2007 ANNUAL REPORT Power Corporation - Aboitiz Equity Ventures

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F R O M Y O U R E V P F O R S T R A T E G Y & R E G U L A T O R Y A F F A I R S Dear Shareholders, Juan Antonio E. Bernad EXECUTIVE VICE PRESIDENT STRATEGY & REGULATORY AFFAIRS The distribution utilities will remain regulated as natural monopolies for the network business, but preparations are being made for the shift of supply services into a competitive environment. As structural changes are gradually implemented in the power industry, the regulatory framework is also changing. The distribution utilities will remain regulated as natural monopolies for the network business, but preparations are being made for the shift of supply services into a competitive environment. Our distribution utilities have pending applications with the Energy Regulatory Commission (ERC) for their Business Separation & Unbundling Plans. In preparation for open access and retail competition, we have acquired licenses for Retail Electricity Supply and Wholesale Aggregation under several corporate entities, including our main electricity service company, Aboitiz Energy Solutions, Inc. (AESI) AESI already serves a wide range of customers today, from commercial and industrial establishments to distribution utilities, helping them improve the efficiency of their electrical systems. On the network side, our utilities are also in the process of acquiring all applicable sub-transmission assets (STA) of the National Transmission Corporation (TransCo) in their respective franchise areas. Acquiring the STAs will prevent anyone from bypassing our distribution networks in serving customers within our franchise areas. With valuation issues already resolved between the ERC and TransCo, many of the STA sale agreements have already been approved by the ERC, and upon transfer will be included in the rate bases of the distribution assets either as network or connection assets, the difference being that the latter are charged to specific customers. A key challenge, as well as opportunity for our generation business, is ensuring future energy supply in the coming years after the privatization of the National Power Corporation. While generation is also intended to be a competitive, and therefore, largely unregulated business, rates passed on to distribution utility customers are still regulated in the transition period before full retail competition. The power supply agreement between Davao Light & Power Company and Hedcor’s Sibulan & Tamugan hydroelectric plants that resulted from a competitive bidding process, is in the final stages of approval with the ERC. We are also in the process of evaluating new supply contracts for the other utilities, and updating our Transition Supply Contracts with NPC to meet our medium-term requirements. Other expanded prospects for the generation business include new guidelines for procurement of ancillary services, which previously had been sourced only from NPC. The expansion of the Wholesale Electricity Spot Market (WESM) to the Visayas grid should also provide market-determined electricity prices in the grid to attract new capacity. The last of our distribution utilities to get a new unbundled rate decision from the ERC was Subic EnerZone, with an average rate adjustment of 36.7 centavos per kilowatt-hour scheduled to take effect after the October 2008 fifth anniversary of its Distribution Management Service Agreement with the Subic Bay Metropolitan Authority. The ERC is moving towards a Performance-based ratemaking approach (PBR) with Cotabato Light currently going through the rate reset procedure to prepare for its entry into a four-year regulatory period under PBR by April 2009. The reset procedure for Davao Light and VECO will start at the end of 2008, for new rates to take effect by July 2010. Initially this will include both distribution wheeling and supply & metering charges, though subsequent resets will only be for distribution wheeling charges. San Fernando Electric and Subic EnerZone are scheduled for the fourth batch of private utilities to enter PBR, with new rates to be effective by 2011. The advantages of PBR include defined timeframes for rate reviews and tariff setting, forward looking cost bases including projected capex, adjustments for inflation, and performance incentive schemes. Since these efficiency improvements benefit the utilities initially, but are kept by the consumers in subsequent periods, it is positive for both parties. Under this arrangement, service levels are enforced not just through statutory requirements imposed by the regulator, but also through a system of financial rewards and penalties. 20 • ABOITIZ POWER CORPORATION ANNUAL REPORT 2007
We expect our distribution companies’ efficiency to be rewarded under this regulatory approach. It also provides an opportunity for immediate gains upon entry as rates will be re-based from the 2000 test years in our current unbundled rates to the present cost levels. The data requirements to effect PBR present a huge challenge, and a strain on resources. So we have applied what we learned from the other utilities’ experience, including our current experience with Cotabato Light, to plan ahead so that much of the work we need to do upon entry by our larger utilities are being prepared ahead of time. We believe this preparation will facilitate the process both for us and the regulator, and help us maximize the benefits of PBR. The future environment will be more demanding, and competition will force the industry to become increasingly efficient. When we enter the era of customer choice, we expect to be able to offer our customers a range of value propositions designed to meet their individual preferences, while retaining one constant: service excellence. Juan Antonio E. Bernad EXECUTIVE VICE PRESIDENT STRATEGY & REGULATORY AFFAIRS When we enter the era of customer choice, we expect to be able to offer our customers a range of value propositions designed to meet their individual preferences, while retaining one constant: service excellence. ABOITIZ POWER CORPORATION ANNUAL REPORT 2007 • 21
Page 1 and 2: Power Corporation Powering New Fron
Page 3 and 4: P o w e r i n g New Frontiers ABOIT
Page 5 and 6: FINANCIAL SUMMARY For the Year (In
Page 7 and 8: R E P O R T T O O U R S T O C K H O
Page 9 and 10: h Powering New Frontiers With deman
Page 11 and 12: Results of Operations POWER D I S T
Page 13 and 14: R E S U L T S O F O P E R A T I O N
Page 15 and 16: A SFELAPCO crew does live line work
Page 17 and 18: Results of Operations POWER G E N E
Page 19 and 20: POWER G E N E R A T I O N Hedcor si
Page 21: STEAG State Power Inc. (SPI) contri
Page 25 and 26: The strong and stable financial per
Page 27 and 28: DIRECTORS SPECIAL AND REGULAR BOARD
Page 29 and 30: Director and Senior Executive Compe
Page 31 and 32: The Office of the Chief Compliance
Page 33 and 34: Employee Relations In AP, people ar
Page 35 and 36: P o w e r i n g New Frontiers F E A
Page 37 and 38: The rest of its capacity is traded
Page 39 and 40: The annual energy requirement will
Page 41 and 42: Gone are the long queues at VECO’
Page 43 and 44: The three utilities aim to provide
Page 45 and 46: CPPC, meanwhile, is situated on a 1
Page 47 and 48: and reliable supply of electricity.
Page 49 and 50: The fulfillment of sharing the frui
Page 51 and 52: Board of Directors Jon Ramon M. Abo
Page 53: Corporate Officers Benjamin A. Cari

2007 ANNUAL REPORT Power Corporation - Aboitiz Equity Ventures

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