy working environment.

Truly, better infrastructure and technology are the keys to delivering reliable service to areas served by your distribution companies.

At the end of 2012, the distribution utilities of your company made significant gains in reducing their systems losses. Cotabato light and VECO recorded losses at 9.5% and 8.9%, respectively. Davao light and all the EnerZones are well below the regulatory cap of 8.5%. This is important since reduced systems losses do not only enhance service delivery and quality of power, but also improve margins as well.

A well-maintained substation in Sta. Ana, Davao

2012 marked the last purchase of electro-mechanical meters in all our utilities.

Starting 2013, all meters that have been purchased will be electronic. The end goal is for all meters in service to be electronic by 2021. In fact, it is worth noting that Balamban EnerZone customers are already 100% Smart-metered. Technology will continue to play an important part in the business as the quest for efficiency dictates the need for automation and improved communications.

In the days ahead, the growth potential of your company’s distribution business hinges on the healthy organic growth of existing businesses that are located in progressive areas.

With the onset of Open Access in 2013, which allows end-users with monthly average peak of 1 MW to select their power supplier, competition is expected to intensify and force players to be more efficient and competitive. The Open Access regime will also bring new rules and probably a measure of experimentation.

The industry participants, their customers, the regulators and policy makers will need head room to sort out what works and what does not in our operating environment.

Our strategy is to open as many sales channels as we can and choose the most attractive one at any given time. By the time Open Access is implemented in 2013, we expect to be fully contracted.

Your company, having successfully grown its business and established its leadership position, is well-equipped to compete in the market, and nurture the loyalty of its customers.

Banking subsidiaries UnionBank and CitySavings had a combined income contribution to AEV of Php3.8 bn, a 12% increase from Php3.4 bn of the previous year.

*Gross loans and Preferreds only

**Based on Audited figures, net of fully-covered loans classified as loans

2012 was another banner year for UnionBank of the Philippines (UnionBank), as it registered a net income of Php7.6 bn anchored on higher trading gains and an improvement in net interest margin. The bank’s record performance translates to a top 3 return on average equity and return on average assets of 17.0% and 3.0%, respectively. Revenue-to-expense ratio is at 2.1x, making UnionBank one of the industry’s lowest cost producers.

Notwithstanding the 100 basis points reduction in benchmark policy rates, which brought asset yields to historic lows, as well as increased regulatory costs, net interest income improved by 5% to Php7.3 bn on account of a robust expansion in credit portfolio and a continuous decline in funding costs.

UnionBank’s average credit portfolio expanded to Php90 bn, a 15% increase over a year ago. This double-digit growth, supportive of its strategic objective of retail-based asset build-up, was evident across all segments, with auto and mortgage loans growing at 22%; middle-market and SME, 18% and corporate lending, 11%. The auto and mortgage loans account for about a quarter of the net loan portfolio yet contributes more than a third of gross interest income from customer businesses.

Consistent with the bank’s thrust of achieving a more cost-effective funding base, peso low cost deposits expanded by 13%, while total deposits contracted due entirely to a strategy of reducing high cost funds and the negative carry on excess liquidity. This resulted to a better funding mix with the share of low cost deposits to total increasing by 6.7 percentage points.

To broaden customer base and deepen relationships, the bank will continue to take advantage of its leadership in the field of cash management, achieved through consistent delivery of innovative, customized and relevant business solutions anchored on superior technology, a unique branch sales and service culture and centralized backroom operations.

During the first quarter of 2013, UnionBank purchased City Savings Bank (CitySavings) to tap new markets for teachers’ loans and expand CitySavings’ loan business model to other civil servant market segments. The acquisition is aligned with the bank’s business plans and long-term strategy of building businesses based on consumers.

The bank remains committed in executing its FOCUS 2020 strategy to build a great Retail Bank. It continues to build its unique culture aligned with living its purpose, which is to “Make Da Diff” in the communities it serves, to elevate lives and make dreams come true. This it does by connecting and enabling communities through Smart Banking in the spirit of Ubuntu.

City Savings Bank (CitySavings) extended its branch expansion in 2012 to widen and deepen its presence in the country - a strategy that elevated its goal of being the bank of choice of educators nationwide.

CitySavings offers warm and helpful customer service

CitySavings’ operating expenses grew 26% to Php652 mn in 2012 as a result of its branch expansion. Consequently, the bank’s income contribution to AEV declined 2% to Php520 mn during the year.

The bank’s strategy of keeping banking simple and straightforward continues to achieve its desired effect. Deposit levels grew 10% to Php8.8 bn, providing an attractive resource for lending. Total resources rose 19% from previous year’s level to Php15.5 bn.

Even as CitySavings maintains its “small bank” personality, it continues to grow its network and has embraced technology to offer its customers greater convenience. At the end of 2012, the bank’s loan portfolio stood at Php13.1 bn, up 31% from its 2011 level because of higher loan takeup and increase in customer reach due to the opening of new branches. This boosted net interest income to Php1.4 bn, up 8%.

With loan growth outpacing growth in total capital, CitySavings’ capital adequacy ratio eased to 16.5% in 2012 from 16.8% in 2011. The bank’s total capital rose 25% from previous year’s level to Php2.3 bn.

The bank’s nonperforming loan (NPl) ratio stood at 1.6 % at end-2012 compared with 0.7% at end-2011. The increase was mainly due to regulatory changes that delayed the processing of teachers’ salary loan payments.

The CitySavings head office in Cebu City

Given its focus on salary loans to teachers along with its more than 40 years of experience in thrift banking business, CitySavings enjoys a solid market share, particularly in the Visayas, its home base and where its business started.

CitySavings closed 2012 with a total network of 36 branches and extension offices nationwide.

Going forward, CitySavings is looking to expand its operation outside of present coverage to cover the broader civil servant and payrolls market. It plans to implement business process improvements to support its expansion program.

Its increased cooperation with UnionBank beginning in 2013 is expected to improve the thrift bank’s technological, as well as financial and management capabilities.

UnionBank’s buying of the shares of AEV in CitySavings marks the consolidation of the banking interests of the Aboitiz Group.

Pilmico Foods Corporation ended 2012 with revenues of Php15.7 bn, a 6% increase from 2011. EBITDA increased 7% to Php2.1 bn. Its income contribution to AEV reached Php1.3 bn, exceeding the 2011 figure by 5%.

Artisan breads using Pilmico flour

The food group’s strong performance was driven by a 6% rise in overall sales as the flour, feeds, and farm divisions all posted increases in sales volume. Sales in the 4th quarter were particularly strong at Php4.2 bn, up 11% year-on-year and outpaced the growth rates in previous quarters.

Performance during the latter part of the year accelerated following the improvement of the group’s port facilities and the expansion of its unloading and storage capacities. In October, Pilmico successfully unloaded the very first Panamax vessel M/V Jia Tong, with a maximum capacity of 65,000 metric tons (MT). Preparations to accommodate a vessel of this size started as early as 2010; these included port dredging, installation of structural reinforcements, additional mooring structures, and new steel silos for storage, and the purchase of a 300-MT/hour pneumatic unloader.

Despite increased competition, the overall sales volume of flour posted modest growth. Pilmico managed to address the challenges posed by the lower-priced imported flour in 2012 by introducing the fighter brand Silver Star.

In the feeds division, sales volume rose 9% to 269,492 MT. But due to softer prices and higher input costs, margins fell, offsetting the impact of higher volume. As a result, there was a decline in the division’s earnings.

The farms division substantially suffered during the 1st half of 2012 because of low selling prices. The improvement in farm gate prices in the 2nd half, along with tighter cost management, enabled the division to recover finishing the year with a 7% sales volume growth.

Pilmico Iligan flour plant

Pilmico’s focus on its long-term strategy of maximizing and optimizing resources to remain a low-cost producer should continue to bear fruit. Capacity-raising investments in the farms divisions along with an increase in sow level that will be completed in 2014 should also spell sustained growth in the long term.

The completion of its 2nd Iligan feedmill plant two years down the road means an enhanced focus and core competence in the feed milling industry for Pilmico and its wholly owned subsidiary Pilmico Animal Nutrition Corporation.

In time for the celebration of its 50th anniversary in September 2012, Pilmico launched Project Avensis - the migration to Oracle’s R12 version that allows new functionalities and further improvements in the company’s enterprise resource management.This project is up for completion in July 2013.

With its sight set on the risks and challenges ahead such as the volatile commodity prices of wheat, corn, and soya bean in the world market and increasing competitiveness in the market, Pilmico is looking to continue building competencies, capacities and capabilities to ensure its organizational readiness for the future.

Aboitizland - Creating and Nurturing Communities That last

As the real estate arm of the Aboitiz Group, Aboitizland Inc. has long been building and nurturing residential, commercial, and industrial communities in Cebu.

By pioneering designs and implementing projects, Aboitizland has met the needs of its diverse clients, fondly called vecinos, a Spanish word for neighbors.

In 2012, Aboitizland posted record-high residential sales of Php1.3 bn, more than 50% growth over the previous year.

The company has also achieved a 38% sales compounded annual growth rate (CAGR) since 2009.

In every undertaking, Aboitizland adheres to the Aboitiz Group’s core values and passion for excellence. It believes that the investment in a home could be the single largest decision in the life of a Filipino, which is why it nurtures communities that foster long-term relationships.

The three attributes that define Aboitizland’s culture and business orientation - Nurturing, Assuring, Enduring – are embedded in the company’s brand promise and captured in its tagline “Made for life.”

The Persimmon Plus is an urban condominium village in Mabolo, Cebu City

Over the years, Aboitizland has continued to innovate, expand and widen its vast array of products to satisfy the various residential market segments - young and upwardly mobile, professionals, newlyweds, growing families, empty nesters, as well as our Filipinos abroad.

In commercial development, Aboitizland brings into the market IMEZ, a modern multi-use facility and self-sufficient commercial hub suitable for business process outsourcing (BPO) and retail stores; The Persimmon Plus, a commercial area that offers new concepts in dining, retail, and entertainment; and Pueblo Verde, a clustered town center featuring an excellent mix of shopping, dining, retail, service facilities, and modern office space.

In the fourth quarter of 2013, The Outlets at Pueblo Verde, the first outlet mall to rise in the Visayas-Mindanao region, will be launched.

In the industrial segment, Aboitizland is the developer and operator of the Mactan Economic Zone II in lapu lapu City, and the West Cebu Industrial Park (WCIP) in Balamban, through its subsidiary, Cebu Industrial Park Developers, Inc. (CIPDI).

In 2012, CIPDI celebrated the 20th year of its partnership with Tsuneishi Heavy Industries of Japan. This partnership created the WCIP shipbuilding and repair facility, which helped put the Philippines on the map as the fourth largest shipbuilding country in the world.

Pristina North, a beautiful suburban community located in Talamban, Cebu City.

Aboitizland’s Property Management Team (PMT) provides vecinos the full benefit of professional advice, experience, and expertise as property managers, thus ensuring the enhancement of the property’s value. PMT also provides property operations at its optimum efficiency without prejudice to the delivery of a safe, orderly, clean, and comfortable working and living environment.

Given its rich landbank, Aboitizland is poised to pursue more innovative projects, providing a meaningful contribution to AEV’s earnings portfolio. There are recurring earnings from its industrial and commercial sectors, as well non-recurring earnings from its various residential projects. AEV acquired full ownership of Aboitizland from Aboitiz & Co. in November 2012 for Php3.2 bn.

In the months ahead, Aboitizland expects exciting times. It is looking forward to the outcome of its bid for the Mactan-Cebu International Airport terminal rehabilitation project under the government’s public-private partnership (PPP) program. The bid is in partnership with the Ayala group and US-based airport operator ADC & HAS Airports Corp. This exercise is expected to pave the way for

Aboitizland’s participation in other PPP projects in the future.

Indeed, as the vibrant Philippine economy continues to brighten the outlook for the property sector, Aboitizland is well positioned to continue serving the global Filipino in a responsive and responsible way.

Our Human Resources

The business of talent in the Aboitiz Group

In HR, our compelling purpose is to “attract, retain and optimize A-people, constantly adding value to the Group”. This is our declaration of intent, our promise when it comes to managing our human capital assets – the Aboitiz way. We devote our greatest efforts and resources into fulfilling this promise so that both our current and future talents are nurtured to reach their highest potential and capability.

TALENT ATTRACTION

In Aboitiz, we take a proactive stance when it comes to talent attraction. We don’t only attract for today, we also attract for tomorrow. Our scholarship program is probably as old as the organization itself. It goes beyond philanthropy; it is about providing self-fulfillment through long-term career goals. To date, 9.6% of our top leaders are products of our scholarship program. We intend to continue producing more leaders out of our scholars in the coming years.

In 2012, we embarked on understanding our employer brand better so we can further strengthen it. A study of the Aboitiz employer brand uncovered great realizations for us in terms of how people, both inside and outside of the organization, perceive us.

2011 AEV Scholar College Senior Business Administration Major in Financial Management

We have created a positive employer brand experience to those who have joined the Aboitiz Group. Our name is fast making its way toward becoming an employer of choice for many professionals. We are not necessarily after the best and the brightest talent. For us, it is rather about seeking the best fit.

The people we attract are those that intend to be with us for the long haul, with a clear passion and commitment to excel in whatever they do. Through programs such as the Aboitiz Future leaders Business Summit (AFlBS), we make an effort to know our potential talents early in their career. We keep track of their professional growth and reel them in at the right time when they are most ready to work in our organization.

Sample response of an employee during an agency interview about the Aboitiz Employer Brand
Newly awarded 2012 scholars under the Aboitiz College Scholarship Program

TALENT OPTIMIZATION

2012 was a milestone year for talent optimization in Aboitiz, particularly in the area of leadership Development. Having completed Key Talent Reviews for all 151 top-level executives across the Group by members of the Group Management Committee, each talent was evaluated for succession and career development options. The evaluation was based on performance, competency, achievement, leadership capability, potential, and even 360 feedback in order to establish the best individual development plans for them and arrive at a proper ”build, buy or borrow” succession and replacement strategy for various key leadership positions across the Group.

Consequently, this practice mitigates the risk of talent loss by planning ahead while recognizing signals and threats along the way such as aging workforce, workforce migration, and talent scarcity in jobs requiring specialized skills.

Individual Development Plans are closely monitored to ensure that potential successors are being prepared by providing them with the necessary training intervention to address identified gaps in leadership and technical competencies.

Talent analytics are regularly generated and presented to the Group Management Committee to help us gain a better understanding of the demographics of our top talents as well as other salient information like career aspirations, motivations and preferences, growth and experience, acquired knowledge, intelligence and competencies that help us develop and design the best career and leadership path for them. A system was also put in place to closely monitor the progress of the succession plans to ensure that these stay on track.

TALENT RETENTION

We retain talent by instilling a strong sense of belonging, a greater sense of community among peers and colleagues that instill a greater sense of pride in being a part of the Aboitiz team.

Recently, we set up an exciting project called “My Aboitiz Moment,”an online intranet database where employees can randomly post their most inspiring moments while working in the company. We now have a collection of “My Aboitiz Moments” from various employees that tell us about what keeps people engaged at work.

CFO 2011 is one of the many Aboitiz moments I have. Here are some of the many reasons why. To be able to listen and experience TA’s awesomeness as a facilitator. To belong to a tribe filled with passion and awesomeness. To experience the support of my equally awesome Tls and Sandro for their presence during the gruelling but fun second day. And lastly, but definitely not the least, to BElONG to a FAMIlY of awesome and brilliant people. This makes working in Aboitiz bearable and fun!!! AWESOMEEEE!!! (word of the day!)

We bring out the best in our talents. We invest an average of three years of leadership and role-specific training under the Aboitiz Universal Training Plan Program for every team member. Our intent is to ensure that 100% of our team members across the Aboitiz Group are able to complete the program in the next three years. Right now we are at 48%. We run a corporate assessment or employee satisfaction survey every two years across all companies and our 2012 survey results show how our talents value us as an employer.

We recognize our talent for their achievements, both individually and as a team.

Our Group-wide team awards program called “Inspired by Passion Team Awards” honor several outstanding team projects across the Group for enhancing customer service, process improvements, increasing efficiency and even for supporting corporate social responsibility programs. Each project becomes a living testament to our brand essence – Passion for Better Ways.

MANAGING PEOPLE THE ABOITIZ WAY

These are the various ways by which we execute our HR strategy, weaving the Aboitiz DNA into each and every talent in the Aboitiz Group, each one uniquely carrying the attributes of being driven - driven to lead, driven to excel, driven to serve.

Our Journey Towards Enterprise Resiliency

Two years after Enterprise Risk Management was launched Groupwide in 2010, AEV and its business units (BUs) embarked on assessing the state of its risk management (RM) maturity and how it fares against leading practices of similar organizations in the region and globally.

The result of the RM maturity index assessment triggered a recalibration of the Group’s existing RM program and gave rise to an enhanced 3-year plan geared towards achieving Aon’s risk maturity level 4 Groupwide.

Level 4 represents the Group’s goal of having RM policies and practices consistently implemented across the Group by the end of 2013. On a scale of 1 to 5, achieving level 4 moves us closer to Enterprise Resiliency.

While we cannot predict what is going to happen in the future, we aim to be antifragile to overcome any Black Swan event that may occur along the way. The Black Swan, made popular by bestselling author Nassim Taleb, refers to a highly improbable event with three main characteristics: impossible to predict, carries a massive impact, and a stunning shock value as people did not conceive of such an event to happen. Antifragile, also coined by Taleb, is beyond being resilient or robust. The resilient resists shocks and stays the same; the antifragile gets better by optimizing the upside from volatility and disorder.

The essence of RM lies in our ability to anticipate, adapt and respond to impacts of significant events, whether predicted or unforeseen, in a rapidly changing environment where our businesses operate. It is not just about responding to and rebounding from a one-time crisis or setback, but is a continuous strengthening process of anticipating and adjusting to significant trends that can permanently impair the earning power and viability of our businesses.

Our key highlights for 2012 include redefining the Group RM framework into four major pillars: Governance, Process & Integration, Risk Finance and Capability Building:

GOVERNANCE

RM Governance policies and structures that guide and support the RM process across the Group

At the Board level, there was increased focus on Reputation Management.

In April 2012, Reputation Management was incorporated in the Board Risk Management Committee oversight, and it is now called the Board Risk and Reputation Management Committee.

There is now a close coordination between the Board Risk and Reputation Management and Audit Committees where joint meetings are being held to discuss programs, developments and key issues affecting governance responsibilities of both committees.

The Board also approved the Group RM Policy setting out the overall RM strategy of the organization, RM structure, roles and responsibilities and the guidelines and protocols that should be followed.

PROCESS AND INTEGRATION

The methodology, tools and Processes for assessing, treating, monitoring and reporting risks, including the Integration with Strategy as well as key internal and external processes

Operational Risk Management was launched in June 2012. This is considered a big step in creating a culture of measuring and managing risks Groupwide as it focuses on the risks of day-to-day business operations and the efforts to mitigate them.

The mandate, framework, policies and guidelines for Project Risk Management were formalized and Strategic Risk Management and Business Continuity Development efforts were pursued.

The integration of RM with key management systems and related processes such as Strategy, Information Security and Internal Audit was also initiated.

RISK FINANCE

Risk Finance is the process for achieving the optimal balance between retaining and transferring risks

Under Risk Finance, Aon was appointed as our new broker. With Aon’s global resources, they have been able to contribute to delivering improved RM solutions to our business units.

A structured, best-in-practice approach to formalizing and quantifying insurable risk as well as designing strategies to transfer risks beyond tolerance level was also implemented.

CAPABILITY BUILDING

Development of an RM culture through Capability Building programs to raise awareness and enhance the Group’s understanding and appreciation of RM

Risk metrics to track the progress of key programs and the total cost of insurable risks were introduced and monitored.

The communication of RM program and concepts at the operational level has also began.

In the area of training, several sessions have been conducted on various topics on RM, Business Continuity, Project Risk Management and Technical Insurance courses.

Aboitiz Group Top Risks

RISK DESCRIPTION

KEY RISK TREATMENT

REPUTATION RISK

Today’s world of higher corporate governance standards coupled with the rise of civil society groups, social media, and greater scrutiny from key stakeholders, have created a new environment where our corporate reputation has become a differentiating asset as well as our No. 1 risk.

• Build organization capability through a formalized governance structure and an intelligence process

• Implement anticipatory issues management

• Develop and implement a Group-wide social media policy and strategy

• Develop brand champions and brand advocates through effective corporate communication and branding programs

• Ensure brand integrity by establishing reputation metrics, aiming to close the gap between how we project ourselves and how others perceive us

COMPETITION RISK

As with other businesses, AEV and its subsidiaries and affiliates operate in highly competitive environments. As such, failure to properly consider changes in our respective markets and predict the actions of competitors can greatly diminish our competitive advantage.

• Separate business development organizations for power and non-power businesses

• Implement a more robust and comprehensive strategic planning process

• Integrate Enterprise Risk Management into the Strategic Planning process

REGULATORY RISK

The complexity of the business and regulatory landscape is increasing dramatically. Several of AEV’s BUs particularly in the power and banking sectors are now being subject to more stringent regulations.

• Dedicated regulatory team for our Power Group

• Our banking units have full time compliance officers who spearhead the implementation of compliance programs

• Maintain good working relations with the Department of Energy, Bangko Sentral ng Pilipinas and other key regulatory agencies

• Participate actively in consultative processes that lead to the development of rules and regulatory policy

BUSINESS INTERRUPTION DUE TO NATURAL CALAMITIES AND CRITICAL EQUIPMENT BREAKDOWN

The loss of critical functions and equipment caused by natural calamities such as earthquakes, typhoons and floods could result to significant business interruptions. Interruptions may also be caused by other factors such as major equipment failures, fires and explosions, hazardous waste spills, workplace fatalities, product tampering, terrorism, and other serious risks.

• Perform regular preventive maintenance of all our facilities

• Continually evaluate and strengthen loss prevention controls

• Develop business continuity plans per site

• Procure Business Interruption insurance to cover the potential loss in profits in the event of a major damage to the Group’s critical facilities and assets.

COMMODITY RISK

Our food and power businesses have raw material and fuel requirements that are subject to price, freight and foreign exchange volatility factors. A fluctuation in any of these volatile elements individually or combined will result to increases in the operating costs of these companies.

• Better understanding of the commodity markets

• Enter into contracts and hedge positions with the different suppliers of these commodities

• Develop a Commodity Risk Management framework to help improve existing capabilities in managing and reducing uncertainty relating to these commodities

PROJECT RISK

Our Power Generation group broke ground on its Greenfield coal plant projects in Subic and Davao and its small hydro projects Tudaya 1 and 2 in Sibulan. Given the magnitude and duration of these projects, there are inherent issues and risks, such as project completion within specifications, budget and timelines.

• Partner with contractors and suppliers of established good reputation

• Implement Project Risk Management following PMBOK (Project Management Book of Knowledge) framework

• Regular review of the project risk register to monitor implementation of risk control measures.

The Heart and Soul of Our 2012 Corporate Governance Practices

We in the AEV Group are serious about our commitment to corporate governance. We have invested a lot of time and effort to ensure that we comply with all regulators and regulations not only because these are required but also because we believe that Good Governance equates to Good Business.

According to the United Nations Economic and Social Commission for Asia and Pacific, good governance has eight major characteristics. It is participatory, effective and efficient, equitable and exclusive, and follows the rule of law. It assures that corruption is minimized, the views of the minorities are taken into account, and the voices of the most vulnerable in society are heard in the decision-making. It is also responsive to the present and future needs of society. On the other hand, bad governance is increasingly being regarded as one of the root causes of evil within our societies.

Our Management believes that good governance, especially in the areas of transparency and accountability, builds trust from all our stakeholders whether they are employees, shareholders, investors, bankers, government, customers or the society at large. In our businesses, we hold Trust and Reputation dearly, in all our companies, whether they are private or publicly listed.

The heart and soul of the corporate governance practices of AEV Group companies revolve around the following core principles: (1) the Company’s personality is independent from that of its Board, officers and employees; (2) the Company has its own distinct rights and duties; (3) the Board has the original power to decide the Company’s policies; (4) the Company can demand loyalty and fealty from the Board; (5) the Company’s business must be pursued through a long-term sustainability strategy; (6) the shareholders and stakeholders must be treated equitably and with fairness; (7) there must be a system of accountability; (8)

Aboitiz Power Corporation Aboitiz Equity Ventures, Inc.

Develops and executes a sound business strategy

Establishes a well-structured and functioning board

Maintains a robust internal audit and control system

Recognizes and manages its enterprise risks

Ensures the integrity of financial reports as well as its externalauditing function

Respects and protects the rights of its shareholders, particularly those thatbelong to the minority or non-controlling group

Adopts and implements an internationally accepted disclosureand transparency regime

Respects and protects the rights and interests of employees,community, environment, and other stakeholders

Does not engage in abusive related-party transactions and insider trading

Develops and nurtures a culture of ethics, compliance andenforcement

there must be transparency in corporate operations and reporting of transactions; (9) the Company must run an ethical business; (10) corporate social responsibility is an integral part of doing business; and (11) the Company abides by environmental compliance and sustainability principles.

We are witness to the rapid changes in regulations that are game changing, giving rise to new business environments, especially with respect to the businesses of AboitizPower. For AboitizPower, 2012 gave us a peek into the upcoming pivotal changes in the power industry landscape. With the privatization of NPC assets in Visayas and Mindanao hopefully completing the journey started many years ago with the passage of EPIRA, with the WESM in luzon and Visayas functioning well, and the preparatory work by the regulators for open access and retail supply market, new players and competitors in the power industry are coming in and the game is changing.

The power industry regulators appear to be tightening the scrutiny over their areas of responsibilities and creating new regulations that are precedent-setting; while the public is becoming more vigilant and involved in the power debate.

In 2012, we are pleased to say that we are thriving in this “new environment” while staying true to our core governance principles. We are especially proud of the health, safety, and environmental track record of our businesses, proving that a business can align itself to the principles of sustainability. We are likewise pleased about our resilience in the face of the dynamic business and regulatory framework of our Group companies. Despite the challenges we face, we continue to adhere to our core values and continue to evolve our corporate governance practices, to adapt to the changing conditions.

In putting these principles to practice in 2012, we have worked to preserve, modify or set up new protocols, systems and policies intended to protect the rights of shareholders; to ensure their equitable treatment; to recognize the value and participatory role of our stakeholders; to practice the appropriate level of transparency and improve corporate disclosures; and to refresh and strengthen the roles and responsibilities of our Board.

We have consistently maintained our corporate compliance and good corporate governance records. There have been no deviations from or violations of the rules set forth in our Manual of Corporate Governance, in the governing laws and regulations, and in our protocols and policies. All in all, we are pleased to say that we have credibly fulfilled the four objectives above.

We believe our 2012 corporate governance scorecard is excellent in the cusp of pivotal changes in our business landscape. Our track record has been duly recognized by independent governance watchdogs who appreciate our achievement in balancing the pursuit of profits and the protection of all our stakeholders, throughout our more than 100 years of doing business.

As part of our commitment to sustainability, we are maximizing the use of digital technology rather than the use of scarce paper sources. We therefore invite you to visit our website www.aboitiz.com for our full Corporate Governance Report detailing our corporate governance practices, our achievements and milestones, as well as our 2012 initiatives.

Aboitiz Foundation, Inc. is the social development arm of the Aboitiz Group. Established in 1988, the Foundation implements corporate social responsibility (CSR) interventions in areas where Aboitiz companies operate.

In the last 24 years, the Foundation has been working on uplifting the lives of Filipinos, especially in Aboitiz host communities nationwide.

Its projects go beyond charity because it is the Foundation’s responsibility to redefine its initiatives to address the changing and growing needs of the communities it serves.

Php 531mn

It implements social development projects in four major components:

• Education

• Enterprise Development

• Primary Health & Child Care

• Environment & Sustainability

It also extends assistance to nongovernment organizations, supports employee-initiated projects and holds disaster relief operations.

* The graphs in this spread are a visual representation of the breakdown of Aboitiz Foundation’s projects in terms of program component and location. Figures under the Aboitiz Group CSR initiatives (1st column) represent the total financial allocation of both the Aboitiz Foundation (2nd column) and business units of the Aboitiz Group (3rd column) for various CSR projects in 2012.

Php 406mn

Php 125mn

Our Growing Commitment

to Our Communities

The Aboitiz Group continues to strengthen partnerships with its host communities, implementing more social development projects in more areas across the country.

In 2012, the Aboitiz Foundation, Inc. (Foundation) and the Group’s business units (BUs), allocated a total of Php531 mn for various corporate social responsibility (CSR) projects nationwide. The amount, which is a 36% increase from the Php391 mn in 2011, is the biggest ever in the Foundation’s 24-year history.

The Foundation continued to implement interventions in the areas of education, enterprise development, primary health & child care, and environment & sustainability, and pursued its partnerships with other like-minded organizations that share its vision of empowering communities.

The Aboitiz Foundation continues to prioritize education-related initiatives to help produce students who are ready to take on the challenges of the future.

Members of Aboitiz Foundation’s partner organizations are also taught livelihood and capability-building skills to give them opportunities for additional income and ensure the sustainability of their projects.

Interventions

Education remained the Foundation’s main thrust, with Php260 mn allocated for education-related programs such as infrastructure building, scholarship grants, school computerization, and book donations.

In 2012, 103 regular and 42 kindergarten classrooms were constructed, six science laboratories refurbished, 2,809 students given scholarship grants, and 328 computers donated.

The Foundation provided 73 loan packages worth Php28 mn to 31 multi-purpose cooperatives nationwide and maintained a high collection efficiency rate of 96%. Capability-building activities and training programs were also conducted to complement its microfinance operations and ensure the sustainability of the cooperatives’ projects.

Water systems were built in mountain barangays while health, dental and optical missions were conducted to ensure the well-being of community residents. With environment and sustainability now a major program component, the Group continued to support the Aboitiz Passion for Agroforest and Reforest to Keep (APARK) program by allocating Php33 mn for various sustainability and bio-diversity projects.

With more projects implemented in 2012, team members also had more opportunities to not only help out but also implement their own projects that complemented the Foundation’s initiatives. They participated in activities like Adopt-a-School, Brigada Eskwela, Christmas outreach, disaster relief operations, health missions and tree planting.

The Foundation and the BUs also granted corporate donations and other forms of assistance to government and non-government organizations operating in their respective areas. Organizations that promote sports, arts and culture were also given similar assistance. Php100 mn was also to WeatherPhilippines Foundation for the installation of 1,000 automated weather stations nationwide to aid local government units in disaster preparedness.

The Foundation also forged partnerships with local government agencies and non-government organizations to provide various forms of assistance to communities.

Fueled by their passion to serve, Aboitiz team members are always quick to respond to calls for help.

Aboitiz team members also implement their own CSR projects that complement the Foundation’s initiatives.

In 2012, it partnered with the Aklat, Gabay, Aruga Tungo sa Pag-angat at Pag-asa (AGAPP) Foundation to build 42 kindergarten classrooms and provide these with reading materials. Its partnership with HAPINOY and AMORE provides livelihood opportunities and improves the quality of life of rural, off-grid households through sustainable renewable energy projects.

Through AMORE, three barangays in Davao City and Davao del Sur were provided with solar home systems and solar lanterns, while charging stations provided additional income to local organizations. With the help of HAPINOY, charging stations were set up in sari-sari stores in two barangays in laguna to energize solar lamps and serve other small power needs of the community.

Our Core Commitment to Sustainability

In striking a balance among people, planet and profit, the Aboitiz Group adheres to five sustainability pillars—Rejuvenate Nature, Re-use/Recycle, Reduce, Renewable Energy and Recharge Communities—which establish its reputation as a corporation that fulfills its responsibility to present and future generations

Embodies our commitment to protect and enhance the Earth’s natural resources through reforestation and biodiversity restoration.

• The Group is ahead of its schedule to plant 3 million trees by 2015 under the Aboitiz Passion for Agroforest and Reforest to Keep (APARK) program, having already planted a total of 2.7 million trees since APARK started in 2010.

• In 2012, a total of 3,000 volunteers helped plant close to 60,000 trees in luzon, Visayas and Mindanao in one day alone during the simultaneous tree planting.

• SNAP conducted tree-planting activities to protect the Ambuklao and Binga watersheds. In Ifugao, it converted a five-hectare grassland for muscovado production, planted seedlings and established tree nurseries.

• APRI-MakBan’s tree planting efforts recharged abandoned well sites surrounding its generating power plants in MakBan.

• 11 Philippine-endemic bird species were sighted in the 540-hectare Visayan Electric Company (VECO) Park, within the Central Cebu Protected landscape.

By re-using and recycling materials, we reduce the volume of wastes that end up in dumpsites and prevent further exploitation of natural resources for raw material production.

• VECO and Davao light & Power Company converted wooden crates into classroom fixtures for students and teachers in public schools in their communities. Over a thousand classroom fixtures for both teachers and students were produced and donated in 2012.

• APRI-MakBan and VECO sent used oil and spent batteries for recycling and used the proceeds to fund environmental protection projects through Aboitiz Foundation.

• Davao light turned over nearly 300 used lead acid batteries to the Balik Baterya Project of the Philippine Business for Social Progress (PBSP) and Oriental Motolite; gave Php200,000 proceeds to PBSP projects.

By promoting prudent use of resources, the Group aims to lessen the amount of carbon dioxide that is released to the atmosphere.

• Under the Race to Reduce challenge, business units monitor consumption of power, paper and water. The average power consumption of participating offices declined, except for AboitizPower Generation, the Food group and Metaphil due to growth in their business operations. The rest of the business sites will be enrolled in 2013.

• The Group participated in the annual celebration of Earth Hour, a global movement meant to raise awareness on climate change issues. In the 2012 Earth Hour, VECO and Davao light posted a drop in power consumption at 3 MW and 5 MW, respectively. The figure increased significantly in 2013, with VECO and Davao light recording reductions at 11 MW and 8 MW, respectively.

• The Group continues to monitor its greenhouse gas emissions (GHGs) by keeping tabs on fuel use of company-owned vehicles and power generation, and purchased electricity. Emissions from generation activities still increased due to a rise in fuel consumption for thermal power generation.

The Group produces renewable energy from hydropower and geothermal power plants under the brand, Cleanergy.

• AboitizPower increased its hydropower and geothermal power production in 2012.

• Pilmico Animal Nutrition Corp.’s biogas digester generated a total of 1,445,253 kWh in 2012.

• In cooperation with Aboitiz Foundation and Hapinoy, AboitizPower implemented a solar lamp rental system in three off-grid communities in MakBan, laguna. AboitizPower also partnered with Aboitiz Foundation and Winrock International to install 261 solar home systems and 165 stand-alone solar lamps in some off-grid areas in Davao.

By recharging communities, the Group addresses the “people” aspect of the triple bottom line ideal. Spearheaded by Aboitiz Foundation, the Group involves improving the well-being of communities through job generation, educational assistance, livelihood programs, disaster preparedness and other social development initiatives.

• Group-wide hiring increased by 12 percent every year since 2010. From 33,025 team members in 2011, the Group’s total workforce increased to 37,055 in 2012

• The Aboitiz Group allocated Php527 mn for corporate social responsibility projects in 2012. Details on the Aboitiz Foundation’s programs can be found in its Annual Report and on its website at www.aboitizfoundation.org.

• The Group made its single biggest CSR donation in 2012, donating Php100 million to WeatherPhilippines Foundation (WPF) for the installation of 1,000 automated weather stations to help local government units improve their disaster preparedness measures and, in the process, avoid loss of lives and property. Details about this project can be found in WPF’s Annual Report or on its website at www.weather.com.ph.

Our Contribution to Severe Weather and Disaster Risk Management

In 2012, the Aboitiz Group embarked on a milestone project, its biggest CSR initiative to date.

We partnered with Meteomedia, a leading Switzerland-based weather services organization, to establish WeatherPhilippines Foundation (WPF). A non-profit organization accredited with the Philippine Council for NGO Certification, it now operates a premiere weather forecasting system that provides free and accurate weather forecasts as a public service to the Filipino nation.

WPF supports the government’s efforts in reducing weather-related disaster risks in the country, enabling timely response to variable weather conditions to avoid loss to life and property.

Aboitiz Foundation Inc. and UnionBank provide the funding to purchase and install about 1,000 weather instruments and devices nationwide in WPF’s first two years of operations. Meteomedia, for its part, will provide the necessary technology to operate the system and generate accurate and localized weather forecasts.

Strategic pillars

WPF operations are guided by three strategic pillars: technology, partners, and communication.

We install compact, fully automated weather stations (AWS) using the latest weather sensor technology that transmits localized weather information. Each unit measures temperature, pressure, humidity, solar radiation, wind direction and speed, using ultrasonic sensor technology to take wind measurements. It also measures the amount of rainfall in any given location.

Complemented with dataloggers from the Advanced Science and Technology Institute (ASTI) of the Department of Science and Technology (DOST), weather information is transmitted to Meteomedia servers every 10 minutes. These weather stations are unmanned and completely solar powered.

As of March 2013, WPF has deployed a total of 230 AWS nationwide: 117 in luzon, 47 in Visayas, 56 in Mindanao, and 10 mobile storm trackers.

To ensure the sustainability of WPF, we rally the support of partners. The speedy deployment of the AWS is a result of our partnerships with the league of Provinces of the Philippines (lPP) and league of Cities in the Philippines (lCP).

Senior specialist Mike Padua does “severe weather warnings” and “typhoon tracking” for WeatherPhilippines Foundation

WeatherPhilippines Foundation has hundreds of automated weather stations across the country

Several donors in the private sector have also pledged to support WPF to make it sustainable. Platinum sponsors SM Investments Corp., Nickel Asia Corp./Sumitomo Metals Mining Co. ltd., International Container Terminal Services, Inc., and Vista land & life Scapes are each donating P25 million over a period of 10 years. Gold sponsors include Aboitiz business units VECO, Davao light, Hedcor, and SN Aboitiz Power.

We affiliate and coordinate with various scientific, governmental and non-governmental agencies for the supply of weather information. We collaborate with the DOST to improve weather forecasting and develop local weather equipment and technology with the ASTI. We are working to build on this partnership, further, by working on areas for collaboration with PAGASA and Project NOAH.

Communication enables the maximum effectiveness of the WPF. We capitalize on the power and reach of the Internet and social media but also make use of traditional TV, print, radio and lGU media channels to ensure that critical localized weather information reaches every barangay even in far-flung areas.

Through Pilmico, we disseminate the information through lCD screens set up in its retail outlets nationwide. Similarly, SM Malls with their lobby lCD screens will provide additional venues to communicate WPF’s localized weather information.

Our Forecast for the Future

WPF will step up its deployment plan and install an additional 550 AWS and 55 lightning detectors in 2013 to further strengthen technical differentiation. Other donors will also enhance WPF’s ability to secure more weather assets.

We will continue to conduct city and provincial instructional sorties for our stakeholders on the use of the WPF portal, www.weather.com.ph, which features a wealth of weather information. Provincial and city public information officers, disaster risk reduction and management leaders, and administrators will be invited to attend these instructional sessions.

WPF and the lCP recently signed a memorandum of understanding to establish a collaborative link for weather-related disaster risk reduction and management capacity-building.

We are also working out partnerships with news and media organizations so weather information gathered through WPF can also be disseminated through additional tri-media channels. We will work to employ SMS and social media technologies to widen our receiving audience.

We will pursue securing additional donors and sponsors to ensure WPF’s sustainability in at least the next 10 years.

As WPF continues to get more support and commendations nationwide, it is well on track to realizing its vision to be the trusted and most reliable private weather information organization in the country.

Management Directory
Power Management Directory

The Board Audit Committee’s roles and responsibilities are embodied in the Board Audit Committee Charter approved by the Board of Directors. It provides assistance to the Board of Directors in fulfilling the Board’s oversight responsibility to the shareholders relating to: (a) the quality and integrity of the Company’s accounting, auditing, legal, ethical and regulatory compliance; (b) risk management; (c) financial reporting practices; and (d) corporate governance. Any proposed changes to the Audit Committee Charter are referred to the Board for approval.

Membership

As of December 31, 2012, the Board Audit Committee is composed of five (5) members, three (3) of whom are independent directors.

Jose C. Vitug, a retired Justice of the Supreme Court (Independent Director) – Chair of the Committee is ably assisted by Atty. Raphael P. M. Lotilla (Independent Director), Stephen T. CuUnjieng (Independent Director), Justo A. Ortiz (Executive Director) and Roberto E. Aboitiz (Executive Director).

Meetings

In compliance with the Board Audit Committee Charter, four (4) regular meetings were held during the year: February 29, May 3, August 2, and October 30, 2012. Two (2) joint meetings with the Board Risk & Reputation Committee were also held on August 1 and Dec 6, 2012; and one (1) special meeting was called on March 1, 2012. Also present in these meetings is the Group Internal Audit Head, the Chief Reputation and Risk Management Officer, and by invitation, the Chief Financial Officer and AEV First Vice President-Controller.

Financial Reports

On a high level basis, we reviewed, discussed, and endorsed for the approval of the Board the quarterly unaudited consolidated financial statements and the annual audit financial statements of Aboitiz Equity Ventures, Inc. and Subsidiaries, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations following prior review and discussion with management, the internal auditors and SyCip Gorres Velayo & Co. (SGV), the company’s independent auditor.

The activities of the Audit Committee were performed in the following context:

• That management has the primary responsibility for the financial statements and the financial reporting process; and

• That SGV is responsible for expressing an opinion on the conformity of the Company’s audited financial statements with Philippine Financial Reporting Standards.

Independent Auditors

The overall scope and audit plan of SGV were reviewed and approved. The terms of engagement which covers audit-related services provided by SGV and its related fees were also reviewed. There was no non-audit related service provided for the year 2012.

We also discussed with SGV the results of the SGV’s audits and its assessment of the overall quality of the financial reporting process. SGV also presented the effects of changes in relevant accounting standards and presentation of financial statements that impact on the reported results.

We also noted and approved the delegation of the appointment of the Company’s external auditors for 2012 by the shareholders to the Board of Directors.

Internal Auditors

A reorganization of the Internal Audit department took effect in August 2012. Majority of the auditors were deployed to the different business units where resident internal audit teams were formed to handle finance and operations audits.

The corporate team, now referred to as Group Internal Audit (GIA), continues to take the lead in setting the standards, initiatives and overall direction. A new Information Systems audit team was formed within GIA to handle the review of the basic stack of potential technical subject areas such as networks, data center facilities, system platforms, databases, applications and general controls. GIA remains as the single point of contact of the Board Audit Committee.

The decision to restructure the internal audit organization underwent careful and deliberate consideration after fully understanding the factors with the end goal of promoting and improving the state of internal controls and adding value to the Company by recommending cost-effective solutions for addressing issues via specific areas of expertise. The creation of resident audit teams would not only increase the scope and coverage of audits undertaken but would also facilitate specialization and in-depth understanding of the business and increase the visibility of internal audit in the different business units.

We reviewed and approved the annual audit program for the year which also covers the adequacy of resources, qualifications and competency of the staff and independence of the internal auditor.

In our review of the performance of internal audit for 2012, we confirm that the auditors of GIA conducted its responsibilities objectively and in an unbiased manner. Its position in the organization was further strengthened by moving the administrative reporting line from the Chief Risk Management Officer to the President and Chief Executive Officer effective July 2012. GIA continues to functionally report to the Board Audit Committee.

Also, based on audit reports and highlights presented to the Committee, we concur with GIA’s assessment that the system of internal controls in effect during the year 2012, taken as a whole, provides reasonable assurance about the effectiveness of the Company’s internal control systems. The policies and procedures in place serve as reasonable and effective safeguards of company resources and the integrity of its programs. Action plans to address control gaps and weaknesses raised have been agreed, timelines set and regular status monitoring strengthened to ensure achievement of more efficient and effective processes as well as general reduction of operational risks. With the synergy of all its control activities, the Company’s overall system of internal controls is adequate and is operating as intended.

Finally, we reviewed and endorsed for approval the revised Audit Committee Charter which was duly approved by the full Board in its meeting held September 27, 2012. Together with the revised Charter is the approval of the Board Audit Committee Self-Assessment Form. Based on the Self-Assessment conducted, the Committee achieved a “Substantive” compliance rating of 98% for the year 2012. The rating indicates that the Committee substantially complies with the requirements set forth in its charter. The Committee demonstrates evidence that its members are meeting most of the requirements set by global standards and practices.

Risk Management

The revised Audit Committee charter includes a new section on the joint duties and responsibilities of audit with the Board Risk and Reputation Committee. Included in this new provision is our role to refer to the Risk and Reputation committee significant reports and findings by internal audit as well as regulatory and government agencies with respect to risk management activities and compliance issues, together with management’s responses. Discussions on items that have significant financial statement impact or required significant financial statement or regulatory disclosures; and other significant issues, including, but not limited to, significant compliance issues, shall be covered during the joint meeting of the Board Audit Committee with the Board Risk and Reputation Committee.

We have approved the inclusion in the audit master plan for next year governance audits which includes the risk management process audit and validation of the risk treatment plans committed by the different business units. These audits will give us a better picture of the adequacy and effectiveness of the risk management processes within the organization.

In behalf of the Committee,

Securities and Exchange Commission

SEC Building, EDSA Greenhills

Mandaluyong, Metro Manila

The management of Aboitiz Equity Ventures, Inc. is responsible for the preparation and fair presentation of the consolidated financial statements for the years ended December 31, 2012 and 2011, including the additional components attached therein, in accordance with the prescribed financial reporting framework indicated therein. This responsibility includes designing and implementing internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances.

The Board of Directors reviews and approves the consolidated financial statements and submit the same to the stockholders.

SyCip Gorres Velayo & Co., the independent auditors, appointed by the stockholders for the period December 31, 2012 and 2011 has examined the consolidated financial statements of the company in accordance with Philippine Standards on Auditing, and in its report to the stockholders, has expressed its opinion on the fairness of presentation upon completion of such examination.

Signed this 5th day of March, 2013.

Republic of the Philippines ) City of Cebu ) S.S.

The Stockholders and the Board of Directors

Aboitiz Equity Ventures, Inc.

We have audited the accompanying consolidated financial statements of Aboitiz Equity Ventures, Inc. and Subsidiaries, which comprise the consolidated balance sheets as at December 31, 2012 and 2011, and the consolidated statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2012, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Aboitiz Equity Ventures, Inc. and Subsidiaries as at December 31, 2012 and 2011, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2012 in accordance with Philippine Financial Reporting Standards.

The Stockholders and the Board of Directors

Aboitiz Equity Ventures, Inc.

Aboitiz Corporate Center

Gov. Manuel A. Cuenco Avenue, Cebu City

We have audited in accordance with Philippine Standards on Auditing, the consolidated financial statements of Aboitiz Equity Ventures, Inc. and Subsidiaries included in this Form 17-A and have issued our report thereon dated March 5, 2013. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the Index to Financial Statements and Supplementary Schedules are the responsibility of the Company’s management. These schedules are presented for purposes of complying with the Securities Regulation Code Rule 68, as amended (2011) and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

The Board Audit Committee’s roles and responsibilities are embodied in the Board Audit Committee Charter approved by the Board of Directors. It provides assistance to the Board of Directors in fulfilling the Board’s oversight responsibility to the shareholders relating to: (a) the quality and integrity of the Company’s accounting, auditing, legal, ethical and regulatory compliance; (b) risk management; (c) financial reporting practices; and (d) corporate governance. Any proposed changes to the Audit Committee Charter are referred to the Board for approval.

Membership

As of December 31, 2010, the Audit Committee is composed of five members - three independent directors and two As of December 31, 2012, the Board Audit Committee is composed of five (5) members, three (3) of whom are independent directors.

I, Jose R. Facundo, Independent Director and Chair of the Committee is ably assisted by Romeo L. Bernardo (Independent Director), Jakob G. Disch (Independent Director), Mikel A. Aboitiz (Executive Director) and Jaime Jose Y. Aboitiz (Executive Director).

Meetings

In compliance with the Board Audit Committee Charter, four (4) regular meetings were held during the year: February 29, May 3, August 2, and October 30, 2012. Two (2) joint meetings with the Board Risk & Reputation Committee were also held on August 1 and Dec 6, 2012; and one (1) special meeting was called on March 1, 2012. Also present in these meetings is the Group Internal Audit Head, the Chief Reputation and Risk Management Officer, and by invitation, the Aboitiz Power Corporation’s Chief Financial Officer and Assistant Vice President-Controller.

Financial Reports

On a high level basis, we reviewed, discussed, and endorsed for the approval of the Board the quarterly unaudited consolidated financial statements and the annual audit financial statements of Aboitiz Power Corporation and Subsidiaries, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations following prior review and discussion with management, the internal auditors and SyCip Gorres Velayo & Co. (SGV), the company’s independent auditor.

The activities of the Audit Committee were performed in the following context:

• That management has the primary responsibility for the financial statements and the financial reporting process; and

• That SGV is responsible for expressing an opinion on the conformity of the Company’s audited financial statements with Philippine Financial Reporting Standards.

Independent Auditors

The overall scope and audit plan of SGV were reviewed and approved. The terms of engagement which covers audit-related services provided by SGV and its related fees were also reviewed. There was no non-audit related service provided for the year 2012.

We also discussed with SGV the results of the SGV’s audits and its assessment of the overall quality of the financial reporting process. SGV also presented the effects of changes in relevant accounting standards and presentation of financial statements that impact on the reported results.

We also noted and approved the delegation of the appointment of the Company’s external auditors for 2012 by the shareholders to the Board of Directors.

Internal Auditors

TA reorganization of the Internal Audit department took effect in August 2012. Majority of the auditors were deployed to the different business units where resident internal audit teams were formed to handle finance and operations audits. For AboitizPower, a resident audit team was set up each for the Power Generation Group and the Power Distribution Group.

The corporate team, now referred to as Group Internal Audit (GIA), continues to take the lead in setting the standards, initiatives and overall direction. A new Information Systems audit team was formed within GIA to handle the review of the basic stack of potential technical subject areas such as networks, data center facilities, system platforms, databases, applications and general controls. GIA remains as the single point of contact of the Board Audit Committee.

The decision to restructure the internal audit organization underwent careful and deliberate consideration after fully understanding the factors with the end goal of promoting and improving the state of internal controls and adding value to the Company by recommending cost-effective solutions for addressing issues via specific areas of expertise. The creation of resident audit teams would not only increase the scope and coverage of audits undertaken but would also facilitate specialization and in-depth understanding of the business and and increase the visibility of internal audit in the different business units.

We reviewed and approved the annual audit program for the year which also covers the adequacy of resources, qualifications and competency of the staff and independence of the internal auditor.

In our review of the performance of internal audit for 2012, we confirm that the internal auditors conducted their responsibilities objectively and in an unbiased manner. GIA’s position in the organization was further strengthened by moving the administrative reporting line from the Chief Risk Management Officer to the President and Chief Executive Officer effective July 2012. GIA continues to functionally report to the Board Audit Committee.

Also, based on audit reports and highlights presented to the Committee, we concur with GIA’s assessment that the system of internal controls in effect during the year 2012, taken as a whole, provides reasonable assurance about the effectiveness of the Company’s internal control systems. The policies and procedures in place serve as reasonable and effective safeguards of company resources and the integrity of its programs. Action plans to address control gaps and weaknesses raised have been agreed, timelines set and regular status monitoring strengthened to ensure achievement of more efficient and effective processes as well as general reduction of operational risks. With the synergy of all its control activities, the Company’s overall system of internal controls is adequate and is operating as intended.

Finally, we reviewed and endorsed for approval the revised Audit Committee Charter which was duly approved by the full Board in its meeting held September 27, 2012. Together with the revised Charter is the approval of the Board Audit Committee Self-Assessment Form. Based on the Self-Assessment conducted, the Committee achieved a “Substantive” compliance rating of 98% for the year 2012. This rating indicates that the Committee substantially complies with the requirements set forth in its charter. The Committee demonstrates evidence that its members are meeting most of the requirements set by global standards and practices.

Risk Management

The revised Audit Committee charter includes a new section on the joint duties and responsibilities of audit with the Board Risk and Reputation Committee. Included in this new provision is our role to refer to the Risk and Reputation committee significant reports and findings by internal audit as well as regulatory and government agencies with respect to risk management activities and compliance issues, together with management’s responses. Discussions on items that have significant financial statement impact or required significant financial statement or regulatory disclosures; and other significant issues, including, but not limited to, significant compliance issues, shall be covered during the joint meeting of the Board Audit Committee with the Board Risk and Reputation Committee.

We have approved the inclusion in the audit master plan for next year governance audits which includes the risk management process audit and validation of the risk treatment plans committed by the different business units. These audits will give us a better picture of the adequacy and effectiveness of the risk management processes within the organization.

In behalf of the Committee,

Securities and Exchange Commission

SEC Building, EDSA Greenhills

Mandaluyong, Metro Manila

The management of Aboitiz Power Corporation is responsible for the preparation and fair presentation of the consolidated financial statements for the years ended December 31, 2012 and 2011, including the additional components attached therein, in accordance with Philippine Financial Reporting Standards. This responsibility includes designing and implementing internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances.

The Board of Directors reviews and approves the financial statements and submits the same to the stockholders.

SyCip Gorres Velayo & Co., the independent auditors, appointed by the stockholders for the period December 31, 2012 and 2011, has examined the consolidated financial statements of the company in accordance with Philippine Standards on Auditing, and in its report to the stockholders, has expressed its opinion on the fairness of presentation upon completion of such examination.

Signed this 5th day of March 2013.

Republic of the Philippines ) City of Cebu ) S.S.

The Stockholders and the Board of Directors

Aboitiz Power Corporation

We have audited the accompanying consolidated financial statements of Aboitiz Power Corporation and Subsidiaries, which comprise the consolidated balance sheets as at December 31, 2012 and 2011, and the consolidated statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2012, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Aboitiz Power Corporation and Subsidiaries as at December 31, 2012 and 2011, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2012 in accordance with Philippine Financial Reporting Standards.

The Stockholders and the Board of Directors

Aboitiz Power Corporation

Aboitiz Corporate Center

Gov. Manuel A. Cuenco Avenue

Kasambagan, Cebu City

We have audited the accompanying consolidated financial statements of Aboitiz Power Corporation and Subsidiaries, which comprise the consolidated balance sheets as at December 31, 2012 and 2011, and the consolidated statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2012, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Aboitiz Power Corporation and Subsidiaries as at December 31, 2012 and 2011, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2012 in accordance with Philippine Financial Reporting Standards.

The Stockholders and the Board of Directors

Aboitiz Power Corporation

Aboitiz Corporate Center

Gov. Manuel A. Cuenco Avenue

Kasambagan, Cebu City

We have audited in accordance with Philippine Standards on Auditing, the consolidated financial statements of Aboitiz Power Corporation and Subsidiaries as at December 31, 2012 and 2011 and for each of the three years in the period ended December 31, 2012 included in this Form 17-A and have issued our report thereon dated March 5, 2012. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the Index to Financial Statements and Supplementary Schedules are the responsibility of the Company’s management. These schedules are presented for purposes of complying with the Securities Regulation Code Rule 68, As Amended (2011) and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements, and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.