2010 Annual Report - Aboitiz Equity Ventures

powering growthAnnual report 2010

table of Contents02 Financial HighlightsReport to Stockholders04 From your Chairman and President & CEO08 Results of Operations09 Power Generation14 Power Distribution18 Power Marketing and Trading20 From your Chief Strategy & Regulation Officer22 From your Chief Financial Officer26 From your Chief Risk Management Officer27 Risk Management Report30 From your Chief Compliance Officer31 Corporate Governance ReportFeatures44 The lasting allure of hydro plants46 Providing better solutionsto customers and community48 Sustainability Statement50 CSR: Sowing seeds of hope52 Board of Directors / Board Committees54 Corporate Officers56 Operating Unit Heads57 Management Directory58 Our Portfolio for 201159 Location of Assets60 Audit Committee Report61 Statement of Management Responsibility62 Independent Auditor Report64 Consolidated Financial StatementThe complete Securities & Exchange Commission Form 20-IS (InformationStatement) and Annual Report is inside the CD inserted at the inside backcover of this Annual Report. The CD’s other contents are the full CorporateGovernance Report 2010 and the Aboitiz Foundation, Inc. Annual Report2010.Annual Report 2010 1

FINANCIAL SUMMARY(In Million Pesos)2008 20092010% change(2010 vs 2009)INCOME STATEMENTOperating revenues 12,243 23,174 59,551 157%Operating expenses (10,590) (17,718) (33,320) 88%Operating profit 1,653 5,456 26,232 381%Other income (charges) 3,390 945 (228) -124%Income before income tax 5,043 6,401 26,004 306%Provision for income tax (618) (631) (921) 46%Net income before non-controlling interests 4,425 5,770 25,083 335%Non-controlling interests (91) (111) (42) -62%Net income attributable to equity holders of the parent 4,334 5,659 25,041 343%EBITDA 5,407 9,867 34,362 248%FINANCIAL CONDITIONTotal assets 47,272 111,341 134,557 21%Total liabilities 16,580 76,294 76,823 1%Non-controlling interests 536 571 404 -29%Equity attributable to equity holders of the parent 30,155 34,476 57,330 66%RATIOSPer share (Pesos)Earnings 0.59 0.77 3.40 342%Book value 4.10 4.69 7.79 66%Cash dividend to common 0.18 0.20 0.30 50%Return on equity 17% 19% 76% 289%Current 2.12 0.68 2.58Debt / equity 0.54 2.18 1.33Net debt / equity (0.13) 1.82 0.84Income ContributionPer business segment (in Php millions)Attributable Power Sales(in GWh)24,390generation100908111%9,7624,6191,7284,656distribution2,7791,479 1,5691,93376(567)(1,282)2008 2009 2010GenerationDistributionParent & Others1009088.6%3,6063,3223,142Annual Report 2010 3

FROM YOURCHAIRMAN AND PRESIDENT & CEODear Fellow Shareholders,The world economy continued its recovery in 2010 albeit in a volatileeco-political environment. Risk aversion remains relatively high. TheUS Fed maintained its easy monetary policy, in particular keepinginterests rates low and monetizing debt through QE2. The debt crisisin the Eurozone and inflation fears in China fueled general adversion.High unemployment and continued weakness in the real estatemarkets of the developed world are drags for sustained growth.In contrast, the strong economic growth in the emerging markets in general, and thePhilippines, in particular, was fueled by consumer spending and private sector investments.The country’s GDP grew by 7.3% in 2010, the highest in decades. The growth in OFWremittances and the ICT sector as well as net exports contributed to the strength of the peso,helping temper inflation that averaged 3% last year. This allowed the Bangko Sentral to resistincreasing policy interest rates. Our gross international reserves reached $62 billion (bn) atyearend 2010, enough to cover the country’s foreign debt of $60 bn.President Noynoy Aquino’s election and the appointment of both competent and crediblegovernment officials, who pledged to fight corruption, improve tax collection and lowergovernment waste, hatched new optimism and investor confidence.Our results2010 was an exceptionally remarkable year for your company. AboitizPower registeredanother record performance with consolidated net income rising exponentially to P25 bn, a343% growth in earnings. Return on equity reached 76%.AboitizPower registeredanother recordperformance withconsolidated net incomerising exponentially toP25 bn, a 343% growthin earnings. Return onequity reached 76%.After AboitizPower went public in 2007, we undertook major growth and investment movesto increase our generating capacity. In 2010, we put those assets to work and maximized thevalue of our portfolio. Over the last few years, we have remained resolute in our objective toassemble a portfolio of power assets that would not only complement each other but alsomake us more competitive over the long run.Our increased capacity allowed us to serve 9,762 gigawatt hours (GWh) of electricity to ourcustomers in 2010, a 111% growth from the previous year. Optimizing the output of ourgenerating assets was important because their availability allowed us to sell substantialquantities of power to the Luzon spot market when, in stretches during 2010, competitiveconditions drove spot spices to unexpectedly high levels. Our plants were available to play acrucial role in partially covering the power supply shortfall in the Luzon grid caused by higherdemand growth, major outages of other plants due to either scheduled maintenance orequipment breakdown, and the effects of El Niño. Our two power barges in Mindanao and thecommissioning of our Sibulan Hydro also aided in assuaging the Mindanao power shortage.4Aboitiz Power Corporation

from your chairman and president & CEOThese deficits in power supply made utilities and industrial customers realize the benefit ofcontracting bilateral contracts with generators such as AboitizPower. Consistent with ourstrategy of contracting our baseload facilities, we signed up an additional 150 megawatts(MW) of power supply contracts in 2010, ending the year with 83% of our attributable capacitycontracted.Aside from filling power deficiencies in Luzon and Mindanao, AboitizPower, through its largehydros and power barges, also provided necessary ancillary services such as regulating,contingency and black start reserves. Ancillary services, which are in short supply, are essentialin maintaining power quality, reliability and stability of the grid.Despite the power supply deficits that hounded Visayas and plagued Mindanao throughout2010, our distribution utilities enjoyed healthy growth in electricity sales, increasing by 9%over 2009 levels. Future new supply in both Visayas and Mindanao will assure us of the energyto drive the growth of the areas we serve.Visayan Electric Company (VECO) and Davao Light & Power Company implemented thePerformance-Based Regulation (PBR) system in 2010, with consequent and much-delayedadjustments in their respective regulatory asset bases and rates.VECO and Davao Lightimplemented thePerformance-BasedRegulation (PBR)system in 2010, withconsequent and muchdelayedadjustmentsin their respectiveregulatory asset basesand rates.In our effort to stay ahead of the growth of our franchise areas and improve the quality ofservice of our distribution utilities, we expanded and enhanced our distribution networksby building new substations and purchasing sub-transmission assets from the National GridCorporation of the Philippines (NGCP). We also built a 36-kilometer 138,000-volt transmissionline to directly connect the Cebu Energy Development Corporation (CEDC) plant to VECO’sdistribution system.Powering growthWe remain excited about the prospects of the Philippine economy and will not stop developinggeneration projects to augment our economy’s generation capacity.Today, AboitizPower is committed, more than ever, to find a better solution to power ournation’s growth with reliable and affordable energy with the least adverse effect on ourenvironment. No single type of generation will address this challenge. We firmly believe that thebetter solution lies in a balanced mix of efficient baseload plants including fossil fuels, flexibleintermediate facilities and, to the extent possible, renewables that are economical and notreliant on excessive subsidies. We are currently in various stages of development for two cleancoal projects and some small hydro plants that we expect to break ground within 2011.Participating in the privatization of targeted National Power Corporation (NPC) assetsthat the Power Sector Assets and Liabilities Management (PSALM) Corporation bids out issomething we will continue to do. We will also keenly look out for opportunities to acquireboth generation and distribution assets. Just recently, we reached an agreement with PacificHydro that will give us full ownership in Luzon Hydro’s 70-MW Bakun plant.Over the years, we have implemented our business initiatives with strategic fervor, and wewill continue to do so moving forward. We have consistently been prudent in managing ourinvestments, vigilant about maintaining a strong balance sheet and healthy cash flow, andkeeping our debt at manageable levels.We are honored that AboitizPower’s clear and focused business strategy was recognized inEuromoney’s 2010 Asia’s Best Companies Awards, landing in the top 3 among 16 corporationsnominated in the Philippines for the Most Convincing and Coherent Strategy.Annual Report 2010 5

Corporate responsibilityTo protect the interestsof all our stakeholders,we have beganimplementing ourwell-defined strategicroadmap towardsinstitutionalizing riskmanagement across theAboitiz Group to ensurebusiness continuityand ultimately achieveenterprise resilience.As we expand our businesses and intensify our growth initiatives, we also continue tostrengthen our practice of and commitment to corporate governance. While most companiestalk about protecting the rights and interests of minority shareholders, your company’sobjective is to align the interests of both controlling and minority shareholders.To protect the interests of all our stakeholders, we have began implementing our well-definedstrategic roadmap towards institutionalizing risk management across the Aboitiz Group toensure business continuity and ultimately achieve enterprise resilience.We are pleased to report that AboitizPower is a gold awardee in the 2010 Institute of CorporateDirectors’ Corporate Governance Scorecard for publicly listed companies, garnering anaverage score of 96.9% , an improvement from the previous year’s silver awardee ratingof 91.6%. Your company will also be honored at the 7th Corporate Governance Asia AnnualRecognition Awards 2011 in recognition of its continuing commitment to the development ofcorporate governance in the region.AboitizPower business units continued to embrace corporate social responsibility (CSR)as a core focus throughout 2010. Those new to the fold immediately adopted the AboitizWay, embarking on their respective social development initiatives with determination andenthusiasm. This commitment to share and serve has always been a real working priority ofthe Aboitiz Group. We widened our reach to include not only communities where Aboitizcompanies operate in but also those in areas where we sell our generated power across thecountry. We also expanded our microfinance program to benefit more organized groupsand increased our involvement in environment related-initiatives, supporting the Group’ssustainability mindset.A number of sustainability projects took shape in 2010, the most significant of which isthe ongoing Race to Reduce resource optimization program that won the top prize in theenvironmental excellence category of the Asian CSR Awards in Kuala Lumpur. This Groupwideprogram, which encourages our business units to reduce consumption of electricity,water and paper, also earned an Anvil Award of Merit.Creating shareholder valueStaying true to our commitment to balance growth and the distribution of dividends, yourBoard approved a cash dividend of P1.32 per share, paid out on April 5, 2011 to shareholders ofrecord as of March 17, 2011 and representing a dividend yield of 4.4%. This is a 340% increasefrom the P0.30 paid out last year.Investors bid up the price of AboitizPower shares in 2010, ending the year at P31.10 per share,up by 262%. This resulted to your company’s market capitalization to surge by P166 bn,hitting close to P229 bn, making AboitizPower among the most valuable companies in termsof market value listed in the Philippine Stock Exchange.We are pleased to report that global investors have taken notice of AboitizPower’sperformance and effective December 1, 2010, your company has been included in the MSCIIndex. We have seen higher levels of trading since then, increasing liquidity of the stock.The outstanding performance of AboitizPower’s stock price indicates your confidence andapproval of our business initiatives and for this, we are truly grateful and honored. We arehappy to see loyal and trusting shareholders rewarded for their conviction in AboitizPower asa long-term investment.We are very thankful to our customers, business partners, suppliers, and host communities,for the valued partnerships and their committed support.6Aboitiz Power Corporation

RESULTS OF OPERATIONSSelect consolidated income statement items are shown below:CONSOLIDATED (mn pesos) 2008 2009 2010% change('10 vs '09)Revenues 12,243 23,174 59,551 157%EBITDA 5,407 9,867 34,362 248%Net Income to Equity Holders 4,334 5,659 25,041 342%Ex-Pagbilao Net Income 4,334 7,167 30,132 320%Core Net Income 4,665 5,291 24,428 362%Ex-Pagbilao Core Net Income 4,665 6,799 29,512 334%Your company ended2010 with revenuesof P77.6 billion (bn),up by 117% from theprior year. Earningsbefore interest, taxes,depreciation andamortization (EBITDA)came in at P36.6 bn, anincrease of 212%from 2009.To better appreciate the Results of Operations, we present subsequentfigures in this portion of the Annual Report in beneficial terms (thesum of subsidiary and associate figures multiplied by your company’sownership in the concerned subsidiary and associate companies).BENEFICIAL (mn pesos) 2008 2009 2010% change('10 vs '09)Revenues 24,548 35,820 77,622 117%EBITDA 7,661 11,740 36,632 212%Your company ended 2010 with revenues of P77.6 billion (bn), up by 117% from the prior year.Earnings before interest, taxes, depreciation and amortization (EBITDA) came in at P36.6 bn, anincrease of 212% from 2009. Core net income jumped 362% from P5.3 bn in 2009 to P24.4 bnin 2010, and, when adjusted for the non-cash expenses relating to the Pagbilao IPPA contract,the core net income figure comes in at P29.5 bn versus the P6.8 bn in 2009.8Aboitiz Power Corporation

RESULTS OF OPERATIONSpower generationBENEFICIAL 2008 2009 2010% change('10 vs '09)Revenues (mn pesos) 8,729 17,927 55,630 210%EBITDA (mn pesos) 5,200 9,419 33,593 257%Income contribution (mn pesos) 2,779 4,656 24,390 424%Power sales (GWh) 1,728 4,619 9,762 111%Capacity (MW) 578 1,745 2,051 18%Renewable capacity (MW) 341 808 850 5%Your company’s generation business recorded an income of P24.4 bn in 2010, up by 424%year on year (YoY). Netting out one-off items, the generation business shored in P23.7 bnfor the year, up by 448% YoY. This was mainly due to the increase in generating capacity andhigher average selling prices both for contracts and spot market.1. The 100-MW Mobile 1 located inBarangay San Roque, Maco,Davao del Norte2. The 100-MW Mobile 2 locatedin Barangay Sta. Ana, Nasipit,Agusan del Norte1The generation business ended 2010 with 2,051 megawatts (MW) of beneficial generatingcapacity, an increase of 18 % for the year. Power sales improved 111% for the year to 9,762gigawatt hours (GWh). Revenues consequently went up by 210% to P55.6 bn with EBITDA aimproving 257%.After making great leaps in our generating capacity the past couple of years, 2010 was aboutputting these assets to work and selling the energy generated. We saw the full-year effect ofassets we took over in 2009, mainly the 467-MW Tiwi-MakBan geothermal and the 700-MWPagbilao coal power plants.2Growth in generation capacityThree plants entered the fold in 2010. The two power barges, renamed Mobile 1 and 2,each with a capacity of 100 MW, were turned over in February and March, and immediatelydelivered energy to the then drought-plagued Mindanao grid. In March, the 42.5-MW Sibulanhydro plant generated its first kilowatt-hour (kWh), providing Cleanergy to Davao Light &Power Company, Inc. (Davao Light) customers, which helped further mitigate the Mindanaopower shortage.Power sold, beneficial installed capacity and Cleanergy9,7624,619Geothermal 467 MWHydro 383 MW1,0184901,728253 341578808 8502007 2008 2009 20102,0511,745Power sold (GWh) Beneficial capacity (MW) Cleanergy (MW)We saw the full-yeareffect of assets we tookover in 2009, mainly the467-MW Tiwi-MakBangeothermal and the700-MW Pagbilao coalpower plants.Annual Report 2010 9

ARTIST: Ebenezer Lanzam A. MorrokEbenezer is a Fine Arts student from the University of the Philippines Visayas–Cebu College. This year, he bagged 3rd place in the 34th Jose Joya Awards and wasa finalist in the same awards in 2009. Twice a finalist in the Level Up Mural Painting Competition, he has been joining exhibits since 2008.Annual Report 2010 11

1. Ambuklao hydro plant2. Magat hydro plant3. Tiwi geothermal plant12Brownfields and rehabilitationsAs for brownfields and rehabilitations, the completion of the Ambuklao Hydro rehabilitationis now expected in the third quarter of 2011 instead of end-2010 as reported in the past. Thedelay is due to the abandonment of the plugging of the old headrace tunnel because of theunexpectedly heavy volume of silt and sediments in it, and the adoption of a new approachwith the use of new penstocks and a new headrace tunnel. Once operational, the plant, whichhas not been operating since 1999, will add 105 MW of new capacity into the Luzon grid.Over at 100-MW Binga Hydro, valve and equipment replacements will result in five additionalMW per year for four years starting in 2011. The works at Ambuklao and Binga Hydro areexpected to cost US$299 million (mn), on top of the US$325 mn paid to purchase both assets.The possibility of adding a reverse pump system at 360-MW Magat Hydro should be decidedon with finality in early 2011. This will allow Magat Hydro to pump back into its reservoir 90-MW worth of water during off-peak hours to be turbined during peak hours.Rehabilitation works at the MakBan and Tiwi Geothermal plants are expected be completedby first quarter of 2012. Ongoing works, along with operational optimization, have caused anincrease of overall reliability factor of the 467-MW geothermal group to 99% in 2010 (priorto takeover, this figure was in the range of 60% to 70%), aided by a significant reduction invented steam from 284 equivalent GWh in 2009 to 60 equivalent GWh in 2010. Asbestos andother hazardous waste have been removed and working conditions improved as part of therehabilitation effort.Coping with extreme weather conditionsThe drought that started towards the end of 2009 affected the ability of our hydro assets togenerate electricity and provide ancillary services to the Luzon grid in the first half of the year,but things normalized as soon as the rains came in.It is interesting to note the contrast between the two six-month periods for Magat and BingaHydros and their combined 460 MW. In the first half of the year, they generated 228 GWh of312Aboitiz Power Corporation

RESULT OF OPERATIONSenergy, while in the second half this figure increased more than threefold to 710 GWh. Theseoutputs work out to aggregate plant factors of 11% and 35%, respectively, for those periods.In terms of ancillary services, both hydros were also able to up accepted offers for ancillaryservices by more than 250% in the second half, thereby providing greater stability to theLuzon grid. To get an idea of how dry it was, Magat Hydro shut down from March to earlyJune.As we look at the year that Magat and Binga Hydro have had, we cannot help but look backwith wonder at how these assets have completely changed their roles in the Luzon grid. Theyused to provide baseload generation (with limited ancillary services) when owned by NPC.After we acquired both plants, we slowly transformed their roles into peaking plants andmaximized their technical capability to provide significant ancillary services for the stabilityand reliability in the Luzon grid. Today, both plants are very comfortable with the strategicservices they provide and the team running those plants is doing a wonderful job.Crucial to thepositive results of thegeneration unit in 2010was ensuring the plantswere in a positionto deliver as muchcapacity as the unitswould allow when thegrid needed the power.Readiness to deliverCrucial to the positive results of the generation unit in 2010 was ensuring the plants were in aposition to deliver as much capacity as the units would allow when the grid needed the power.In Luzon, for example, the system suffered from fuel shortages, major planned maintenance,unexpected breakdowns, the effects of El Niño, or a combination of all factors.With a combination of output optimization measures and structured fuel procurementpractices that ensured coal supply, your Company’s plants were able to sell substantialquantities of power to the Luzon spot market when, in stretches during 2010, conditionsdrove spot spices to unexpectedly high levels and power supply shortfalls affected the grid.The fuel position for 2011 is fully secured. In the first quarter of 2011we saw increasing oil and coal prices, and the hedged position allowsyour management team to breathe a sigh of relief.Looking out for acquisitionsWe will continue to keep a watchful eye for acquisition opportunitieslike our March 2011 Memorandum of Agreement with Pacific Hydrothat will give us full ownership of Luzon Hydro’s 70-MW Bakun plant.We will also actively participate in the privatization of targetedNPC assets being bid out by Power Sector Assets and LiabilitiesManagement (PSALM) Corporation.Antonio R. MorazaExecutive Vice PresidentChief Operating OfficerPower Generation GroupAnnual Report 2010 13

In general terms,however, all thedistribution utilitiesregistered highgrowth, althoughthe EnerZones atSubic, Mactan andBalamban postedsomewhat higherfigures, indicatingthe resurgence of theexport sector.power distributionBENEFICIAL 2008 2009 2010% change('10 vs '09)Revenues (mn pesos) 15,685 17,812 21,767 22%EBITDA (mn pesos) 2,629 2,625 3,112 19%Income contribution (mn pesos) 1,479 1,569 1,933 23%Power sales (GWh) 3,142 3,322 3,606 9%Power sales by customer (GWh)Residential 877 935 988 6%Commercial and industrial 2,265 2,387 2,618 10%Customers (thousands) 637 658 685 4%Your company’s distribution business ended the year 2010 with 27,000 more customers thanthe year before, an increase of 4%. Power demand, on a group basis, reached a peak of 910MW for the year versus 857 MW in 2009, while power sales for the year were 3,606 GWh asagainst the 3,322 GWh of the prior year. Revenues, EBITDA and income contribution increasedby 22%, 19% and 23%, respectively in 2010.Distribution power sales is a reliable indicator of domestic economic health and, if anything,the robust sales growth we saw in 2010 shows that the economy really is on the rebound.The 8.6% growth would in fact have been 9.5% had it not been for the combined 30 GWh(40 GWh if actual, not beneficial) lost by Visayan Electric Company (VECO), Davao Light andCotabato Light due to power generation shortfalls in Visayas and Mindanao. In general terms,however, all the distribution utilities (DUs) registered high growth, although the EnerZonesat Subic, Mactan and Balamban posted somewhat higher figures, indicating the resurgenceof the export sector.Beneficial power sales and peak demand20072,7903,3223,1427757373,606857910Focus on innovationYour company’s DUs have always had a reputation for findinginnovative ways of handling some aspects of the business.One outstanding example of this is our Interruptible LoadProgram (ILP), which is in place and approved by theregulator at VECO and Davao Light. It is turning out to bea major factor in reducing the negative effects of supplydeficits; a win-win approach that benefits the consumer bytapping the spirit of volunteerism among the local businesscommunity while compensating them almost entirely forrunning their own generators. In areas without a WholesaleElectricity Spot Market (WESM), the ILP replicates theWESM. It is a program that the regulator would like to seereplicated in other areas throughout the country.200820092010VECO completed a 36-kilometer 138-kV interconnectionwith the CEDC plant, thereby reducing the cost of the powersourced from there for VECO customers.Power sales (GWh)Peak demand (MW)VECO and neighboring Cebu Electric Cooperative Iformed a consortium in 2010 to purchase an 82-km 69kvsubtransmission line traversing their franchise areas.14Aboitiz Power Corporation

ARTIST: Almun Rey LogronioA graduate of the University of the Philippines Visayas–Cebu Campus, Almun Rey was a finalist during the Shell National Art Competition in 2009.Annual Report 2010 15

VECO and DavaoLight entered thePerformance BasedRegulation (PBR) regimein mid-2010, joiningCotabato Light, whichdid so in 2009.As the consortium starts to operate this line, their customers can look forward to better andmore reliable service.Similarly, we are hoping to complete in 2011 the purchase of all National Grid Corporation ofthe Philippines’ (NGCP) sub-transmission assets within our DUs’ franchise areas.Energy losses persistCotabato Light and VECO ended 2010 with systems losses above the regulatory cap of 8.5%.The following chart shows how the DUs ended the year with their systems losses.Systems loss2010 Gov’t Cap - 8.50%7%8% 8% 7%10%9%9%10%3%1%1%2%1%2%MEZBEZ SEZ SFELAPCO Davao Light Cotabato Light VECO1-2 Davao Light and Cotabato Light crewsconducting line maintenance worksFY 2009 FY 201012The 33-MVA VECO mobile substation is useful duringscheduled substation maintenance activities.16Aboitiz Power Corporation

RESULT OF OPERATIONSGetting both DUs under the cap is a priority in 2011. The approach will involve actions on boththe technical and the pilferage aspects. Revenue protection teams have been formed in bothDUs to spearhead the loss reduction effort.More DUs in PBRVECO and Davao Light entered the Performance Based Regulation (PBR) regime in mid-2010,joining Cotabato Light, which did so in 2009. In the case of these three utilities, this meansupdating the regulated asset base on which rates are based from an outdated P9 bn to a morerepresentative 4-year average of P15 bn. Unitary margins expectedly adjusted upward for theDUs under PBR.PBR also considers the level of customer service and product quality in setting rates andrecognizes that service and quality require investment. Since our DUs have always beenknown for offering outstanding customer service and constant innovation, they shouldconfidently operate under this regulatory paradigm.We firmly believe thatour DUs must look tocontract most of theirpower requirement andminimize exposure tothe WESM in order toeliminate undue pricevariations from thecustomers’ electric bills.Move away from price volatilityIn the past, contracting power for utilities meant waiting for NPC to send over the contractand signing it. As more and more plants are privatized, we are moving your company’s DUstowards lessened NPC dependence and more into contracting directly with generators. Inthe recent past, our DUs have signed with CEDC, Sibulan Hydro, Therma Marine and GreenCore Geothermal. We firmly believe that our DUs must look to contract most of their powerrequirement and minimize exposure to the WESM in order to eliminate undue price variationsfrom the customers’ electric bills.Seen this way, at some point there will surface purchased powercost discrepancies between utilities that can negotiate thesecontracts well and those that cannot. These utilities could very wellbe next door neighbors, geographically. As such, we will take thesecontractual negotiations very seriously.Jaime Jose Y. AboitizExecutive Vice PresidentChief Operating OfficerPower Distribution GroupAnnual Report 2010 17

The start of WESMhas helped reduce theincidence of brownoutsin the Visayas grid. Yourcompany’s two peakingplants in Cebu andMactan, for example, fed32,973 MWh into the gridfrom the opening of theWESM to the endof March 2011.power Marketing & tradingImportance of availabilityIn contrast to 2009, when low electricity spot market prices resulted from sufficient supply,wet weather and almost no significant increase in demand, 2010 started with high spot marketprices. This was caused by unexpected, and occasionally simultaneous market conditions,namely:• Unusually high increase in demand (peak demand grew by 10% for the yearcompared to the 10-year average of 5%);• Unimplemented maintenance plans in 2009 carried over and implemented in 2010;• Disruptive coal supply conditions in Asia due to weather and market conditions;• Relatively dry and hot weather (compared to 2009);• Simultaneous plant rehabilitations as a result of recent privatization;• Re-arranged plant maintenance schedules due to national elections; and• Forced outagesThese factors drove the average monthly spot market price to almost twice the expectedvalue in the first quarter of the year. Subsequently, average prices were reduced to levelsexpected from normal market conditions.Throughout the first quarter and up to October, your company and its partners operated itsplants reliably and thus benefitted from the temporary increases in electricity spot marketprices.Expect the unexpectedIn mid-November, a unit of Pagbilao experienced a two-week forced outage. Fortunately,the cost impact of this outage was mitigated by careful management of the mix betweenbilaterally contracted and spot market capacity of your company. Opportunity losses resultedfrom this even as the financial impact of this was minimized. Nevertheless, your company setout to better manage such situations in the future. During the next scheduled maintenanceperiod set in 2011, your company has taken pro-active steps to increase plant reliability.In the first half of the year, the power sales contracts of Magat and Binga Hydro and the lack ofwater in their reservoirs forced them to purchase replacement power at prices in excess of theircontractual selling prices. Your company was, and is, aware that these types of circumstancesoccur and have mechanisms in place to mitigate their impact on the bottom line.WESM in the VisayasOn December 26, 2010, the Philippine Electric Market Corporation opened the much-awaitedelectricity spot market in the Visayas. The start of this market is expected to make available atleast 200 MW of previously unused peaking capacity in a grid that essentially has no significantreserve margin. Hopefully, a similar market can be initiated in 2011 for Mindanao, where gridreserves are negative during the summer months. The start of WESM has helped reduce theincidence of brownouts in the Visayas grid. Your company’s two peaking plants in Cebu andMactan, for example, fed 32,973 MWh into the grid from the opening of the WESM to the endof March 2011.Operationally our trading department is developing its procedures and IT systems to allowit to trade multiple plants in multiple regions through one central location. This focuses theexpertise and allows us to benefit from the economies of scale.18Aboitiz Power Corporation

RESULT OF OPERATIONSPreference for long-term contractsIn 2009, when wet weather drove electricity spot market prices in Luzon to low levels,your company signed only a few electricity supply contracts as many utilities relied on theelectricity spot market for much of their needs. However, the significantly higher prices in2010 convinced many customers to rethink and later, sign contracts with suppliers. Yourcompany closed approximately 150 MW of these contracts as aggressive marketing effortswere put in place. By the end of 2010 we increased our mix of contracted (versus spot)capacity in Luzon from 70% to 83%, thus reducing the volatility of future earnings fromunexpected market changes. At the current mix between contracted and bilateral sales,your company has achieved a balance between reliable sales and being able to capitalize onmarket opportunities in electricity spot market prices.With the acquisitionof Mobile 1 and 2,your company hasbeen actively pursuingcontracts with Mindanaocustomers.For 2011, as transition supply contracts assigned to privatized power plants expire, the planis to sign new contracts with long contract periods. These contracts are designed to reflect apass through cost insofar as fuel costs and foreign exchange volatility is concerned. This willfacilitate your company’s capability to minimize revenue fluctuations stemming from theselargely uncontrollable variables.With the acquisition of Mobile 1 and 2, your company has been actively pursuing contractswith Mindanao customers. While the initial contract was with NGCP, we have closed manycontracts with cooperatives by the end of 2010. We hope to fully contract the two plants beforethe end of 2011. Building a strong relationship with cooperatives in Visayas and Mindanao is avital strategic initiative of the company.Building a workforce for the futureWe spent considerable effort in 2010 to building our organization to meet the rapid increasein generating capacity from our new acquisitions. Your company will continue building up itssales and marketing team presence in Luzon, Visayas, and Mindanao.It will continue to likewise prepare the team as it anticipates for thenext major change in the industry--open access, expected to occurby mid-2012.CleanergyWe continue to work towards building recognition and equityfor Cleanergy, our brand of clean and renewable energy. Whencustomers opt to make a responsible choice with this type of energy,we work to give them the recognition they deserve for making sucha choice.Luis Miguel AboitizSenior Vice PresidentPower Marketing and TradingAnnual Report 2010 19

FROM YOURChief strategy & regulation officerDear Shareholders,By the middle of 2011, it will have been 10 years since thepassage of Republic Act 9136, otherwise known as the ElectricPower Industry Reform Act of 2001, or EPIRA. It was meant tobe a comprehensive industry reform and restructuring act, andbecause of where we started from, it involved the privatizationof government assets in the industry as well.It seems like a good time to review what has been done, and what hasn’t, and no doubt, thecountry’s legislative and policy-making bodies will do just that. But we should be careful withthe conclusions we reach, because EPIRA is still a work in progress. It may be tempting toblame the problems besetting the industry today as a failure of the law to accomplish its goals,instead of perhaps a failure to fully implement the law, at least in the intended timeframe. Wewere supposed to achieve the privatization thresholds for open access in just a few years, andcomplete the process 100% in eight years, but we have at this writing done neither, though weare tantalizingly close to open access.Like living in a house undergoing major renovation, it often seems as though, with the painand the trouble, it isn’t worth the time and effort we already put in, or that we were betteroff before we started, but we can’t really appreciate the benefits until the work is completed.Indeed, most of the problems are transition issues, brought about by a partially privatizedgeneration sector where the rules for a competitive, market based industry sector don’t quitework, yet the resources can’t support the old centrally planned, allocated and subsidizedmodel either. Stopping, or backtracking isn’t really an option – we just have to move on.Privatized plants havesignificantly improvedtheir reliability, and thisis not limited to theAboitizPower plants.And the markets work–prices moved up inresponse to supplydeficiencies.2010 probably highlighted the shortcomings of our industry more than any recent year. Allthree grids in the country at one time or another experienced supply deficiencies that eitherdrove up prices, or caused power interruptions, or both. Blame it on the scheduling of powerplant maintenance to ensure sufficient capacity during elections, or on nature’s decision towithhold the rains. Blame it on the lack of planning on the part of energy purchasers whoshould have signed up new contracts years before, so new capacity would come in. Blame iton the lack of market mechanisms in some areas. Throughout the year, people were lookingfor someone, or something, to blame for the pain they experienced.Yet the reforms have been working. Elsewhere in this report, you will see how the privatizedplants have significantly improved their reliability, and this is not limited to the AboitizPowerplants. And the markets work – prices moved up in response to supply deficiencies as theywere supposed to, and on just about every weekend when demand is low, you also see pricesdropping like they should. A little bit less demand, or more supply and both problems ofreliability and price are addressed. Now, how do we ensure that happens on a continuingbasis?20Aboitiz Power Corporation

FROM YOUR Chief strategy & regulation officerLet me look at it from the regulatory perspective. The regulated natural monopolies, thetransmission company and the electricity distributors, have moved away from the traditionalhistorical return on rate base (RORB) approach, into a performance based ratemaking (PBR)approach. The two largest distribution utilities under AboitizPower, Davao Light and VisayanElectric, both started their PBR based rates in 2010. The most important feature of thisapproach, to my mind, isn’t the performance incentives, but the forward-looking view. Thisessentially assures sufficient resources for continuity of service at the levels prescribed by theregulator for at least the years covered in the reset period. In other words, it requires, allows,and encourages future investment.The irony is that the same cannot be said for the generation sector, which was intended to becompetitive, with market-based pricing.The government-ownedgeneration assets underNPC/PSALM continue tobe regulated based onthe Return on Rate Baseor RORB approach.The government-owned generation assets under National Power Corp. (NPC)/Power SectorAssets and Liabilities Management (PSALM) Corporation continue to be regulated basedon the RORB approach. In this extended transition period when private generators have tocompete with the government generators, the NPC regulated pricing effectively serves as acap. The regulator recognized this problem long ago, and allowed higher rates where NPChad no additional capacity to offer. Unfortunately, the evaluation process still utilizes in oneform or another the RORB approach, in the absence of an alternative evaluation approach forgeneration. Ironically, what was replaced as inadequate for a non-competitive business liketransmission or distribution that allows full cost recovery, is still in use for the competitivebusiness, even for short-term contracts that do not assure full cost recovery, let alone futureinvestment.The complex legislation that is EPIRA operated on a few simple premises: relatively (notabsolutely, as the cost components of electricity supply follow markets we cannot control)lower prices and better reliability can be attained by subjecting parts of the industry tothe discipline of the marketplace. We see glimpses of that already, even in our unfinishedhouse. But, going back to our demand-supply proposition, you willneed new capacity to keep up with demand if you are to sustain anenvironment of supply reliability and stable, moderate prices.To get the new capacity, it would help if government encouragedor assisted developers instead of leaving them on their own tonegotiate a minefield of bureaucratic and other obstacles. It wouldhelp if counterparties were made more credit-worthy. It wouldhelp if the industry followed its own rules about procuring requiredreserves. Not least, it would help if prices were allowed to supportnew investment.Juan Antonio E. BernadExecutive Vice PresidentStrategy and RegulationAnnual Report 2010 21

FROM YOURChief financial officerDear Shareholders,In 2010, AboitizPower continued on powering growth in terms of netincome, return on equity (ROE) and cashflow generation.Since its listing in 2007, your company has consistently set new recordsin all forms of value creation.Net income for 2010 stood at P25 billion (bn) versus P5.6 bn in 2009, a remarkable increaseof 343%. Adjusted for non-recurring gains, core net income once again set another record ofP24.4 bn. When further adjusted for the non-cash Pagbilao lease accounting treatments, corenet income would have ended at P29.5 bn, increasing by 334% versus last year’s levels.Increased bottom line profits and the further evolution toward a more optimal balance sheetbrought about by the leveraging effect of the Pagbilao finance lease further boosted 2010ROE. In 2010, ROE shot up more than 3x to end at 76%, 74% on a recurring basis and finally89% after adjusting for the Pagbilao finance lease effects.Net income and return on equity75.9%50.0%25,04116.8%19.5%4,161 4,3345,65920072008 2009 2010Net income (million P) Return on equity (%)Cash upstreamed bybusiness units likewiseset new records totalingP25.4 bn in 2010, anincrease of 477% versus2009 levels of P4.4 bn.In line with the record setting pace of net income growth, cashflow generation was equallyremarkable. Earnings before interest, taxes, depreciation and amortization (EBITDA) in 2010stood at P34.4 bn versus P9.9 bn of 2009. Adjusting for your company’s beneficial ownershipin its subsidiaries and associate companies, this figure increased to P36.6 bn versus 11.7 bn of2009. Cash upstreamed by business units likewise set new records totaling P25.4 bn in 2010,an increase of 477% versus 2009 levels of P4.4 bn.This impressive growth in income and cashflow was once again led by your generationbusiness. Growth in profitability was driven both by volume increases and average tariffincreases.22Aboitiz Power Corporation

FROM YOUR Chief financial officerPower sold by your generation business soaredfrom 4.6 GWh in 2009 to 9.8 GWh in 2010. Thisincrease of 111% was brought about by:Beneficial EBITDA(Million P)• The full-year effects of Tiwi-MakbanGeo and Pagbilao• Contributions of Mobile 1 and 2• Contributions from the greenfieldprojects which were completed andsynchronized into the grid in 2010,namely, Sibulan Hydro and CebuEnergy Development Corporation(CEDC)20072008200920104,1617,66111,74036,632Average price obtained per kWh increased by43% from P3.82/kWh in 2009 to P5.47/kWh in2010. This escalation was mainly brought aboutby upward movements in spot and bilateral0 10,000 20,000 30,000 40,000contract prices. The upward movement in bilateral contract prices was in turn driven by anincrease in the National Power Corp. grid rate that is the benchmark for transition supplycontracts and further supported by upward changes in the tariff structures of newly signedbilateral contracts. As the market gained sophistication in the buying and selling of power,the price has begun to reflect true market dynamics and move towards the true cost of fairlypriced energy.Your distribution business was not to be outdone. The net income in 2010 stood at P1.9 bn.This growth of 23% over last year’s levels was brought about by expansions in both marginsand kWh sold.As the full-year effects of tariff increases under the Performance Based Ratemaking (PBR)regime for Davao Light and Visayan Electric Company (VECO) were realized, gross marginsper kWh increased from P1.16 /kWh in 2009 to P1.25/kWh in 2010. This increase in marginswas despite significant increases in operating costs as Davao Light dispatched its 50-MWdeisel plant to mitigate the power shortages in Mindanao over the first half of 2010. Thebenefits of the rising PBR tariffs were further partially off-set by the systems losses of bothVECO and Cotabato Light. Both these utilities have struggled with significant non-technicalsystems losses, which have pushed said losses above the regulatory mandated cap of 8.5%.Management is addressing these systems loss issues with capex-related metering programsand organizational adjustments.The discussed improvement in margins per kWh were further augmented by the healthygrowth in kWh sold throughout all your distribution utilities. The kWh sold in 2010 increased to3.6 bn (please note this is beneficial figure) kWh, a 9% increase over 2009 levels.The state of your balance sheet continued to strengthen and reflect the strong financial andoperating fundamentals of the operating business units:• Total consolidated assets increased from P111 bn in 2009 to 135 bn in 2010.- This increase is mainly attributable to the previously discussed strong cashflowgeneration which resulted in 2010 consolidated cash ending at P18.3 bn versus P3.8bn in 2009.- Investments and advances likewise increased by P3.8 bn as equity contributions forthe completion of CEDC and the ongoing rehabilitation of Ambuklao Hydro tookplace.• Total liabilities increased slightly from P76 bn in 2009 to P77 bn in 2010.- This increase was caused mainly by an increase in the Pagbilao finance lease liabilitywhich in turn was brought about by the debt-compounding effects of the mismatchin non-cash interest accreted and cash monthly payments.The upward movementin bilateral contractprices was in turndriven by an increasein the National PowerCorp. grid rate thatis the benchmarkfor transition supplycontracts and furthersupported by upwardchanges in the tariffstructures of newlysigned bilateralcontracts.Annual Report 2010 23

In line with its long--termstrategy of contractingsignificant portions of itscapacity, your companywill embark on a prudentmarketing effort tostructure a portfolioof bilateral contractswith better matchingof revenues to costs,reduced volume risk andlonger durations.- Adding slightly to this increase were the final loan drawdowns of Hedcor Sibulan asit approached completion and the leveraging exercise of Cebu Private Power Corp.• Buoyed by a strong 2010, total stockholders’ equity ballooned to P57 bn in 2010 versusP34 bn in 2009. This increase of P23 bn was net of a dividend paid in March 2010.• As the growth in stockholders’ equity outpaced the growth in total liabilities, theconsolidated net debt/equity ratios strengthened from 1.82 x in 2009 to 0.84 x in 2010.While your company looked upon 2010 with excitement and optimism, it walks into 2011 withconfident enthusiasm.The distribution business is expected to post improved income levels due to rising marginsbrought about by the entry of Subic EnerZone and San Fernando Electric into the PBR tariffregime. In addition, Davao Light, VECO and Cotabato LIght will implement another round oftariff increases as per the approved PBR schedule. Management programs aimed at curbingnon-technical losses are likewise expected to bear fruit and further improve margins. Electricityconsumption is expected to increase, further improving profitability as the country’s need forpower rises fueled by robust economic activity.Your generation business has witnessed spiraling growth throughout the last three yearsprimarily through its successful participation in the privatization process. The liberalizationprocess has likewise improved power prices as competitive market dynamics function to bringout the true price of power in both the spot market and in bilateral contract negotiations. Inline with its long-term strategy of contracting significant portions of its capacity, your companywill embark on a prudent marketing effort to structure a portfolio of bilateral contracts withbetter matching of revenues to costs, reduced volume risk and longer durations. This strategywill likewise call for the shifting of capacity away from the volatile spot market to more stablebilateral contracts. While this rebalancing of the merchant versus contracted capacity mayresult in foregoing short term upside brought about attractive spot prices in this period oftightness, stretched contract duration and better structured contracts will provide for morestable and predictable cashflows over the longer term.This reduced cashflow risk is expected to not only result in bettervaluations but also further strengthen your company’s alreadysolid balance sheet, allowing it to ably focus on its second stage ofgrowth – adding much-needed new, reliable and cost competitivecapacity to further power the growth of the nation such as the Subicand Davao coal projects and the various hydros to be built in 2011 inLuzon and Mindanao.Growth in the generation business will further be augmented withthe full-year effects of the Sibulan Hydro project, Cebu Coal (CEDC),Mobiles 1 and 2 in Mindanao and the completion of the AmbuklaoHydro rehabilitation.Iker M. AboitizFirst Vice PresidentChief Financial Officer24Aboitiz Power Corporation

powering growthAnnual Report 2010 25

FROM YOURChief risk management officerEnterprise RiskManagement unifiesand solidifies riskmanagement acrossthe Abotiz Group byfunneling the best anddesired practices backand forth betweenbusiness groups andservice units.Dear Shareholders,Today, business leaders face many different kinds of risks ranging fromthe traditional, which are within the company’s drawing board, to aset of new, more dangerous, emerging risks referred to as the ‘blackswans’. Power companies face an array of risks, which are systemic innature and global in scope.The increasing complexity of these ‘black swans’ now leads to new emphasis on accountability.It is imperative that the boards of directors and senior executives of power companies clearlyunderstand the risks facing their businesses so they may be able to communicate well to investorsand other stakeholders what these risks are and assure them these are being effectively managed.Under the Enterprise Risk Management Program of Aboitiz Equity Ventures (AEV), AbotizPowerhas developed its own risk management framework following the ISO 31000 Risk ManagementStandards. These standards provide the structure for establishing the context of identifying,analyzing, evaluating, treating, monitoring and communicating the risks the company’s generation,distribution and trading business groups face.AboitizPower’s risk management framework provides a robust structure for the identification andmanagement of risks from the board of directors down to the business units (BUs) and across alllevels of the organization.In 2011, an Enterprise Business Continuity Management program will beimplemented in AboitizPower and its BUs to support AEV‘s corporateobjective of achieving enterprise resilience. This objective represents anew thrust in anticipating and adapting to the complexities and rapidlychanging environment where our businesses operate.AboitizPower’s Business Continuity Management (BCM) program willfollow the British Standard 25999, which defines BCM as a managementprocess that identifies potential impacts that threaten an organization. Italso provides a framework for building resilience and the capability for aneffective response that safeguards the interests of its key stakeholders,reputation, brand and value-creating activities.BCM is inclusive of business continuity strategy, disaster recovery,crisis management, incident management, emergency managementand contingency planning and will take off from the top risks that wereidentified and assessed for the organization’s businesses. It will assureAboitizPower of business success during turbulent times.Enterprise Risk Management (ERM) unifies and solidifies riskmanagement across the Abotiz Group by funneling the best and desiredpractices back and forth between business groups and service units. AEVsets the tone for how risks are thought about and handled throughoutthe Group. The presence of ERM in AEV and AboitizPower conveysthat managing risks is considered an essential and intentional businessfunction in the organization.Rolando C. CabreraChief Risk Management Officer26Aboitiz Power Corporation

Aboitizpower RISK management reportIn line with Aboitiz Equity Ventures’ (AEV) Group-wide initiative of implementing Enterprise Risk Management (ERM), AboitizPower has followed suit and isgetting active participation from the company’s business units (BUs) and support units.As part of its efforts to embed a risk aware culture throughout all levels and across all units of the organization, the AEV Enterprise Risk Management Groupdeveloped an ERM implementation roadmap. It details key program elements and milestones that the Group has to follow and hurdle in order to maximizethe benefits of ERM and ultimately achieve its goal of enterprise resilience.Enterprise resilience represents a new thrust in the effort to anticipate and adapt to the the complexities and rapidly changing environment where ourbusinesses operate. It is not about responding to a one-time crisis or rebounding from a setback. Enterprise resilience is about continuously anticipating andadjusting to deep, secular trends that can permanently impair the earning power and viability of the business.“We need to focus on risks with a common mindset and process - a comprehensive and integratedprocess to identify, measure, control and monitor risk on a continuous basis. Enterprise risk managementstrategies should be designed to improve the balance between risks and rewards, weigh threats andopportunities, avoid and transfer unacceptable risks, reduce retained risks to an acceptable level in ourpursuit of increasing shareholder value”. - AboitizPower President & CEO Erramon AboitizAboitizPower Risk Management StructureBoard of DirectorsBoard Risk Management CommitteeRisk Management Council (Group Mancom)Risk Management Council (Group Mancom)BU Risk Management TeamBU Risk Management TeamBU Risk Management TeamThe AboitizPower Risk Management framework provides a robust structure for the identification and management of risks from the Board down to the BUlevel. In 2010, the AboitizPower Board Risk Management Committee was formally convened and since then has had quarterly meetings.The Board of Directors’ role with respect to risk management is that of overall risk oversight. The Board must understand the risks facing the company and isresponsible for ensuring there are effective processes for identifying, assessing, and mitigating the company’s risks. This is to give shareholders reasonableassurance that the company will achieve its corporate goals and objectives.The Risk Management Committee’s role is to assist the Board in fulfilling its corporate governance responsibilities relating to risk management. The RiskCommittee also assists in defining AboitizPower’s risk appetite and oversees the the company’s risk profile and performance against the defined risk appetite.The Committee is responsible for overseeing the identification, measurement, monitoring and controlling of the company’s strategic risks.AboitizPower Risk Management FrameworkBased on the AEV Framework, AboitizPower has developed its own risk management framework following the ISO 31000 Risk Management Standards. Thestandard provides the framework for establishing the context of, identifying, analyzing, evaluating, treating, monitoring and communicating risk.Throughout 2010, risk assessment and risk treatment activities were facilitated and performed at the strategic level for all AboitizPower BUs. These activitiesincluded identifying and analyzing the top risks of the different businesses including the measures and efforts currently in place, and defining future plans tomanage and mitigate these risks.In 2011, risk management activities will focus on the operational level that will be aligned and linked up with the strategic risks that have been identified andassessed.The results from the strategic risk sessions were summarized and presented to the Risk Management Council (Group Mancom) and then to the RiskManagement Committee of the Board.Annual Report 2010 27

Figure 1.0 - Risk Management Process, ISO 31000The key risks identified are summarized below:Reputational riskAboitizPower recognizes its reputation as both its major asset and source of competitive advantage as well as its primary source of vulnerability in viewof the increasing presence of the company and its BUs throughout the Philippines. Media and communication have also reached a point where scrutinyfrom stakeholders and the general public has become more stringent. Regulators are a vital stakeholder in the power and banking businesses and it isimperative for AboitizPower businesses in these sectors to keep their reputation levels high. A Reputation Management Department was establishedin 2009 to ensure the protection and enhancement of this vital asset. Corporate social responsibility programs, undertaken mainly through the AboitizFoundation, and sustainability efforts are given full management support, these being important sources of reputational gain for AboitizPower.Competition riskIncreased competition in the power industry could have a significant adverse impact on the AboitizPower’s operations and financial performance.The move towards a more competitive environment could result in the emergence of new and numerous competitors. Some of these competitors mayhave greater financial resources, more extensive operational experience, and thus be more successful than AboitizPower in acquiring existing powergeneration facilities or in obtaining financing for and the construction of new power generation facilities.To mitigate this, the company has demonstrated its ability to acquire the skill and talent to operate newly acquired plants at their expected levelof operating standards. It also intends to continue hiring experienced talent for plants that will be constructed as part of its future investment plan.Partnering with entities that possess expertise in plant types where AboitizPower has limited technical expertise is also being considered.Trading risksRisks Relating to Electricity SalesPower prices are subject to significant volatility from supply and demand imbalances. From the time the Wholesale Electricity Sport Market (WESM)for Luzon began operating in June 2006, market prices for electric power have fluctuated substantially. These factors have caused and are expected tocause fluctuation or instability in the operating results of generation companies, particularly those that sell substantial portions of the electricity theygenerate to the WESM.To mitigate this, AboitizPower aims to achieve a balanced portfolio of contracted and merchant business. In the short-term, it will be contracting moreof its power under price-stable bilateral contracts. This will allow the company to take advantage of the upside in the WESM prices and at the same timesecure and guarantee revenue streams from the contracted businesses.Regulatory riskAboitizPower’s power generation and distribution businesses are now subject to more stringent regulations. To manage this risk, planning ahead andpreparing for expected changes in regulation now, rather than waiting for regulations to be imposed, is a must. Trying to respond to new regulatorystandards in a short period of time can be difficult, especially in a climate where forbearance may be limited. To respond proactively to such fundamentalchanges may require companies to take a long view on possible regulations and consider alternate scenarios.Business interruption due to natural calamities and critical equipment breakdownLoss of critical functions caused by natural calamities such as earthquakes, windstorms, typhoons and floods could result in a significant interruptionof business operations. Interruptions may also be caused by other factors such as major equipment failures, fires and explosions, hazardous waste28Aboitiz Power Corporation

isk management reportspills, workplace fatalities, product tampering, terrorism, and other serious risks. In order to prevent and manage the risk of business interruptions,regular preventive maintenance of AboitizPower facilities are being strictly observed and loss prevention controls are continually being evaluated andstrengthened. In addition, to ensure the continuity of operations in the event of a business interruption, a Business Continuity and Crisis ManagementPlan will be developed and implemented in 2011. Business interruption insurance has also been procured to cover the potential loss in gross profits ofthe Group’s critical operations and assets.Financial risksIn the course of AboitizPower and its BUs’ operations, the Group is exposed to financial risks namely, interest rate risk resulting from movements ininterest rates that may have an impact on outstanding long-term debt; credit risk involving possible exposure to counter-party default on its cash andcash equivalents, AFS investments and trade and other receivables; liquidity risk in terms of the proper matching of the type of financing required forspecific investments; and foreign xxchange risk in terms of foreign exchange fluctuations that may significantly affect its foreign currency denominatedplacements and borrowings. Details of above risks including measures to mitigate them are discussed in the Notes to the Financial Statements (Seeattached CD).Fuel Supply riskAboitizPower’s thermal plants, i.e., STEAG Power, Cebu Energy Development Corp. (CEDC), which both use coal, and Cebu Private Power Company(CPPC) East Asia Utilities Corp. (EAUC), and Therma Marine which use bunker fuel - have contracts that allow for their fuel cost to be recovered from theirtariffs. Meanwhile, Southern Philippines Power Corp. (SPPC) and Western Mindanao Power Corp. (WMPC) power plants are operated under export creditagencies (ECAs) with the National Power Corp. (NPC). Under these agreements, NPC is required to deliver and supply to both plants the fuel necessaryto operate these power plants for the duration of the cooperation period.Meanwhile, on the supply side, CPPC, EAUC and Therma Marine have entered into medium-term (2-3 year) contracts with large oil companies in the Philippines.CPPC and EAUC currently have medium-term supply contracts in place, while Therma Marine will be negotiating for a new supply contract in 2011.CEDC has long-term coal contracts with various coal suppliers that will kick in upon the plant’s commercial operations. STEAG has entered into an alternatecoal supply agreement to allow it to diversify its fuel supply. Therma Luzon has managed to lock in the prices of its coal supply at a fixed price for 2011. It hasentered into a long-term coal supply agreement after an evaluation of the various Indonesian coal sources to allow flexibility in its coal sourcing.With regard to the steam supply for AP Renewables, Inc. (APRI) , it is possible that the steam resource will decline faster than anticipated. The companybelieves that the fact that Chevron, the largest producer of geothermal energy in the world, is the steam contractor mitigates the risks inherent in thesupply of steam. Chevron has proven itself capable of managing the resource efficiently, having almost 40 years of experience in developing, operatingand maintaining the Tiwi-MakBan steamfields.Political and economic factorsAboitizPower is a holding company which, through its BUs, is engaged in power generation and distribution, and other related services. The results ofoperations of the investee companies have historically been influenced to a certain extent by the political and economic situation in the Philippines. Inthe past, the country experienced periods of slow or negative economic growth. Any future political or economic instability may have an adverse effecton the business and results of operations of the company or its investee companies.Business Continuity ManagementAboitizPower recognizes that unplanned events can have a devastating effect on any business.Crises such as major earthquakes, typhoons and other natural catasthropies, fire, illness of keyteam members, and IT system failures could all make it difficult for our businesses to carry outnormal day-to-day activities. These events could result to the loss of important customers andrelationships - and worst, even going out of business altogether. In order to presvent this fromhappneing, measures should be put in place to minimize the potential impact of events thatcould disrupt business continuity.In 2011, to support AEV’s objective of achieving enterprise resilience, an Enterprise BusinessContinuity Management program will be implemented in AboitizPower and its BUs.The British Standard 25999 defines Business Continuity Management (BCM) as a managementprocess that identifies potential impacts that threaten an organization and provides a frameworkfor building resilience and the capability for an effective response that safeguards the interests ofits key stakeholders, reputation, brand and value creating activities. BCM is inclusive of businesscontinuity strategy, disaster recovery, crisis management, incident management, emergencymanagement and contingency planning and will take off from the top risks that were identifiedand assessed for the organization’s businesses.Annual Report 2010 29

FROM YOURChief compliance officerAboitizPower believesthat for it to continueto grow and flourish, ithas to operate withina rational financialmodel, with a mutuallycollaborative community,and within a sustainableecological framework.Dear Shareholders,The Company has steadfastly pursued the execution of its goalsfor 2010. The Board, our Management and all AboitizPower teammembers, have exerted their collaborative efforts to lay thefoundation of tomorrow’s future growth.These efforts have resulted in a credible performance for AboitizPower without compromiseof the Company’ corporate governance core values. AboitizPower’s performance has beenachieved through a well defined strategy measured against a clearly articulated balancedscorecard framework: the financial perspective, customer and stakeholders’ perspective,internal business processes perspective and the learning and growth orientation for teammembers. Thus, our brand promises to offer better, cleaner energy solutions that leave alighter impact on the earth’s climate and its limited resources through shared value creation forall of the Company’s shareholders. Our work has been recognized by Asiamoney Magazine’saward to the Company as one of Asia’s Best Managed Companies and Euromoney’s award asthe top three companies with the most convincing and coherent strategy in the Philippinesin 2010.AboitizPower believes that for it to continue to grow and flourish,it has to operate within a rational financial model, with a mutuallycollaborative community, and within a sustainable ecologicalframework. As the Company looks to providing better energysolutions to power the future’s growth, it remains committed to itscovenant as a good corporate citizen.It is my honor, as Chief Compliance Officer of AboitizPower, to reportto you a good corporate compliance track record, one that has beenrecognized with a Gold Award in the 2010 Institute of CorporateDirectors Corporate Governance Scorecard. For 2011, we will striveto stay on course.M. Jasmine S. OportoCorporate SecretaryChief Compliance Officer30Aboitiz Power Corporation

2010 corporate governance reportABOITIZ CORE VALUESAboitiz Power Corporation’s (AP) culture of good governance is deeply rooted in the 90 years of the Aboitiz family traditionbased on values of integrity, fairness, prudence, respect for individuals and diverse cultures. The Aboitiz entrepreneurial spiritand team work underpinned with a well entrenched corporate social responsibility.These family and corporate values are continually refreshed and enlivened through modern practices as the Company movesforward to deliver on its brand promise of finding better solutions for a better future to give to the community it serves.GOVERNANCE MECHANISMS FOR CONTROLLED FIRMSThe Company, the Board of Directors, and Management accept their fiduciary duties to the Company’s stakeholders and are careful to exercise these dutieswithin the context of its ownership structure and the social, cultural, political and economic environment of the Company. The Company acknowledgesthat the Aboitiz ownership structure may be categorized as a firm with controlling shareholder and is mindful of putting in place the appropriate corporategovernance controls to ensure against insider opportunism. The Board and the Management team govern the Company as responsible owners because theybelieve that this contributes to increased corporate and stakeholder valueThe Company is therefore deeply committed to unhampered exercise of the minority shareholder protection and empowerment provisions under theCorporation Code of the Philippines. These statutory rules include, the One Share-One Vote rule, Cumulative Voting, and supermajority vote for certaincorporate acts, giving the minority shareholder the ability to influence Board composition (including Independent Directors), Board compensation,amendment of the Company’s Articles and By-laws, and the treatment of Board duties as a high level of fiduciary responsibilities.Current Company procedures and mechanisms require accurate and timely disclosures for transparency of process, and insider trading and trading blackoutguidelines are intended to prevent controlling shareholder opportunism.Independent Directors are not subject to firing by management or by the Company’s controlling shareholders since they are selected through the BoardCorporate Governance Committee’s process and in accordance with the requirements of the Philippine Securities and Exchange Commission (SEC) forshareholder approval. This process supports minority shareholder protection and empowerment.Pursuant to the One Share-One Vote rule, the Company does not have any arrangements that separate voting rights and cash flow rights. All shareholders areentitled to voting and dividend rights. These ensure that the Company’s controlling shareholders’ interests are aligned with the minority shareholders interests.In summary, the Company has policies on transactions with related parties requiring the full disclosure thereof in the Company’s financial statements and inother Company reports. The Company’s related party transactions include, among others, written service level agreements with its affiliates and subsidiariesfor human resources, internal audit, legal, treasury and corporate finance services, guarantees of credit accommodations of subsidiaries and affiliates; andintercompany advances for working capital requirements of subsidiaries and affiliates. The Company does not set thresholds for disclosure of related partytransactions but rather fully discloses all related party transactions regardless of amounts in compliance with existing accounting standards, or ensures thatthey have the character of arm’s length transactions. (See details in the Audited Financial Statements)The Company follows the Philippine Corporation Code rules on voting for specific corporate acts where approval of specific types of related party transactionsin the Board and in shareholders meetings levels may be required. The Company’s Independent Directors and the Board Audit Committee play an importantrole in reviewing significant related party transactions. The Company’s related party transactions are typically agreements entered into in the ordinary courseof business to maximize efficiencies and realize cost synergies. These are reported to the Board as they are entered into.THE FOUNDATIONS OF THE COMPANY’S CORPORATE GOVERNANCESound corporate governance principles are the foundation upon which the trust of investors is built on. The Company views its corporate existence, goals andstrategies on a long term growth and sustainability horizon. We believe that a balancing of all stakeholders’ interests is necessary to avoid myriad economic andpolitical pitfalls that have caused the demise of corporate institutions, locked in a “short termism” business mindset. The Company’s corporate governance,rooted on a values-based corporate culture for a sustainable future, is its real benchmark for corporate governance. The Company is committed to preservingits fundamental core values and embedding these in its daily business practices, going beyond a mere “tick the box” corporate governance scorecard. Theenduring Aboitiz brand is a testimony of such commitment.As a Philippine company listed on the Philippine Stock Exchange, the Company is subject to a number of laws and rules that affect it and its subsidiaries’governance. Major statutes of which the Company is compliant, include, among others: the Corporation Code of the Philippines, the Securities RegulationCode, the Labor Code of the Philippines, the Electric Power Industry Reform Act, the Renewable Energy Act, the Anti-Pilferage of Electricity and Theft ofElectricity Transmission Lines Act, Clean Air Act, Clean Water Act and other applicable statutes, implementing rules, regulations, guidelines, and governingcirculars and policies of the SEC, the Philippine Stock Exchange (PSE), , the Department of Energy (DOE), Department of Environment and Natural Resources,the Energy Regulatory Commission (ERC), the Wholesale Electricity Spot Market, and other relevant administrative agencies with oversight of its corebusinesses. Its corporate governance policies are found in its Articles of Incorporation and By-Laws, its Amended Manual of Corporate Governance, Code ofEthics, Directors’ code of ethics, Board and Board Committees internal work procedure rules, Information Systems Management and Security Policies, itsEnterprise Risk Management Policies and in other Company and Aboitiz group policies and guidelines.Since the Company went public, it has participated in the ICD-SEC Corporate Governance Scorecard exercise for Philippine companies. In 2009, its corporategovernance practices were recognized by the ICD through the annual ICD corporate governance awards.Annual Report 2010 31

COMPLIANCE WITH THE SEC CODE OF CORPORATE GOVERNANCEThe Manual of Corporate Governance (Manual) states that corporate governance is a necessary component of what constitutes sound strategic businessmanagement and enjoins the Board, the management and employees to undertake every effort necessary to create this Company wide awareness as partof the Aboitiz corporate culture. The Manual was approved by the Board at its regular meeting on April 26, 2007, shortly before it became a publicly listedcompany. Since its adoption, the Company has reviewed, revised, updated and amended the Manual through subsequent Board actions in keeping withevolving best practices. AboitizPower is committed to complying with best practices corporate governance whenever possible, including the continuedcompliance with the SEC’s form corporate governance manual. The Board regularly reviews the Manual in order to update its practices in line with the SEC’sand the PSE’s regulatory amendments and global developments.The Manual can be found on the Company’s website: www.aboitizpower.comCOMPANY VISION: A BETTER FUTUREThe Company’s vision is to actively develop and offer better energy solutions to meet the Philippines growing energy demands while committing to sustain theEarth’s resources. As a publicly listed company, the Company’s investment focus is for its businesses to provide reliable and ample power supply when needed,and to ensure that the supply of electricity is provided at a reasonable and competitive price. The Company believes it is its responsibility to accomplish thesegoals with the least possible adverse effect on the environment.AboitizPower’s mission is to find better solutions to address the needs of our customers and to bring new ideas to market whilst exercising responsibilityto sustain earth’s resources & environment, encourage energy conservation and efficiency and grow supply & encourage adoption of renewable energy. ItsCleanergy Brand communicates the vision of AboitizPower to offer energy solutions that leave a lighter impact on Earth’s climate and its limited resourcesand to promote the usage of clean and renewable energy from sources that are sustainable and cleaner than fossil fuels. (See details of Cleanergy Brand inSustainability Report)AN ETHICAL BUSINESSThe Aboitiz Code of Ethics and Business Conduct adopted by the Company in 2002 sets out how the Executive management, team leaders and team memberscan achieve and maintain ethical standards in the Company’s day to day operations and summarizes the Company’s fundamental policies and directives.The Code of Ethics and Business Conduct clearly sets the standards, policies and procedures on proper business conduct with co-employees, shareholders,investors, suppliers, customers, analysts, creditor and financial institutions, fair dealings, conflicts of interest and related party transactions, inappropriategifts and favors, appropriation of corporate opportunities, dealing with proprietary and confidential information and Company system and assets, use andmisuse of inside information, fair and truthful disclosures to the public, maintenance of accurate books and records, respect and dignity accorded to others,promotion of safe and healthy working environment and the enforcement and administration of the Code of Ethics. The detailed implementation of the Codeof Ethics and Business Conduct is overseen by the Board Corporate Governance Committee, by the Chief Compliance Officer as well as the functional teamleaders in the Company in cooperation with AEV Corporate Center.All newly hired employees in the Company attend a new-hirees’ seminar that includes an orientation on the Company’s Manual of Corporate Governance andCode of Ethics and Business Conduct. In addition, Company and group wide formal seminars are scheduled by the Office of the Compliance Officer to inculcatein and refresh all employees’ awareness and understanding of the Manual and the Code and the underlying principles of corporate governance and ethicalbehavior and conduct.All employees have an individual responsibility to ensure that business practices adhere to the rules of the Code of Ethics and Business Conduct. Generally, noemployee or officer seek or has sought exemptions from the application of the corporate governance rules and guidelines of the Company.The Code of Business Ethics can be found at the Company’s website: www.aboitizpower.com/AP/1439:code-of-ethics-and-business-conduct.htmlOUR OWNERSHIP STRUCTUREThe share capital of the Company consists of one class of listed common shares and a class of non-listed preferred shares. All common shares are votingfollowing the rule of One share – One vote. The preferred shares are non-voting, non-participating, non-convertible, cumulative, re-issuable shares and may beissued from time to time by the Board in one or more series. These preferred shares which are issued to financial institutions or financial market intermediariesare treated as debt instruments by the Company in its books in conformity with the Philippine Accounting Standards (which adopt the International FinancialReporting Standards. (See Management’s Discussion and Analysis or Plan of Action and the Company’s Financial Statements)According to the share register kept by Securities Transfer Services, Inc., as of December 31, 2010, Aboitiz had 483 shareholders. As of 2010 yearend, AboitizEquity Ventures, Inc. (AEV), another publicly listed holding company, owned 5,622,113,063 or 76.40% of the 7,358,604,307 of the total outstanding and commonstock entitled to vote. Of the publicly held shares, 18.86% are owned by institutions and/or are nominee-registered (10.91% Filipino & 7.95% Foreign), i.e., heldoff record by banks, brokers and /or nominees, such as the PCD Nominee Corp. This means that the actual shareholder is not displayed in the share register orincluded in shareholding statistics. As a result, the ultimate shareholder of such nominee-registered shares does not participate in shareholder votes and otheractions, unless otherwise represented by proxy or nominee. The Company has exerted efforts to extend the communication channels between the Companyand the institutional shareholders through its Investor Relations Office and to the nominee registered shareholders through the PCD Nominee Corp.Below is the general view of shareholders composition.AEV is, in turn, publicly owned by 10,702 shareholders as of December 31, 2010.The Company issued retail Bonds to the public on April 14, 2009 and thesebonds are listed on the Philippine Dealing and Exchange Corporation (PDEX)for greater liquidity. These bonds are treated as indebtedness in the books ofthe Company pursuant to International and Philippine Accounting Standards.For more information on the Company’s shareholders see the Company website:www.aboitizpower.com.32Aboitiz Power Corporation

At its regular meeting last March 3, 2010, the Board Audit Committee approved a resolution to submit for the approval of the stockholders during the annualgeneral membership meeting, a proposal to delegate to the Board of Directors the authority to appoint the Company’s external auditors for 2010. Theproposal is intended to give the Board Audit Committee sufficient time to evaluate the different auditing firms who have submitted engagement proposals toact as the Company’s external auditor for 2010.The record of attendance of the directors and regular members of the Board Audit Committee has been an exemplary 100%.Aside from the Board Committees established under the Manual, the Company has other policy recommendatory and evaluation committees, such as, but notlimited to, the AP Generation Companies Management Board and the AP Distribution Utilities Management Board. Furthermore, the Company is an activeparticipant in the AEV Corporate Center’s the Human Resources Committee, the LexCom and the Government Relations Committee.Since power generation and power distribution comprise the core businesses of the Company, the functional boards, namely AP Generation CompaniesManagement Board and AP Distribution Utilities Management Board, provide the alignment, monitoring and execution of the Company’s business strategiesand that of its BUs. These functional management boards meet every month to discuss financial operations, marketing and sales development, and basicgeneral operational issues concerning the BUs.The LexCom is one of the Company’s institutional venue enabling members of the Legal & Corporate Services Team to meet with the executive managementto discuss legal issues and concerns that affect the group. It is overseen by the AEV’s CFO and managed by the Chief Legal Officer. The LexCom has oversightover the Company’s compliance with laws and regulations. The Chief Human Resources Officer, the Chief Risk Management Officer, the Company’s ChiefFinancial Officer, as well as the legal team of the Legal and Corporate Services, the regulatory legal team and Business Units’ legal team who participate in theLexCom meeting. The members report, discuss and assess corporate governance compliance track records, identification and mitigation of legal risks, reviewof litigation management procedures, tax protocols, current litigation issues and other related matters affecting the Aboitiz Group of companies, includingoverall legal expenditure of the Company’s Business Units.The LexCom meets every two months to regularly update management on ongoing projects or activities of the Legal and Corporate Services Team. Thepurpose of these meetings is to provide Executive Management with up to date and relevant legal developments within the subsidiaries and affiliates ofthe Company. The LexCom reviews if there are any requests for waivers or exemptions of company governance rules. The LexCom initiates the formaladoption of the Company’s code of ethics and proper conduct that guides individual behavior and decision making, clarifies responsibilities, and informsother stakeholders on the conduct expected from company personnel. The LexCom sets the policies and procedures for curbing and penalizing company oremployee involvement in unethical behavior, such as offering, paying and receiving inappropriate rewards.The Office of the Chief Legal Officer is responsible for ensuring compliance by the Company, its subsidiaries and affiliates, with all relevant laws, rules andregulations, as well as all regulatory requirements, including the protection and respect for intellectual property rights. The LexCom is responsible forthe comprehensive legal compliance program of the Company. As part of its program, the LexCom and the Office of the Chief Legal Officer oversee theappropriate training and awareness initiatives to facilitate understanding, acceptance and compliance with the said issuances by the employees and the BUs.The Company has a regulatory compliance team that handles compliance issues for the Company. The Company also has a government relations committeecomposed of senior management and certain members of the Board, having oversight over the Company’s legal and administrative concerns and issues.The LexCom also reviews or recommends the appropriate dispute resolution system for conflicts and differences with counterparties, particularly withshareholders and other key stakeholders to ensure that they are settled in a fair and expeditious manner from the application of a law, rule or regulationespecially when it refers to a corporate governance issue.THE RIGHT OF SHAREHOLDERSEFFECTIVE EXERCISE OF SHAREHOLDERS’ RIGHTSThe Company ensures the genuine exercise of shareholders’ rights as granted by the Corporation Code of the Philippines, by other related laws and by itscorporate covenants under the Company’s By-Laws, and the Company’s Manual. Foremost among corporate governance principles established by yourCompany is its assurance that shareholders enjoy all the rights granted by the Corporation Code of the Philippines.ONE SHARE – ONE VOTEThe exercise of a shareholder’s voting right is encouraged by the Company to ensure meaningful participation in all shareholders’ meetings. The Board isdirected to remove excessive costs and other administrative or practical impediments to a shareholder’s right to vote.Voting methods and vote-counting systems employed by the Company are clearly explained to ensure the effective exercise of Shareholders’ right to vote.As earlier mentioned, the Company follows the system of cumulative voting for the election of directors, to allow shareholders an opportunity to elect eachmember of the Board of Directors individually. Other matters are also decided through voting by shares of stock. The Company adheres to the one-shareonevotepolicy for the same class of shares. Proxy voting is allowed at all meetings and is facilitated through proxy voting forms. In its regular board meetinglast November 12, 2010, the Board of Directors of the Company approved the deletion of the notarization requirement of proxy forms to be used in allshareholders’ meetings of the Company. This is to facilitate easy voting by shareholders, in line with the Company’s efforts to improve corporate governancepractices. As such, the amendment of the Company’s By-laws to remove the notarization requirement, while approved by the Board, will also be presented tothe shareholders for their understanding.The counting of shareholders’ votes is done in accordance with the general provisions of the Corporation Code. The Office of the Corporate Secretarysupervises the counting of votes.PRE-EMPTIVE RIGHTSPre-emptive rights to subscribe to the capital stock of the Company, if offered, are also available pursuant to the Company’s By-Laws and Corporation Code.The Company’s Articles of Incorporation states the specific rights and powers with respect to each class of shares. Such rights and powers are protected insofaras they do not conflict with the Corporation Code.38Aboitiz Power Corporation

2011 Proposed Directors’ Per DiemTYPE OF MEETING DIRECTORS CHAIRMANMonthly Allowance P100,000 P150,000Board Meeting P100,000 P150,000Committee Meeting P80,000 P100,000Information on Sycip Gorres Velayo (SGV), the External Auditors of the Company, is also disclosed to all shareholders, together with the name of the currentaudit partner and the engagement fees charged by SGV.SGV has been the Company’s external auditing firm for the last 12 years. By policy, the Company changes its audit partner every five years.The Chairman of the Board of Directors, the Chief Executive Officer and the chairmen of the various Board Committees all attend the annual shareholders’meetings of the Company to answer any questions shareholders may have concerning the Company. Likewise, the Chairman and all members of the Boardof Directors and other key officers are present at the shareholders’ meeting and have been present at the past three annual shareholders’ meetings. It is alsothe practice of the Company to hold a separate shareholders’ briefing in Makati City two days after the annual shareholders’ meeting to give shareholders whocould not attend the Annual Shareholders’ Meeting in Cebu City an opportunity to listen to the presentation by the Board and top Management on the currentstate of the Company’s business and affairs and to ask any questions from the Directors and Officers.RIGHT TO RECEIVE DIVIDENDSThe Company has a clear and transparent dividend policy. This is disclosed in the Operational and Financial Information section of the Annual Report, in theInformation Statement and in the Report of its Chief Financial Officer. The Company maintains an annual cash dividend payment ratio of approximatelyone-third of its consolidated net income from the preceding fiscal year, subject to the requirements of applicable laws and regulations and the absence ofcircumstances that may restrict the payment of cash dividends.APPRAISAL RIGHTShareholders enjoy the appraisal right or the right to dissent and demand payment of the fair value of their shares. The right is exercised under circumstancesprovided in the constitutive documents of the Company and within the statutory requirements of Section 82 of the Corporation Code of the Philippines, whichdisallows payment of such shares if the Company has no unrestricted retained earnings in its books to cover a payment.EQUITABLE TREATMENT OF SHAREHOLDERSVOTING RIGHTS OF MINORITY SHAREHOLDERSThe Company believes in the value of building a sustainable and long-term relationship with its shareholders, and ensures that the Company’s minorityshareholders are equitably treated. All minority equity shareholders of AboitizPower are entitled to the same voting rights as the other shareholders. TheCompany adheres to the one-share-one-vote policy for matters requiring shareholder approval and, through the cumulative voting system, allows minorityshareholders the ability to influence Board composition. However, the removal of a director will not be allowed if this will result in a denial of minorityshareholders representation in the Board.Other rights enjoyed by minority shareholders include the right to propose the holding of a meeting and the right to propose items in the agenda of themeeting, provided that these items are for legitimate business purposes. The minority shareholders have access to any and all information relating to mattersfor which Management is accountable for and other information that is necessary. If certain information is not included, then the minority shareholders canpropose to include legitimate matters in the agenda of shareholders’ meeting.FAIR DEALINGS FOR ALL SHAREHOLDERSAs a publicly listed holding company, the Company is subject to numerous laws and regulations. It is the responsibility of everyone within the organizationto know and understand the laws applicable to their job functions and to comply with both the letter and spirit of these laws and regulations to avoid actualmisconduct and any appearance of impropriety. The Board Corporate Governance Committee is currently is codifying its Director’s Code of Conduct tohighlight its responsibility of fair dealing. Every employee is responsible for fair dealings with the Company’s suppliers, customers, creditors, analysts, marketintermediaries and participants. The Company also has a policy requiring full disclosure of details of related-party transactions in public communications.The Company’s Code of Ethics and Business Conduct outlines the general expectations of, and sets standards for employee behavior and ethical conduct.Board members, Management and all other employees are informed of the Code and strict adherence is enjoined. The Code encompasses prohibited practicesinvolving conflicts of interest, proper dealings with proprietary and confidential information, and truthful disclosures in the best interests of the clients, theCompany, and the public.The Company strictly enforces a Policy on Trading of Company securities. The Policy imposes a trading blackout on AboitizPower securities beginning 10trading days before and until two full trading days after the release of the quarterly or annual earnings of the Company. The Chief Compliance Officer sendsout notices requiring the strict observance of the trading blackout via various media (email and short messaging services) to all the Directors, Officers andidentified key employees of the Company during any relevant blackout period. Because non-compliance with the policy may carry criminal and civil liabilitiesas well as reputational damage to the Company, the Board, the Management and the Office of the Chief Compliance Officer enforce compliance with thisTrading Policy.40Aboitiz Power Corporation

2010 corporate governance reportInsider trading is strictly prohibited under the Code of Ethics and Business Conduct and the Manual and under the PSE Rules. The Amended Manual prohibitsevery member of the AboitizPower organization from any misuse of inside information. All team members of the Company are mandated to exercise prudencein handling material non-public information in the course of their work and in relation to the trading or dealing with AboitizPower securities.The Company promotes a culture of service, excellence and leadership. We believe that this environment promotes the recognition of a duty for employeesand officers to advance the Company’s interests and that of its stakeholders. No employee, officer or director may use his position or corporate property orinformation for personal gain, and no employee, officer or director may take for himself Company opportunities for sales or purchases of products, servicesor interests. Protection of proprietary and confidential information generated and gathered in the conduct of business is considered the obligation of everymember of the Company’s organization. Everyone is also expected to respect the property rights of other companies.Our employees and officers are encouraged to promptly report any potential relationship, action or transaction that may give rise to a conflict of interest tothe Human Resources Department or to the Chief Compliance Officer. Directors are under the obligation to disclose any actual or potential conflicts of interestto the Chairman of the Board and the Chief Compliance Officer. All Directors are also required to inhibit themselves from any Board discussion or decisionaffecting their personal, business or professional interests. Legal proceedings involving Directors and Officers that could affect their ability and integrity toserve the Company are required to be disclosed to the Chief Compliance Officer. No issues relating to related party transactions or conflict of interest has beenraised in the past or recent years.DISCLOSURE AND TRANSPARENCYThe Company is committed to elevating our standards of disclosure and transparency and the quality and depth of its corporate governance practices toenable the investing community to understand the true financial condition of the Company. Through the Investor Relations Office, the Annual Report, theCompany website, the Company’s Information Statement and all disclosures to the PSE and SEC, the Company publishes timely material information on itsbusiness.DISCLOSURE OF MATERIAL INFORMATIONThe Company periodically submits to the PSE a public ownership report detailing the extent of ownership of controlling shareholders, including theshareholdings of their subsidiaries and affiliates, and that of the Directors and Management. It submits to the PSE a list of its top 100 shareholders everyquarter. It also discloses its top 20 shareholders, including shareholders of record and beneficial owners owning more than five percent of the Company’soutstanding capital stock, and shareholdings of its Directors and Officers in the Company’s Information Statement, and sent out to shareholders annually.The Company, however, has no control over outside shareholders who may choose to put their shares under nominee holding companies such as the PCDNominee Corporation, and is thus unable to make any disclosure on details of that ownership.The Company strives to publish a clear, comprehensive and informative Annual Report (See sections on Management Discussion and Analysis or Plan ofAction, the Audited Financial Statements and Results of Operations of the Annual Report, the Shareholders’ Report and Results of Operations section).The Company has a transparent policy on compensation for its Directors and key executives. Information on the basis of Board remuneration is readilyaccessible through the Company’s Annual Report and its Board Corporate Governance Committee minutes. The Board Corporate Governance Committeeensures that the Directors and executives’ remuneration is consistent with the Company culture, strategy and business policies at a level sufficient to attractand retain directors and officers who are needed to run the Company successfully. The Company rewards its individual Directors and Officers based on abilityto execute their duties and responsibilities. It is the Company’s philosophy to reward officers and employees based on individual performance measuredthrough established Human Resources management metrics. Performance is evaluated and compensation is reviewed on an annual basis. The Companyensures that it pays its directors and officers competitively by comparing rates with other Philippine-based companies through participation in and access tomarket salary surveys.The Company is compliant with the requirement for the members of the Board of Directors and management to report or disclose to the SEC and the PSE,within five trading days from the disclosed transaction, any acquisition, disposal or change in their beneficial shareholdings in the Company. This is to monitorand ensure a proper relationship between Directors and the Company. Under its Manual, Directors have a duty to avoid conflicts of interest. Thus, a directormust not do anything for and on behalf of the Company where his motivation and loyalties would be divided, or would result in favoring his own self-interest,or allowing someone connected or related to him to be given equal or higher stature to that of the Company. Directors have a duty to account to the Companyfor any profit or gain he may have obtained as a result of such activities. The Company may thus exercise certain rights against the director for acting incircumstances such as conflict of interest.TRANSPARENCY OF AUDIT PROCESSThe Company’s Corporate Audit Team and the Board Audit Committee conduct the Company’s internal audit operations. The Corporate Audit Team conductsits own internal audit, providing an independent review of the Company’s organizational and operational controls and risk management policies to ensure itseffectiveness and appropriateness, and that they are complied with. The Corporate Audit Team reports to the Board Audit Committee.With an independent audit function, the Corporate Audit Team provides reasonable assurance that the Company’s key organizational and proceduralcontrols are effective, appropriate and complied with. The team is also responsible for identifying and evaluating significant risk exposures and contributesto the improvement of risk management and control systems. They do this by assessing adequacy and effectiveness of controls covering the organization’sgovernance, operations and information systems.The Corporate Audit Team adheres to established professional standards and such standards promoted by the Institute of Internal Auditors’ Code of Ethics.Aside from an internal audit, an annual external audit of the Company is performed by SGV, which has been serving as the Company’s external auditors for thefiscal years 1998 to 2010. Mr. J. Carlitos G. Cruz was the audit partner for the Company for 2009. Previously Mr. Ladislao Z. Avila served as the audit partner ofAnnual Report 2010 41

the Company from 2004 to 2008. Our external auditors also attend the Company’s annual stockholders’ meeting to respond to questions on the Company’saudited financial statements for 2009.There has been no event in the past 12 years where the Company and its external auditors or the handling partner had any serious or material disagreementwith regard to any matter relating to accounting principles or practices, financial statement disclosure or auditing scope or procedure.LINKAGES TO THE COMPANYThe Company website contains up-to-date corporate information of the Company, including details of its business operations. The Investor Relations Sectionof the Company website provides financial highlights, recent press releases and information on the shareholding structure and organizational structure of theCompany, among others. An electronic copy of the Annual Report including the Corporate Governance Report can also be downloaded from the website. Inaddition, Management regularly provides updated news on the Company website.The contact details for your Company’s Investor Relations Office and shareholders inquiry point person is available on the website.RELATED PARTIES TRANSACTIONS DISCLOSURESThe nature and extent of transactions with affiliated and related parties are disclosed annually to shareholders through the Company’s Information Statement,Annual Report and Audited Financial Statements. The Company and its subsidiaries enter into related party transactions consisting of payment of shareholderadvances, professional fees and rental fees. These are made on an arm’s length basis and at current market prices at the time of the transactions. Serviceand management contracts are also entered into with subsidiaries and affiliates for corporate center services, such as human resources support services,internal audit services, legal and corporate compliance services, treasury and corporate finance services, technology infrastructure services. These services areobtained from the Company to enable the Aboitiz group of companies to realize cost synergies. Transactions are priced on a cost recovery basis. In addition,transaction costs are always benchmarked to third party rates to ensure competitive pricing.THE ROLE OF THE STAKEHOLDERS IN CORPORATE GOVERNANCEThe Company has a corporate policy and an entrenched culture that recognizes and protects the rights and interests of key stakeholders, specifically itsemployees, suppliers and customers, creditors, as well the community, environment and other key stakeholder groups.COMPLIANCE WITH HEALTH, SAFETY AND ENVIRONMENTAL LAWSThe Company’s power generation and distribution operations are subject to evolving and stringent safety, health and environmental laws and regulations.For the year 2010, the Company and its subsidiaries and affiliates have been fully compliant with the standards set forth by law. AboitizPower and all itsgeneration companies and distribution utilities have been granted Certificates of Compliance (COC) from the relevant governmental agencies and bureausrequiring certification. The BUs of the Company commit to the expenditure on occupational health and safety measures well worth the investment. To note,the Company has gained recognition for operating without accidents, a clear demonstration of how the Company values health and safety measures in thework environment. The Company’s Hedcor, Inc. has consistently received awards in recognition of its occupational health and safety practices and initiatives.Existing regulations, specifically Energy Regulation 1-94 requires the BUs of the Company to allocate funds for the benefit of host communities. Compliancewith the mandatory provisions of law is not only for the protection of the natural environment, but for the neighboring communities as well. The Companyis committed to compliance with the increased governmental enforcement of regulatory requirements on health, safety and environmental laws for strictimplementation. (See Section on Costs and Effect of Compliance with Environmental Laws under Business & General Information)The Company has a long and deep corporate social responsibility culture and program. The Company continues to address the social and economicdevelopment needs of the less privileged through outreach activities. The Company and its BUs have been able to obtain the Free Prior and Informed Consentfrom the Indigenous Communities in areas where the AboitizPower group companies operate because of the well entrenched corporate social responsibilityprograms of the group. The Company adheres to the practice of priority in hiring qualified disadvantaged individuals in the community for better employmentopportunities. The Company prioritizes programs in education, such as but not limited to, scholarship plans, construction or renovation of school buildings,and computer and library kit donations. These programs help improve the learning development of students from all levels in the community. As part of itscorporate social responsibility, the Company also engages in enterprise development, microfinance operations and primary health and child care servicesto improve the quality of life of its beneficiaries. (See Aboitiz Foundation Report) It is committed to sustainability of the earth’s resources through a clearlydefined Sustainability Program. (See Sustainability Report)The Company recognizes that corporate governance principles revolve around relationships between and among the many stakeholders and the goals forwhich a corporation is governed. Its principal stakeholders, the shareholders, management teams, employees, Board of Directors, lenders, financing providersand intermediaries, regulators and the community, together contribute to the successful pursuit of the Company’s business goals. This is why AboitizPowerensures that its various stakeholders are dealt with fairly and honestly, consistent with its mission and vision and its commitment to service.THE EMPLOYEE AS A STAKEHOLDERAEV Corporate HR has a universal training passport program for all employees, which is also extended to the Company’s employees. This universal trainingprogram includes personal development skills such as Principles of Quality Living, Seven Habits, Creating the Future Organization, Basic Quality Awareness,Working Program, to name just a few technical in-house training skills. The Company adheres to a merit-based performance incentive pay compensationpackage that includes some form of employee stock purchase plan, merit increase schemes and bonus schemes for performance and incentives to employees.42Aboitiz Power Corporation

2010 corporate governance reportEMPLOYEE RELATIONSThe Company believes in inspiring our employees, developing their talents and recognizing their value as business partners. The contribution of everyemployee is important to the fulfillment of the Company’s goals. The Company is committed to a workplace in which all individuals are treated with dignityand respect. The Code also promotes a safe and healthy working environment which provides equal employment opportunities and prohibits discriminatorypractices.Employees’ professional and personal growth is of paramount concern to the Company and the Company is keen to provide opportunities to deepenemployee’s understanding of the Company’s value-creating proposition. The Company cultivates a culture of life-long learning through high value, relevant,quality training programs designed to support employee career development path and personal growth. The Company’s numerous “Kabisig” programs striveto strengthen the ties that bind employees and the Company together.The Company maintains robust lines of communication between Management and employees, allowing the Company’s employees to interact withtop executives in the organization and provide opportunities for leadership role models and mentoring. This allows a free exchange of ideas and sharedexperiences, promoting teamwork, collaboration, cooperation, innovation and diversity within the organization. The Chairman of the Board and the ChiefExecutive Officer also organize regular formal and informal get-togethers with the Board of the Directors and key officers across the Company and its BUsproviding invaluable interaction between the Board and the management team leaders.RELATIONS WITH SHAREHOLDERS, CUSTOMERS, SUPPLIERS, BUSINESS PARTNERS AND FINANCING PROVIDERSThe Company believes in the value of its shareholders and ensures that its shareholders and investors receive timely, relevant, balanced, high-quality andunderstandable information about the Company. The Investor Relations Office assures shareholders and investors of an easy and direct access to officiallydesignated spokespersons for clarifying information and issues as well as dealing with investor concerns.The Investor Relations Office conducted investors’ briefings in March 5, 2010, May 7, 2010, August 6, 2010 and November 5, 2010 as a forum for investors todiscuss the Full Year 2009 Financial Operating Results, First Quarter 2010 Financial and Operating Results, First Half 2010 Financial and Operating Results andThird Quarter 2010 Financial and Operating Results.In dealings with its customers, suppliers and business partners, the Company abides by the Fair Dealing Policy found in its Code of Ethics and Business Conduct.The basis of the policy is the Company’s objective to out-perform its competition fairly and honestly through superior performance. Every employee, officerand director therefore always prioritizes the best interests of the Company’s clients and endeavors to deal fairly with suppliers, competitors, the public andone another. No one should take unfair advantage of anyone through manipulation, abuse of privileged information, misrepresentation of facts or any otherunfair dealing practice.Its commitment to its shareholders is reflected in the Company’s comprehensive reports on its operations, particularly its Report to Stockholders in theAnnual Report. Its senior financial officers, executive officers and directors endeavor to inform and assure shareholders of the timely discharge of financialresponsibilities through the Annual Report of the Company. The Audited Financial Statements of the Company gives a clear view of the Company’s financialcondition. All pending legal and tax proceedings, tax assessment notices, and voluntary assessment program or tax relief availment that are potentiallymaterial to AboitizPower’s business are disclosed through the Legal Proceedings section of the Information Statement of the Company.RELATIONS WITH THE COMMUNITY AND THE ENVIRONMENTThe Company’s broader obligations to society and the community are addressed by the Company’s continued compliance with its Manual, relevant laws andregulations, and the principles of sustainable development practices by the Company and its Business Units.The Company is committed to strike a balance between economic growth and social development and environmental stewardship in the conduct of itsbusiness, on the other hand. To this end, your Company implements programs that promote environmental preservation, such as the Mt. Apo Natural Parkrejuvenation project, and social and economic development in the communities where its businesses operate through the Aboitiz Foundation. The Company’sBusiness Units implement programs designed to make their operations more cost-efficient at the same time foster meaningful and long term partnershipswith their host communities. In October 22, 2010, one of the Company’s leading hydropower generation companies collaborated with its community’s in anancient indigenous people’s ritual, the Panubadtubad, led by the Bagogo-Tagabawa tribe’s 110 year old elder, to call and honor the “spirit of the mountains”both to give thanks and to ask for blessings for one of the Company’s newly installed power plants. Thus, the Company not only respects sustainability of theenvironment and natural resources, but also considers the immeasurable legacy and culture of indigenous peoples.The policy of sustainability of businesses is now part of the Company’s corporate governance culture. The Company’s “Race to Reduce Challenge” participatedin by the group’s companies, was recently awarded the Asian Corporate Social Responsibility Award for environmental excellence and the Anvil Award of Meritfor 2010. (See Sustainability Report)The Company believes that for it to continue to grow and flourish, it has to operate within a rational financial model, with a collaborative community, andwithin sustainable ecological framework. As the Company looks to the providing better solutions for a better future, it remains committed to its covenant asa good corporate citizen.Annual Report 2010 43

featureThe lasting allure of hydro plantsFor one who enjoys the hum of machinery inside built-to-last structures constructed ages ago,nothing can equal the thrill of walking into a hydroelectric power station, with the mesmerizingroar getting increasingly louder. The sight of solid steel turbines, made even more impressiveby a venerable pedigree in their casing, perhaps fabricated in Basel, Switzerland in 1915 orPhiladelphia, PA in 1934, holds one in awe. How could something made almost a century agostill be working? And how could it still manage to look so good?AmpohawThis love affair with hydros is what drives Rene Ronquillo, president and chief operating officerof AboitizPower wholly-owned unit Hedcor, Inc., to build even more plants than the 17 hecurrently has in his stable. These are scattered across Benguet in Northern Luzon and Davaoin Southern Mindanao. “Hydros have little impact to the environment. Moreover, hydropowerplants help the host communities in a major way.”Asin 1While the use of hydropower for generating electricity started in the 1880s in the UnitedStates, it wasn’t until the 1920s that the technology found its way to the Philippines. Althoughit is no longer in use, the Arsenio Escudero Hydroelectric Power Plant still stands today at VillaEscudero in Laguna, with its birth year proudly emblazoned on the powerhouse: 1937. TheAsin 1, 2, and 3 power plants in La Trinidad, Benguet, which Aboitiz was operating until thesewere turned over to the City of Baguio in December 2006, were built in the 1920s by the U.S.Army.Asin 2If it isn’t the technical aspect, or longevity, of a hydro that gets one hooked, it is the mannerit generates electricity that does. Hydros can be built relatively quickly, with smaller plantsunder 10 megawatts (MW) built in between 9 to 16 months. The effect on the surroundingecosystem and community is minimal, as there is no dam for impounding vast quantities ofwater and in its place is a small weir, which simply regulates water flow. Water is not used; itis simply run through a turbine and returned back to the river downstream from the powerstation. And the plants can do this for many years.Asin 3Bineng 2bHydros can be built relatively quickly, with smallerplants under 10 megawatts built in between9 to 16 months. The effect on the surroundingecosystem and community is minimal, as there is nodam for impounding vast quantities of water and in itsplace is a small weir, which simply regulates water flow.44Aboitiz Power Corporation

featureAmong the oldest working hydro plants in the world is the 5.75-MW Mechanicville power planton the Hudson River, which is said to have been operating 24/7 since 1895! Hydro plants canhave relatively high productivity rates as measured by plant factor, which is the percentageobtained by dividing total possible plant energy output by actual. For a hydro, anything above40% is pretty good. For the 1-MW Upper Talomo in Davao and the 2.4-MW Labay in Benguet,average plant factor for the last 15 years have been above 60%.Lon-oyWhat’s more, the communities that AboitizPower has been working with throughout thecountry seem very pleased with the prospect of having an Aboitiz-run hydro plant in theirmidst. “The communities are delighted with the benefits that they will receive and they lookforward to improved infrastructure, especially roads and bridges, among other things, thathydro plants bring to them,” says Ronquillo of his own experience. Host communities alsoreceive a share of every kilowatt-hour of electricity sold by the plants, and this can reachamounts they have never seen before, thereby bringing much benefit to the community.FLSWhat does the future hold for hydros? Ronquillo says there are six very firm projects lined upfor construction starting in 2011 and 2012 with one already under construction in Benguet.That is 59 MW of new renewable capacity that should be operational in 2012 or 2013. “Webelieve that there’s always a bright future for hydropower development. It is 100% cleanenergy and contributes to the countryside’s sustainable development,” he says.At an average investment of $3 million per MW, AboitizPower is indeed making big stakes inbuilding hydro plants. But given the allure of hydro, it seems all of us want to ask for more.FLSAnnual generation from small AboitizPower hydros (GWh)266Sal-Angan137 138169177130 134151143159172167175161112Sibulan19961997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010TalomoAnnual Report 2010 45

featureProviding better solutions to customers and community“We impact the lives ofmillions so we have toserve as best as we can.Our customers and thecommunity deserve thebest possible servicewe can give,” saysJim Aboitiz, EVP andCOO of AboitizPower’sDistribution Group.Even as it is already known for its operational efficiency, AboitizPower still continues to seeknew ways to effectively address the needs of its customers and community.Its brand promise of “Better Solutions” is fleshed out from its brand values of continuing andanticipating customer needs; acquiring, sharing and applying its knowledge; and committingto sustaining Earth’s resources and environment.“We impact the lives of millions so we have to serve as best as we can. Our customers and thecommunity deserve the best possible service we can give,” says Jim Aboitiz, executive vicepresident and chief operating officer of AboitizPower’s Distribution Group.Going the extra mile for customer serviceCustomer service is one of the areas that AboitizPower has especially been efficient in. Inthe past decade alone, it has introduced innovative ways that have vastly improved the waycustomer needs and concerns are addressed.Davao Light, for one, has introduced a “Visit First Before Disconnection Policy,” the firstof its kind for a utility company. If customers still haven’t settled their bill during a 96-hourgrace period, it is only then that their electric power supply will be disconnected. The VisayanElectric Company (VECO) in Cebu also implements this program.For customers’ convenience, service centers and third party agents are made available. VECOis the only distribution utility in the country to have a full-service center in a mall, SM Cebu,and accepts payments through RCPI branches nationwide. The company also pioneeredbilling services in Braille; it is the first and only utility in the country that has adopted thissystem dedicated to the visually impaired.Davao Light, meanwhile, has partner payment centers that are located in several malls andother areas, third party agents, and three satellite offices.Subic EnerZone, Mactan EnerZone and Balamban EnerZone, on the other hand, haveimplemented a Customer Care Program that offers free consultation to customers regardingtheir unbundled electric bill and also shares energy conservation tips such as how to reducetheir demand charges. All three companies offer free thermal scanning of customers’ electriclines to identify the weakest points in their systems that need to be replaced or looked into.Subic EnerZone has also installed Ring Main Units in the Subic Bay Industrial Park. Theseinitiatives are aimed to avoid any possible power interruption in their areas.“We provide electricity at a reasonable cost, at the correct voltage all the time. This meansthe customer receives the correct bill amount at the right time all the time. We also don’twaste a customer’s precious time when he pays for his bill or requires other services. We servehim as fast as we can,” Aboitiz adds.Providing proactive solutions during power crisis situationsIn the past years, AboitizPower has stepped up in helping consumers and the communitiesthey serve deal with the power crisis situation. Its power distributors have come upwith measures that would help lighten the burden of its consumers during these times.One of these solutions is the Interruptible Load Program (ILP) of both VECO and Davao Light,which has received strong support from government and the private sector. Here, customers46Aboitiz Power Corporation

featureare encouraged to fully or partially de-load by using their own generator sets. This sparesother customers from being hit by rotational power outages.Through the ILP, VECO was able to save three million kilowatt hours and minimize therotational brownouts in its service area from two hours to just one hour last year. It likewisepaid its customers who participated in the ILP. The rates were computed according to theEnergy Regulatory Commission (ERC) standard conversion rate for diesel multiplied by thecost of diesel used for a particular month less the VECO selling rate.Davao Light’s ILP, meanwhile, encouraged its large customers to operate their own standbygenerators during peak hours, hence allowing several other customers to be spared by thedaily rotating brownouts last summer. The company has also maximized the operation ofits embedded generating plants: the standby power plant in Bajada providing an average of40 MW, while Hedcor’s hydroelectric plants in Sibulan, Davao Del Sur and Mintal, Davao Cityprovide a total capacity of 21.8 MW. These power generation capacities can service close to61,000 households.For its part, Cotabato Light has a readily available standby power plant that augments thepower demand of its service area. So while most areas in Mindanao experienced four to sixhours of rotating brownouts, Cotabato Light customers experienced only one to two hours ofpower interruption.To keep customers informed about scheduled power interruptions, meanwhile, VECOlaunched a mobile phone texting service dubbed the “Text Broadcast.” Both VECO and DavaoLight have also utilized the power of social network sites Facebook and Twitter to disseminateinformation to its customers.Promoting energy efficiencyAs it is one of the country’s major producers and distributors of renewable energy,AboitizPowerhas initiated programs that promote energy solutions that leave a lighter impact on theEarth’s resources.VECO has partnered with Osram, a world leader in lighting technology, to promote the usageof compact fluorescent lamps (CFLs) within its franchise area. CFLs use less power and havelonger life spans than incandescent lamps.Davao Light also include a number of energy-saving tips in its company website thatcustomers can easily access, while Cotabato Light maintains a weekly radio program thatconsistently promotes the importance of energy conservation.AboitizPower complements these programs and projects with “team members who aresmart, intelligent, and have a passion to serve.”“We also buy, develop and use world-class computer software, invest heavily in the best utilityequipment, and benchmark our services with that of other world-class utilities,” Aboitiz says.Annual Report 2010 47

sustainability statementHelping create a better planetIn AboitizPower, we believe in striking a balance among sustainable profits, a healthyecosystem, empowered employees and involved communities. Your company is committedto create a socially responsible and environment-friendly business that we can pass on to thenext generation.Our five sustainability pillars—Rejuvenate Nature, Reduce, Re-use/Recycle, RenewableEnergy and Recharge Communities—guide our sustainability efforts. We hope to achieve the3P balance of profit, people and planet through these elements.Our first pillar is Rejuvenate Nature, where we engage in programs that will enable better carefor our natural landscape and promote biodiversity enhancement.1. Earth Hour 2010 celebration in Cebu2. Pinning a pledge for the mother Earth onthe cleanergy commitment tree1AboitizPower is at the forefront of propagating the Aboitiz Group’s inventory of 1.15 milliontrees that thrive in different locations nationwide. Our business units (BUs) in generation anddistribution have adopted hectares of land to plant the trees on. Hedcor has committed tomanage 1,000 hectares in the Sibulan Watershed and the Visayan Electric Company (VECO)has partnered with a non-government organization to reforest about 500 hectares in theupland area. Watershed management is a commitment of your company and we recognizethat the integrity of the natural resources we utilize in power generation and distributiondepends on how well we maintain these resources.Of the 20 companies that joined in the 2010 Aboitiz Group simultaneoustree planting activity, nine were from AboitizPower. The simultaneousevent enabled the planting of 35,000 indigenous and fruit-bearing trees.For Reduce, your company looks for ways to better conserve resourcesor minimize waste. We actively participate in the Aboitiz Group’s Race ToReduce program, a campaign that aims to increase awareness on betterresource consumption in energy, water and paper. Of the 17 companiesthat enrolled in the program, nine are from AboitizPower. Group-wideresults of the program were encouraging. By December 2010, the threecategories registered decreases compared to previous months.2In 2010, we continued to uphold our commitment to participate in EarthHour. We joined the global community in shutting off lights for an hourin our offices and homes.Our BUs also practice resource conservation efforts ranging fromcarpooling to turning lights off when not in use and during lunchtime.Davao Light imposed an interdepartmental program to reduceelectricity consumption by making sure that temperature levels of airconditioning units do not go below 22 o C. Mactan EnerZone, BalambanEnerZone, and Hedcor practice carpooling to save on fuel and emissions.For the Re-use/Re-cycle pillar, we are aggressively promoting the use ofCleanergy, AboitizPower’s core brand of clean and renewable energy,which is harnessed from hydroelectric and geothermal sources.In 2010, AboitizPower generated 4.4 billion kWh of energy from ourgeothermal and hydroelectric power plants. This accounted for 45% of48Aboitiz Power Corporation

sustainability statementthe total power generation for the year. On the average, 46% of the power acquired by ourdistribution utilities came from renewable sources. Cleanergy was delivered to 34 distributionand institutional clients nationwide. It will soon be available to all Filipinos once the GreenEnergy Option of the Electric Power Industry Reform Act will be implemented.We also advocate to extend the life of used materials and to reduce the volume of waste.Group-wide, BUs are already engaged in recycling wastes such as paper. It has become ahabit not to discard paper waste right away; scratch papers are first considered before usingclean sheets of paper for printing.The Sustainability Team is also implementing the Aboitiz Recycled Tarp (ART) Program,where discarded tarps are collected and recycled into items like bags, re-usable pouches andpencil cases. AboitizPower companies contributed their discarded tarps to the ART project.Together with the Aboitiz Foundation, the Sustainability Team will partner with accreditedexternal organizations and raise funds from used oil and discarded vehicle batteries to funddifferent corporate social responsibility and sustainability projects.AboitizPower continuesto be committed in itspursuit to strike the 3Pbalance in how we dobusiness. We will continueto explore ways on howwe can adopt moresustainable practices andcontribute to creating abetter planet.Implementation of projects like these is part of the Recharge Communities pillar. We continueto support the welfare of our partner communities by implementing projects in the followingfocus areas: education, enterprise development and primary health and childcare andenvironment. In 2010, the Foundation allocated P106 million for projects implemented underthese focus areas; AboitizPower BUs donated 31 school buildings and supported a total of 330scholars in 2010.Our BUs also participated in the global Earth Day movement. In one day, our employeevolunteers contributed 1,084 man-hours or equivalent to 5 man-days cleaning up thecommunities where they operate.AboitizPower BUs and affiliates have also initiated several programs that benefit the theirpartner communities. Among these programs are Hedcor’s Climate Change Caravan inschools, Save A River orientation and eco-market in communities; and Davao Light’s effortsinclude coastal clean-up and tree nurturing and maintenance. The BUs also partnered withGawad Kalinga to build homes for a number of beneficiaries and actively participated in theDepartment of Education’s Brigada Eskwela program.AboitizPower continues to be committed in its pursuit to strike the 3P balance in how we dobusiness. We will continue to explore ways on how we can adopt more sustainable practicesand contribute to creating a better planet.Annual Report 2010 49

corporate social responsibilitySowing seeds of hope121. Manang Letty tends to her plant nursery inher own backyard at the Buhisan Watershed.2. Manang Letty Nepa (seated, 2nd from right)with the Dulhogan People’s Association(DPA), a community-based organization inthe Buhisan Watershed & Forest Reservein Cebu City. DPA is among 13 communitybasedorganizations that have beenmobilized to raise native tree species for theVECO Reforestation Park Project.From a distance, you could see that Sitio Dulhogan Buhisan’s rolling hills were dotted with smallumber patches. Having no other resources to harness, most of this quiet town’s residents, likeManang Letty, relied on taking down tree trunks and branches and selling these at the local market.Just like the charcoal and firewood that she peddled, her meager profits were quick to burn out.Everyday at dawn, you would find her scouring the forests, trying to earn from anything that shecould chip off from trees to feed her six children and 17 grandchildren.This was back in 2009.In May 2010, AboitizPower subsidiary Visayan Electric Company (VECO) invested in a P19.4-millionreforestation park project that is benefiting 13 communities in the Central Cebu Protected Land(CCPL). Included in the CCPL are Mananga, Kotkot-Lusaran, Central Cebu, Sudlon National Parksand Buhisan Watershed and Forest Reserves, where Manang Letty’s hometown can be found.VECO’s reforestation park project is in partnership with the Philippine Business for Social Progress(PBSP). CCPL’s 540 hectares will eventually be planted with 900,180 native and fruit-bearing,flowering tree species, while the 10 hectares in Mactan Island will be home to 100,000 mangroves.The project will provide 60 marginal farmer-claimants and fisher folk with alternative incomesources.“Through VECO’s reforestation project, our vision in life was changed. We were given hope to liftourselves from poverty. This encourages us to turn our backs from manguling (charcoal making),which is harmful to Buhisan’s environment,” shared Manang Letty, whose newfound means oflivelihood is planting and selling seedlings. In a year, her average monthly earnings rose fromP2,000 to P6,000.Creating a Cleanergy worldAboitizPower believes in providing sustainable solutions for its host communities with the leastadverse effect on nature. Through Cleanergy, its brand of clean and renewable energy, the companyoffers responsible alternatives in choosing not just a power source, but also a way of life. This goalcan be seen in VECO’s reforestation park initiative, and in AboitizPower endeavors Groupwide.“We impact the lives of millions across the country, so we take it as our responsibility not onlyto provide our customers with the best service that we can give in terms of power generationand distribution, but likewise to help them and their communities through ventures towardssustainability,” says AboitizPower President and CEO Erramon Aboitiz.Magat Hydro power plant50Aboitiz Power Corporation

corporate social responsibilityAboitizPower subsidiaries under both the generation and distribution groups have all bandedtogether to support the Aboitiz Group’s campaign to plant one billion trees by 2013. They are alsoresolute in rolling out information drives on proper waste management and clean up activities, andin supporting international environmental events such as Earth Hour and Earth Day. In 2010, theycollectively invested close to P9-million in environmental projects alone.Sparking livelihood opportunitiesStemming from its support of the Aboitiz Foundation’s mission of helping people help themselves,AboitizPower companies also implement enterprise development programs.Hedcor, Inc., SN Aboitiz Power (SNAP), STEAG State Power, Cebu Private Power Corporation(CPPC) and Davao Light allocated a combined P3.8 million in 2010 for skills training andmicrofinance projects.The microfinance packages are handed out to Aboitiz Foundation’s partner-cooperatives,supporting such projects as cut flower and farm production and swine raising.Improving infrastructurePaving the way for sturdy roads towards progress, AboitizPower subsidiaries also improveinfrastructure in its host communities.1To name a few, Cotabato Light and the EnerZones have undertaken street lighting and ruralelectrification projects in their areas. Hedcor has helped improve roads in Sibulan and Irisan, covering615.4 kilometers to date. Davao Light, SNAP, Luzon Hydro, CPPC, and East Asia Utilities Corporationhave also implemented infrastructure projects in cooperation with local government units.Enlivening good healthAboitizPower subsidiaries have contributed over P6 million in supporting primary health initiativesto help nurture their host communities. They carry out medical and dental missions, circumcisiondrives, day care center rehabilitation, and adoption of ambulances.Energizing mindsCeaselessly cultivating bright ideas among the youth, AboitizPower subsidiaries continued to offerclose to P9.3 million worth of scholarship grants and financial assistance. To provide a conduciveenvironment for learning, its business units have donated remarkable amounts for facilities andequipment, and have made possible 15 construction-related projects in their host communitiesworth P33.4 million. The company is also set to build a Cleanergy Science Museum by 2012,pouring an estimated P30 million into the greenfield project.21. Top view of the Sibulan Hydro plant2. School children enjoying the facilitiesprovided by AboitizPower.One particular area that AboitizPower has stood by is the Aboitiz Foundation’s IntegratedComputerization Program, contributing almost P2.5 million to it. Its goal is to make computersand computer education integrated in the curriculum of public schools in their areas of operation.Upon graduation, the company and its subsidiaries extend college grants to their high schoolscholars and employment opportunities to their college scholars. In 2010, there were a total of 391high school and college scholars.With all these avenues that AboitizPower is pursuing, the company is one step closer to its visionof helping build a better future for every Filipino.“We impact the lives of millions across the country, sowe take it as our responsibility not only to provide ourcustomers with the best service that we can give in termsof power generation and distribution, but likewise to helpthem and their communities through ventures towardssustainability,” says AboitizPower president and CEOErramon I. AboitizAnnual Report 2010 51

oard of directorsboarEnrique M. Aboitiz, Jr.ChairmanJon Ramon AboitizVice ChairmanJakob DischIndependent DirectorErramon I. AboitizDirectorAntonio R. MorazaDirectorJose R. FacundoIndependent Director52Aboitiz Power Corporation

d of directorsJaime Jose Y. AboitizDirectorMikel A. AboitizDirectorRomeo L. BernardoIndependent Directorboard committeesBoard Corporate Governance CommitteeMikel A. Aboitiz (Chairman)Erramon I. Aboitiz (CEO)Romeo L. Bernardo (Independent Director)Jakob Disch (Independent Director)Jose R. Facundo (Independent Director)Xavier J. Aboitiz (Ex-Officio member, AEV Chief Human Resources & Quality Officer)Sebastian R. Lacson (Ex-Officio member, AEV Chief Reputation Officer)M. Jasmine S. Oporto (Ex-Officio member, AEV Chief Legal & Compliance Officer)Board Audit CommitteeJose R. Facundo (Chairman, Independent Director)Romeo L. Bernardo (Independent Director)Jakob Disch (Independent Director)Mikel A. AboitizJaime Jose Y. AboitizIker M. Aboitiz (Ex-Officio member, Chief Financial Officer)Rolando C. Cabrera (Ex-Officio member, AEV Chief Risk Management Officer)Board risk management committeeAntonio R. Moraza (Chairman)Erramon I. Aboitiz (CEO)Jakob Disch (Independent Director)Jose R. Facundo (Independent Director)Iker M. Aboitiz (Ex-Officio member, Chief Financial Officer)Rolando C. Cabrera (Ex-Officio member, AEV Chief Risk Management Officer)Annual Report 2010 53

orate officersBienamer D. GarciaVice PresidentCustomer ServicesPower Distribution GroupRaul C. LuceroVice PresidentEngineeringPower Distribution GroupJaime Jose Y. AboitizExecutive Vice PresidentChief Operating OfficerPower Distribution GroupAnastacio D. Cubos, Jr.Vice PresidentSpecial ProjectsRaymond E. CunninghamFirst Vice PresidentBusiness DevelopmentWilfredo R. Bacareza, Jr.Vice PresidentProject DevelopmentThomas J. Sliman, Jr.Vice PresidentBusiness DevelopmentManuel M. OrigFirst Vice PresidentMindanao AffairsAnnual Report 2010 55

corporate officersLuis miguel o. aboitizSenior Vice PresidentPower Marketing and TradingRoland U. GaerlanVice PresidentMarketingAlvin S. ArcoVice PresidentRegulatory Affairsoperating unit headsstanding Dante T. PollescasSenior Vice PresidentChief Operating OfficerSubic, Balamban and Mactan EnerZonesArt M. MilanExecutive Vice PresidentChief Operating OfficerDavao Light and Cotabato LightJose Venancio P. BatiquinExecutive Vice PresidentChief Operating OfficerTherma Marine, Inc.Michael B. piercePresidentChief Operating OfficerAP Renewables, Inc.SiTTINGBenjamin A. Cariaso, Jr.Executive Vice PresidentChief Operating OfficerTherma Luzon, Inc.Emmanuel V. RubioPresidentChief Executive OfficerSN Aboitiz Power, Inc.Rene B. RonquilloPresidentChief Operating OfficerHedcor, Inc.56Aboitiz Power Corporation

our portfolio for 2011Renewable Plant Plant capacity (MW)Renewable900 MWHydro433 MWGeo467 MW%ownershipAttributable capacity(MW)ManagementcompanyMagat 360 50 180 SNAP-MagatAmbuklao 105 50 52.5 SNAP-BenguetBinga 105 50 52.5 SNAP-BenguetBenguet 1- 10 34 100 34 HEDCORDavao 1- 5 4 100 4 HEDCORSibulan 42.5 100 42.5 HEDCOR SibulanBakun 70 100 70 Luzon HydroTiwiMakban467 100 467 AP RenewablesTotal 1,118 903NotesAttributable capacity is plant capacity multiplied by % ownershipAmbuklao plant capacity of 105 MW is after completion of expansion in 3Q 2011Binga plant capacity is 105 MW after completion of 2011 refurbishment which will add 5 new MWTiwi and Makban plant capacity is based on steam availabilityNon renewable Plant Plant capacity (MW)Nonrenewable1,201 MWCoal843MWOil358 MW%ownershipAttributable capacity(MW)ManagementcompanyPagbilao 700 100 700 Therma LuzonToledo 246 26 64 CEDCMindanao 232 34 79 STEAG State PowerCebu 70 60 42 Cebu Private PowerMactan 50 50 25 East Asia UtilitiesZamboanga 100 20 20 Western Mindanao PowerGeneral Santos 55 20 11 Southern Philippines PowerMobile 1 100 100 100 Therma MarineMobile 2 100 100 100 Therma MarineDavao 53 100 53 Davao LightCotabato 7 100 7 Cotabato LightTotal 1,713 1,201SummaryPlantTotal plant Total attributablecapacity (MW) capacity (MW)eRenewable Hydro 721 436RNon renewableGeoCoal4671,178467843nonROilTotal5352,9003582,10457%Non Renewable43%Renewable58Aboitiz Power Corporation

A diversified portfolio with assetslocated all over the country (with plant capacities)Renewable Non-Renewable Distribution Sales and RetailsAmbuklao Hydro (105MW)Binga Hydro (105 MW)Bakun Hydro (70 MW)Benguet Hydro (1-10) (34 MW)Magat Hydro (360 MW)San Fernando Electric Light & Power CompanySubic EnerZone CorporationTiwi - Makban Geothermal (467MW)Pagbilao (700 MW)Visayan Electric CompanyAboitiz Energy SolutionsmanilaCebu (70 MW)Mactan (50 MW)Mactan Enerzone CorporationBalamban Enerzone CorporationToledo (246 MW)Mobile 2 (100 MW)cebuMindanao (232 MW)Zamboanga (100 MW)Cotabato Light & Power CompanyCotabato (7 MW)Mobile 1 (100 MW)Davao Hydro (1-5) (4 MW)davaoDavao (53 MW)Davao Light & Power CompanySibulan (42.5 MW)General Santos (55 MW)Annual Report 2010 59

The Board Audit Committee Report to the Board of DirectorsThe Board Audit Committee’s roles and responsibilities are embodied in the Audit Committee Charter approved by the Board of Directors. It providesassistance to the Board of Directors in fulfilling the Board’s oversight responsibility to the shareholders relating to: (a) the quality and integrity of theCompany’s accounting, auditing, legal, ethical and regulatory compliance; (b) risk management; (c) financial reporting practices and (d) corporategovernance. Any proposed changes to the Audit Committee Charter are referred to the Board for approval.MembershipAs of December 31, 2010, the Audit Committee is composed of five members - three independent directors and two executive directors.Jose R. Facundo (independent director) chairs the Committee and is ably assisted by Romeo L. Bernardo (independent director), Jakob Disch (independentdirector), Mikel A. Aboitiz (executive director) and Jaime Jose Aboitiz (executive director). Ex-officio members also include Iker M. Aboitiz – AboitizPowerChief Finance Officer and Rolando C. Cabrera – Chief Risk Management Officer.MeetingsFour regular meetings were held during the year: March 3, May 5, August 5, and November 4, 2010. In these meetings, the Chief Financial Officer, ChiefRisk Management Officer, AboitizPower AVP-Controller and Corporate Audit Head were also present.Financial ReportsOn a high level basis, the Committee reviewed, discussed and endorsed for the approval of the Board the quarterly unaudited consolidated financialstatements and the annual audited consolidated financial statements of the Company and its subsidiaries, including the results of operations uponprior review and discussion with management, internal auditors and SGV & Co., the independent auditor of AboitizPower.These activities were performed in the following context:• That management has the primary responsibility for the financial statements and the financial reporting process; and• That SGV & Co. is responsible for expressing an opinion on the conformity of the Company’s audited consolidated financial statementswith Philippine Financial Reporting Standards.Independent AuditorsThe overall scope and audit plan of SGV & Co. was reviewed and approved. The terms of engagement were also reviewed.The Committee also discussed with SGV & Co. the results of SGV’s audits and its assessment of the overall quality of the financial reporting process. SGV& Co. also presented the effects of changes in relevant accounting standards and presentation of financial statements that impact the reported results.The Committee also approved the proposal to submit to the approval of the stockholders the delegation of the appointment of the Company’sexternal auditors for 2011 to the Board of Directors and/or the Audit Committee.Internal AuditorsThe Committee also reviewed and approved the annual audit program of the internal audit team of the Company. Included in this review is the adequacyof resources, competencies of staff and effectiveness of the internal audit function.Further, the Committee reviewed the reports of the internal auditors, which contain, among others, the internal auditors’ assessment that the Group’sinternal controls are adequate and the basic control assertions of reliability, integrity, timeliness of information, and compliance to policies, procedures,laws and regulations have been satisfactorily complied with.It is also the internal audit team’s assessment that operational efficiency, standardization, alignment of processes and timeliness of information acrossthe Group should remain the focus of management’s efforts.The Committee likewise reviewed, approved, and endorsed the revised Internal Audit Charter. The revision to the charter focused mainly on internalaudit’s role in the Enterprise Risk Management program.Risk ManagementIn keeping with its charter, the Committee reviewed and discussed the progress of the implementation of the Enterprise Risk Management (ERM)initiative. In 2010, the Company’s top risks were identified and approved by the Board Risk Management Committee. These were then utilized as inputsto the internal audit team’s risk-based audit planning process.In behalf of the Committee,Jose R. FacundoChairman60Aboitiz Power Corporation

SECURITIES AND EXCHANGE COMMISSIONSEC Building, EDSA GreenhillsMandaluyong, Metro ManilaSTATEMENT OF MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTSThe management of Aboitiz Power Corporation is responsible for all information and representations contained in the consolidated financial statementsfor the years ended December 31, 2010 and 2009. The financial statements have been prepared in conformity with Philippine Financial ReportingStandards, and reflect amounts that are based on the best estimates and informed judgment of management with an appropriate consideration tomateriality.In this regard, management maintains a system of accounting and reporting which provides for the necessary internal controls to ensure that transactionsare properly authorized and recorded, assets are safeguarded against unauthorized use or disposition and liabilities are recognized. The managementlikewise discloses to the Company’s Audit Committee and to its external auditor: (i) all significant deficiencies in the design or operation of internalcontrols that could adversely affect its ability to record, process, and report financial data; (ii) material weaknesses in the internal controls; and (iii) anyfraud that involves management or other employees who exercise significant roles in internal controls.The Board of Directors reviews the consolidated financial statements before such statements are approved and submitted to the stockholders of theCompany.SyCip Gorres Velayo & Co., the independent auditors appointed by the stockholders, have examined the consolidated financial statements of theCompany in accordance with Philippine Standards on Auditing, and have expressed their opinion on the fairness of presentation upon completion ofsuch examination in the Report to the Stockholders and Board of Directors.ENRIQUE M. ABOITIZ , JR.Chairman of the BoardERRAMON I. ABOITIZPresident & Chief Executive OfficerIKER M. ABOITIZFirst Vice President /Chief Financial Officer/Corporate Information OfficerRepublic of the Philippines )City of Cebu) S.S.Before me, a notary public in and for the city named above, personally appeared:Name passport No. Date/Place IssuedENRIQUE M. ABOITIZ , JR. EA0008887 December 8, 2009, ManilaERRAMON I. ABOITIZ XX1560733 July 7, 2008, ManilaIKER M. ABOITIZ XX3643697 may 6, 2009, Cebu Citywho are personally known to me and to me known to be the same persons who presented the foregoing instrument and signed the instrument in mypresence, and who took an oath before me as to such instrument.Witness my hand and seal this_______________________.Doc. No. _______ 397 ;Page No. _______ 80 ;Book No. _______ XVI ;Series of 2011Annual Report 2010 61

Independent Auditors’ ReportThe Stockholders and the Board of DirectorsAboitiz Power CorporationAboitiz Corporate CenterGov. Manuel A. Cuenco AvenueCebu CityWe have audited the accompanying consolidated financial statements of Aboitiz Power Corporation and its Subsidiaries, which comprise the consolidatedbalance sheets as at December 31, 2010 and 2009, and the consolidated statements of income, consolidated statements of comprehensive income,consolidated statements of changes in equity and consolidated statements of cash flows for each of the three years in the period ended December 31,2010, and a summary of significant accounting policies and other explanatory information. We did not audit the 2009 and 2008 financial statementsof the following subsidiaries: Aboitiz Energy Solutions, Inc., Balamban Enerzone Corporation and Mactan Enerzone Corporation; the 2009 financialstatements of five subsidiaries of Aboitiz Renewables, Inc. (ARI; formerly Philippine Hydropower Corporation); and the 2008 financial statements ofARI and Subsidiaries, which statements reflect total assets of 6.40% of the consolidated assets as at December 31, 2009, and total revenues of 7.74%and 13.21% of the consolidated revenues in 2009 and 2008, respectively. Also, we did not audit the 2009 and 2008 financial statements of the followingassociates: East Asia Utilities Corporation, Hijos de F. Escaño, Inc., Pampanga Energy Ventures, Inc. and STEAG State Power, Inc., the investments inwhich represent 7.53% of the total consolidated assets as at December 31, 2009, and the Group’s share in net earnings represents 17.55% and 29.19% ofthe consolidated net income for 2009 and 2008, respectively. Those financial statements were audited by other auditors whose reports thereon havebeen furnished to us, and our opinion on the 2009 and 2008 consolidated financial statements, insofar as it relates to the amounts included for thoseentities, is based solely on the reports of the other auditors.Management’s Responsibility for the Consolidated Financial StatementsManagement is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Philippine FinancialReporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financialstatements that are free from material misstatement, whether due to fraud or error.Auditors’ ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordancewith Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtainreasonable 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. Theprocedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financialstatements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparationand fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness ofaccounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of theconsolidated financial statements.We believe that the audit evidence we have obtained and the reports of the other auditors are sufficient and appropriate to provide a basis for our auditopinion.OpinionIn our opinion, based on our audits and the reports of the other auditors for 2009 and 2008, the consolidated financial statements present fairly, inall material respects, the financial position of Aboitiz Power Corporation and its Subsidiaries as at December 31, 2010 and 2009, and their financialperformance and their cash flows for each of the three years in the period ended December 31, 2010 in accordance with Philippine Financial ReportingStandards.SYCIP GORRES VELAYO & CO.J. Carlitos G. CruzPartnerCPA Certificate No. 49053SEC Accreditation No. 0072-AR-2Tax Identification No. 102-084-648BIR Accreditation No. 08-001998-14-2009,June 1, 2009, Valid until May 31, 2012PTR No. 2641514, January 3, 2011, Makati CityMarch 3, 201162Aboitiz Power Corporation

Independent Auditors’ Reporton Supplementary SchedulesThe Stockholders and the Board of DirectorsAboitiz Power Corporation and SubsidiariesAboitiz Corporate CenterGov. Manuel A. Cuenco Avenue, Cebu CityWe have audited in accordance with Philippine Standards on Auditing, the consolidated financial statements of Aboitiz Power Corporation and itsSubsidiaries included in this Form 17-A and have issued our report thereon dated March 3, 2011. Our audits were made for the purpose of forming anopinion on the basic financial statements taken as a whole. The schedules listed in the Index to Financial Statements and Supplementary Schedules arethe responsibility of the Company’s management. These schedules are presented for purposes of complying with the Securities Regulation Code Rule68 and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basicfinancial statements, and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basicfinancial statements taken as a whole.SYCIP GORRES VELAYO & CO.J. Carlitos G. CruzPartnerCPA Certificate No. 49053SEC Accreditation No. 0072-AR-2Tax Identification No. 102-084-648BIR Accreditation No. 08-001998-14-2009,June 1, 2009, Valid until May 31, 2012PTR No. 2641514, January 3, 2011, Makati CityMarch 3, 2011Annual Report 2010 63

ABOITIZ POWER CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Amounts in Thousands)ASSETSCurrent AssetsCash and cash equivalents (Note 4)Trade and other receivables (Note 5)Derivative assets (Note 33)Inventories (Note 6)Other current assets (Note 7)π18,301,8456,805,7917,6701,845,587959,353December 312010 2009π3,814,9064,476,0288461,110,639512,684Total Current Assets 27,920,246 9,915,103Noncurrent AssetsProperty, plant and equipment (Note 11)Intangible asset - service concession rights (Note 12)Investment propertyInvestments in and advances to associates (Note 9)Available-for-sale (AFS) investments - net of impairment of π5,254Goodwill (Note 10)Pension assets (Note 26)Deferred income tax assets (Note 28)Other noncurrent assets (Note 13)74,291,764936,99610,00028,799,3703,744996,005173,442199,8221,225,48372,901,029882,30810,00024,800,3013,744996,00537,186250,0091,545,032Total Noncurrent Assets 106,636,626 101,425,614TOTAL ASSETS π134,556,872 π111,340,717LIABILITIES AND EQUITYCurrent LiabilitiesBank loans (Note 15)Trade and other payables (Note 14)Derivative liabilities (Note 33)Income tax payableCurrent portions of:Long-term debts (Note 16)Finance lease obligation (Note 35)Long-term obligation on power distribution system (Note 12)Payable to a preferred shareholder of a subsidiary (Note 18)π1,979,8006,953,830323179,648555,4951,102,08040,00013,797π5,828,1006,022,53716,476365,209101,2002,270,99440,00011,263Total Current Liabilities 10,824,973 14,655,779(Forward)64Aboitiz Power Corporation

Noncurrent LiabilitiesNoncurrent portions of:Long-term debts (Note 16)Finance lease obligation (Note 35)Long-term obligation on power distribution system (Note 12)Payable to a preferred shareholder of a subsidiary (Note 18)Customers’ deposits (Note 17)Pension liabilities (Note 26)Deferred income tax liabilities (Note 28)16,147,61847,203,036242,55962,9702,004,38416,001321,12116,151,33543,315,170247,46076,7671,781,11628,15838,005Total Noncurrent Liabilities 65,997,689 61,638,011Total Liabilities 76,822,662 76,293,790Equity Attributable to Equity Holders of the ParentCapital stock (Note 19a)Additional paid-in capitalShare in net unrealized valuation gains on AFS investments of an associate (Note 9)Share in cumulative translation adjustments of associates (Note 9)Acquisition of non-controlling interestsRetained earnings (Note 19b)7,358,60412,588,89478,11857,922(259,147)37,505,7977,358,60412,588,894–115,246(259,147)14,672,26257,330,188 34,475,859Non-controlling Interests 404,022 571,068Total Equity 57,734,210 35,046,927TOTAL LIABILITIES AND EQUITY π134,556,872 π111,340,717See accompanying Notes to Consolidated Financial Statements.Annual Report 2010 65

ABOITIZ POWER CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(Amounts in Thousands, Except Earnings Per Share Amounts)Years Ended December 312010 2009 2008OPERATING REVENUESSale of power (Notes 20 and 30)GenerationDistributionServicesTechnical, management and other fees (Note 31)π46,313,90413,064,59362,524110,437π12,359,47910,734,42761,59818,761π2,880,7199,227,69661,06573,50059,551,458 23,174,265 12,242,980OPERATING EXPENSESCost of generated power (Note 22)Cost of purchased power (Note 21)Depreciation and amortization (Notes 11 and 12)Operations and maintenance (Note 24)General and administrative (Note 23)Cost of services15,882,32610,001,5703,003,9772,437,9281,986,8267,2515,030,2778,032,5621,412,9001,336,9871,902,4282,9441,695,8946,625,385511,154653,1041,102,5742,36433,319,878 17,718,098 10,590,475FINANCIAL INCOME (EXPENSES)Interest income (Notes 4, 13 and 31)Interest expense and other financing costs (Note 32)224,158(6,678,293)409,972(2,813,978)607,540(378,536)(6,454,135) (2,404,006) 229,004OTHER INCOME (CHARGES)Share in net earnings of associates (Note 9)Other income - net (Note 27)4,625,8831,600,3992,535,386813,4112,784,511376,6926,226,282 3,348,797 3,161,203INCOME BEFORE INCOME TAX26,003,727 6,400,9585,042,712PROVISION FOR INCOME TAX - Net (Note 28)920,697 631,190618,384NET INCOME π25,083,030 π5,769,768 π4,424,328Attributable to:Equity holders of the parentNon-controlling interestsπ25,041,11641,914π5,658,581111,187π4,333,61390,715π25,083,030 π5,769,768 π4,424,328EARNINGS PER COMMON SHARE (Note 29)Basic and diluted, for income for the year attributable to ordinary equity holders of the parent π3.40 π0.77 π0.59See accompanying Notes to Consolidated Financial Statements.66Aboitiz Power Corporation

ABOITIZ POWER CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Amounts in Thousands)Years Ended December 312010 2009 2008NET INCOME ATTRIBUTABLE TO:Equity holders of the parentNon-controlling interestsπ25,041,11641,914π5,658,581111,187π4,333,61390,71525,083,030 5,769,768 4,424,328OTHER COMPREHENSIVE INCOME (LOSS)Share in net unrealized valuation gains on AFS investments of an associate (Note 9)Share in movement in cumulative translation adjustment of associates (Note 9)Income tax effect on other comprehensive income78,118(57,324)––133,668––557,554–Total other comprehensive income for the year, net of tax 20,794 133,668 557,554TOTAL COMPREHENSIVE INCOME π25,103,824 π5,903,436 π4,981,882Attributable to:Equity holders of the parentNon-controlling interestsπ25,061,91041,914π5,792,249111,187π4,891,16790,715π25,103,824 π5,903,436 π4,981,882See accompanying Notes to Consolidated Financial Statements.Annual Report 2010 67

ABOITIZ POWER CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN EQUITYFOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008(Amounts in Thousands, Except Dividends Per Share Amounts)Attributable to Equity Holders of the ParentCapitalStock(Note 19a)AdditionalPaid-in CapitalShare in NetUnrealizedValuationGains on AFSInvestmentsof anAssociate(Note 9)Share inCumulativeTranslationAdjustmentsof Associates(Note 9)Acquisition ofNon-controllingInterestsRetainedEarnings(Note 19b)Non-controllingInterests TotalBalances at January 1, 2010 π7,358,604 π12,588,894 π– π115,246 (π259,147) π14,672,262 π571,068 π35,046,927Net income for the yearOther comprehensive income (loss)–––––78,118–(57,324)––25,041,116–41,914–25,083,03020,794Total comprehensive income (loss) for the yearCash dividends - π0.30 a share (Note 19b)Cash dividends paid to non-controlling interestsChange in non-controlling interests––––––––78,118–––(57,324)––––––25,041,116(2,207,581)––41,914–(94,240)(114,720)25,103,824(2,207,581)(94,240)(114,720)Balances at December 31, 2010 π7,358,604 π12,588,894 π78,118 π57,922 (π259,147) π37,505,797 π404,022 π57,734,210Balances at January 1, 2009 π7,358,604 π12,588,894 π– (π18,422) (π259,147) π10,485,401 π536,333 π30,691,663Net income for the yearOther comprehensive income–––––––133,668––5,658,581–111,187–5,769,768133,668Total comprehensive income for the yearCash dividends - π0.20 a share (Note 19b)Cash dividends paid to non-controlling interestsChange in non-controlling interests––––––––––––133,668–––––––5,658,581(1,471,720)––111,187–(76,401)(51)5,903,436(1,471,720)(76,401)(51)Balances at December 31, 2009 π7,358,604 π12,588,894 π– π115,246 (π259,147) π14,672,262 π571,068 π35,046,927Balances at January 1, 2008 π7,358,604 π12,588,894 π– (π575,976) (π107,163) π7,476,337 π619,427 π27,360,123Net income for the yearOther comprehensive income–––––––557,554––4,333,613–90,715–4,424,328557,554Total comprehensive income for the yearCash dividends - π0.18 a share (Note 19b)Cash dividends paid to non-controlling interestsAcquisition of non-controlling interestsChange in non-controlling interests–––––––––––––––557,554–––––––(151,984)–4,333,613(1,324,549)–––90,715–(148,848)(25,962)1,0014,981,882(1,324,549)(148,848)(177,946)1,001Balances at December 31, 2008 π7,358,604 π12,588,894 π– (π18,422) (π259,147) π10,485,401 π536,333 π30,691,663See accompanying Notes to Consolidated Financial Statements.68Aboitiz Power Corporation

ABOITIZ POWER CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in Thousands)Years Ended December 312010 2009 2008CASH FLOWS FROM OPERATING ACTIVITIESIncome before income taxAdjustments for:Interest expense and other financing costs (Note 32)Depreciation and amortization (Notes 11 and 12)Write-off of project costs and assetsGain on sale of property, plant and equipmentUnrealized fair valuation losses (gains) on derivativesInterest income (Notes 4, 13 and 31)Net unrealized foreign exchange losses (gains)Share in net earnings of associates (Note 9)Dividend incomeOperating income before working capital changesDecrease (increase) in:Trade and other receivablesInventoriesOther current assetsOther noncurrent assetsIncrease (decrease) in:Trade and other payablesCustomers’ depositsNet cash generated from operationsIncome and final taxes paidService fees paid (Note 12)π26,003,7276,678,2933,003,97742,217(75)(22,977)(224,158)(1,504,650)(4,625,883)–29,350,471(2,399,871)(734,948)(448,445)410,2691,685,285223,26828,086,029(770,382)(40,000)π6,400,9582,813,9781,412,900–(2,865)15,630(409,972)(27,468)(2,535,386)–7,667,775(2,608,352)(547,968)(20,600)(922,143)2,651,669210,0246,430,405(516,772)(40,000)π5,042,712378,536511,1545,254(2,965)–(607,540)49,084(2,784,511)(33)2,591,69142,12842,579(136,977)13,008(169,543)197,1622,580,048(634,654)(40,000)Net cash flows from operating activities 27,275,647 5,873,633 1,905,394CASH FLOWS FROM INVESTING ACTIVITIESCash dividends received (Note 9)Interest receivedProceeds from sale of property, plant and equipmentAdditions to:Intangible assets - service concession rights (Note 12)Property, plant and equipment (Notes 11 and 35)Additional investments in associates (Note 9)Net collection of (additional) advances to associates (Note 9)Acquisition of Tiwi-Makban Geothermal Power Plants (Note 8)1,818,359215,2591,778(104,250)(4,208,027)(1,031,232)(1,060,396)–833,187451,68318,604(70,259)(3,274,390)(2,526,754)813,221(20,198,774)1,930,244595,2205,995(227,401)(2,623,993)(3,779,977)(1,687,932)–Net cash flows used in investing activities (4,368,509) (23,953,482) (5,787,844)CASH FLOWS FROM FINANCING ACTIVITIESProceeds from availment of long-term debt - net of transaction costs (Note 16)Payments to a preferred shareholder of a subsidiary (Note 18)Changes in non-controlling interestsPayments of:Long-term debt (Note 16)Finance lease obligationInterest paidCash dividends paid (Note 19b)Net availments (payment) of bank loans (Note 15)Acquisitions of non-controlling interests870,000(31,070)(208,960)(442,564)(1,118,880)(1,622,023)(2,207,581)(3,597,038)–9,762,893(31,070)(158,142)(48,446)–(1,468,820)(1,471,721)1,136,900–5,712,664(31,070)221,276(1,000)–(299,216)(1,324,549)949,000(177,946)Net cash flows from (used in) financing activities (8,358,116) 7,721,594 5,049,159NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTSEFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTSCASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR14,549,022(62,083)3,814,906(10,358,255)(160,515)14,333,6761,166,709460,86412,706,103CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 4) π18,301,845 π3,814,906 π14,333,676See accompanying Notes to Consolidated Financial Statements.Annual Report 2010 69

Aboitiz Power Corporation (AboitizPower) is the holding company for the Aboitiz Group’sinvestments in power generation, distribution, retail and power services. It is a major producer ofCleanergy, its brand for clean and renewable energy in the Philippines with several hydroelectric andgeothermal assets in its generation portfolio and also has non-renewable power plants located across thecountry. The company owns distribution utilities that operate in high-growth areas in Luzon, Visayas andMindanao.Aboitiz Equity Ventures, Inc. (AEV) is the publicly listed holding and investment management companyof the Aboitiz Group with major investments in power generation and distribution, financial services, andfood. Two of its investee companies are also listed on the Philippine Stock Exchange. AEV is consistentlyrecognized in international surveys as among the Philippines’ best managed companies and has also beencited for its commitment to good corporate governance.Aboitiz Foundation, Inc. (Foundation) is the concrete manifestation of the Aboitiz Group’s strongcommitment to corporate social responsibility. Guided by its mission, helping people help themselves,the Foundation addresses social and economic development needs of less privileged communitiesand members of society in areas where Aboitiz companies operate. The Foundation acts primarilythrough chosen programs in education, enterprise development, primary health and childcare, and theenvironment, in order to improve the quality of life of its beneficiaries.Investor InformationHead Office: Aboitiz Corporate CenterGov. Manuel A. Cuenco AvenueKasambagan, Cebu City 6000PhilippinesTel (63-32) 411-1800 • Fax (63-32) 231-4037Metro Manila: 110 Legazpi StreetLegaspi Village, Makati CityManila, PhilippinesTel (63-2) 793-2800 • Fax (63-2) 817-3560Common StockThe Company’s common stock is listed and tradedon the Philippine Stock Exchange.Stockholders’ MeetingThe Company’s regular stockholders’ meetingis held on the third Monday of May of every year.Stockholder Services and AssistanceThe Securities Transfer Services, Inc. (STSI) serves as theCompany’s stock transfer agent registrar.For matters concerning dividend payments, account status,lost or damaged stock certificates, change of address,please write or call:SECURITIES TRANSFER SERVICES, INC.Ground Floor, Benpres BuildingMeralco Avenue cor. Exchange RoadOrtigas Center, Pasig City, PhilippinesTel (63-2) 490-0070 / 477-3080Fax (63-2) 631-7148Email: tonyg@stsi.ph / stsi@stsi.phAboitizPower welcomes inquiries from institutionalinvestors, analysts, and the financial community.Please write or call:Investor RelationsAboitiz Power CorporationTel (63-32) 411-1756Fax (63-32) 231-4037Email: ap_investor@aboitiz.comwww.aboitizpower.comwww.cleanergy.com.ph70Aboitiz Power Corporation

Almun Rey LogronioTHE ARTISTis one of six young artists from the University of thePhilippines Visayas Cebu College commissioned byAboitiz Equity Ventures, Inc. (AEV) to make visualrepresentations on the themes of the 2010 Annual Reportsof AEV, Aboitiz Power Corporation and Aboitiz Foundation,Inc., and the 2nd Aboitiz Sustainability Report.Almun Rey, a student at the University of the PhilippinesVisayas–Cebu Campus, was a finalist during the ShellNational Art Competition in 2009. In doing the Aboitizproject, he said, “I used some reference and my imaginationto come up with my concept for the artworks.”The cover and the inside pages of this 2010 Aboitiz Power Corporation Annual Report are printed on Splendorgel EW,ultra-fine paper made of pure elemental chlorine-free ecological pulp, and is 100% biodegradable and recyclable. Theink used is from the Aniva euro series, which is a high-pigmented and mineral oil-free offset ink based on renewableraw materials.The management directory, portfolio and financial statements are printed on Econobond, which is 100% recycleduncoated paper made from post-consumer collected waste.

www.aboitizpower.com