Aboitiz Equity Ventures, Inc. (AEV or the Company) saw its year-to-date (YTD) consolidated net income decline by 8% year-on-year (YoY) to P16.6 billion from P18.0 billion. This translates to P3.00 in earnings per share. Power accounted for 71%, followed by the Banking, Food and Real Estate strategic business units (SBUs) with income contributions of 22%, 6%, and 1%, respectively.

For the period ending September 30, 2013, the revaluation of consolidated dollar-denominated liabilities and placements resulted in a non-recurring loss of P1,103 million. A one-time net loss was also recognized by the Power SBU, mostly due to the pre-termination of its loans resulting in a one-time write-off of the unamortized borrowing costs. AEV’s share in this amounted to P67.5 million. On the other hand, the Company booked gains of P1,298 million from the sale of City Savings Bank, Inc. (CitySavings). Adjusting for these one-offs, AEV’s core net income amounted to P16.4 billion, which is 7% lower than last year.

“We remain pleased with the performance of our business units. Our challenge in the coming years is to deploy the cash flow we are generating into ventures that meet our hurdle rates. For one, we are very keen on participating in the government’s public-private partnership projects,” Erramon I. Aboitiz, AEV President and Chief Executive Officer, said.

Meanwhile, AEV ended the third quarter of 2013 with a consolidated net income of P4.6 billion, recording a decrease of 25% YoY. Out of the total earnings contributions from the Company’s SBUs, Power accounted for 80% while the income contribution of the Banking, Food and Real Estate SBUs were at 12%, 7%, and 1% respectively.

For the three-month period in review, the revaluation of consolidated dollar-denominated liabilities and placements resulted in a non-recurring loss of P119.7 million. This was partly offset by the reversal of a previous impairment provision amounting to P29.9 million for the period related to the sale of a stake in an associate, as well as AEV’s share in the Power SBU’s one-time gain resulting from the redemption of shares in several affiliates. Adjusting for these, AEV closed the quarter with a core net income of P4.7 billion, down 25% YoY.

Strategic Business Units

Power

For the period ending September 30, 2013, Aboitiz Power Corporation (AboitizPower) registered an income contribution of P11.0 billion, registering a 22% decrease when compared to the previous year’s P14.1 billion. When adjusted for non-recurring items, the Power SBU recorded a 12% YoY decrease in its earnings share, from P13.7 billion to P12.1 billion.

The group’s average price for its power decreased by 12% YoY during the first nine months of 2013. This was due to the YoY decline in both the average selling price of electricity sold to the spot market and average selling price under bilateral contracts of 23% and 10%, respectively.

On the other hand, AboitizPower’s attributable net generation for the period in review grew by 4% YoY, from 7,903 gigawatt-hours (GWh) to 8,245 GWh due to the increase in demand brought about by the hotter weather during the summer months. Power sales through bilateral contracts for the period remained flat at 6,761 GWh. Meanwhile, spot market sales improved by 33% YoY from 1,118 GWh to 1,484 GWh.

“Power will remain a key focus for us. We are committed to providing power in support of the country’s economic growth. We still believe the most pragmatic and cost-effective way of achieving this is through a balanced mix of base load and renewable energy sources where feasible,” Aboitiz added.

Over the past several months, AboitizPower has been taking steps to shift the bulk of its contracts from energy-based contracts to capacity-based contracts. In general, the latter are essentially de-risked contracts since these provide a fixed capacity fee payment for the company covering capital recovery and operation and maintenance costs; allows for the full pass-through of fuel costs, which make up a significant portion of the company’s operating costs; and includes provisions for inflation-related adjustments and where applicable, forex adjustments on these costs. The combination of these features allows the company to minimize revenue to cost mismatches. As such, the shift to capacity-based contracts will allow AboitizPower to benefit from more stable and predictable cash flows and minimize volatility in the company’s cash flow generation.

On a capacity basis, the company’s attributable sales decreased by 3% YoY from 1,562 MW to 1,514 MW as a result of lower sales for services as well as the decrease in bilateral sales. Ancillary volumes dropped by 52% during the period due to the lower acceptance rate by the National Grid Corporation of the Philippines while sales by the Tiwi and Makiling-Banahaw (Tiwi-MakBan) plants dropped due to lower contract levels. On the other hand, the start of the implementation of commercial transactions under an interim development system for Open Access last June 26, 2013, helped support AboitizPower’s initiative to shift the bulk of its sales from bilateral energy contracts to capacity-based contracts. The company, through its licensed Retail Energy Suppliers, was able to secure close to 280 megawatts (MW) in contracts with various off-takers under the scheme.

“We have always maintained that what will bring down power prices is competition. Open Access is giving the customer the power of choice, which will drive competition. We therefore think it is a crucial element in making our power more competitive,” Aboitiz said.

To mitigate the impact of the new steam supply contract for the Tiwi-MakBan plants, AboitizPower was able to close an interim agreement last August 14, 2013 with the steam supplier that will supplement the Geothermal Resource Supply Contract (GRSC). The agreement, which originally had a term of two months, called for a revenue sharing agreement when spot market prices are greater than the GRSC-determined fuel cost, thus making the plants more competitive. The agreement has since been extended by another two months. Ultimately, the company aims to close a more permanent agreement with the steam supplier that will also enable the full development of the existing steam field and maximize utilization of the Tiwi-MakBan plants.

Meanwhile, expansions in volumes and margins resulted to an 11% YoY increase in the power distribution group’s earnings share for the first nine months of 2013, from P1.7 billion to P1.9 billion. Total attributable electricity sales increased by 3% YoY, from 2,935 GWh to 3,024 GWh. The residential segment spearheaded the increase in sales with a 6% YoY expansion in volume sales, while commercial and industrial accounts registered YoY growth of 5% and 3% respectively. The group’s year-to-date gross margin on a per kilowatt-hour basis improved to P1.73 from P1.60 a year ago. This was due to the improvement in the systems loss levels of all the distribution utilities, which were maintained within the government-imposed cap of 8.5%. Approved adjustments under performance-based rates also helped support the increase in gross margins.

Banking

The Banking SBU’s income contribution for the first nine months of 2013 recorded an 8% growth YoY, from P3.1 billion to P3.3 billion. This was driven by higher interest income and other income, as well as the increase in the Company’s stake in Union Bank of the Philippines (UnionBank).

Net interest income increased by 17% to P6.4 billion mainly attributed to the continuous expansion in the average level of earning assets, notwithstanding compression in asset yields. Total other income rose by over a quarter to P10.5 billion largely on account of higher service charges, fees and commissions and trading gains. Total operating expenses went up by 23% to P8.1 billion on increases in salaries and employee benefits, taxes and licenses, and miscellaneous expenses.

As of end-September 2013, UnionBank’s resources expanded by 24% to P345.9 billion, buoyed by the 36% growth in total deposits to P258.5 billion. Loans and other receivables stood at P120.6 billion as the increases in gross loan portfolio were offset by lower level of securities purchased under reverse repurchase agreements. Capital ratios remained healthy and supportive of growth with Tier 1 and total capital adequacy ratio at 18.6% and 19.7%, respectively.

Food

AEV’s Food unit, Pilmico Foods Corporation, recorded a 3% YoY increase in its income contribution for the first nine months of 2013, from P906.2 million to P932.1 million. The growth was driven by the Farms division, which registered a net income of P149.3 million versus last year’s P27.4 million. The hefty increase in income contribution is attributable to the improvement in the average selling price of market hogs. Meanwhile, the Flour division performed weakly as prices remained soft when compared to the year before, resulting to a 15% decrease in YoY in income contribution to P348.5 million. The Feeds division also registered an 8% YoY decline in its bottomline to P434.3 million as a result of higher input costs.

Real Estate

In November 2012, AEV acquired Aboitiz Land, Inc. (AboitizLand), thereby making it the real estate arm of AEV. AboitizLand posted a consolidated net income contribution of P162.8 million during the first nine months of 2013. Total revenues amounted to P922.1 million, 68% of which came from the residential segment. Meanwhile, the industrial segment posted P269.9 million in revenues, equivalent to 29% of total revenues for the first nine months of 2013. The remaining amount of P27.8 million came from the commercial and property management business segments.

The cCompany’s capital expenditures for 2013 will likely exceed its target of P1.0 billion. These expenditures include the construction of various projects, namely: Priveya Hills, the Persimmon Studios and Ajoya, as well as land acquisitions and other investment initiatives. AboitizLand’s balance sheet continuesd to be strong with adequate capacity to support its growth plans for 2013 and beyond. Current ratio as of end-September 2013 was at 1.75x, while net debt to equity stood at only 0.39x.

Financial Condition

As of September 30, 2013, the Company’s consolidated assets amounted to P201.6 billion, 9% lower than the year-end 2012 level. Cash and cash equivalents was at P18.1 billion, 46% lower than the year-end 2012 level of P33.7 billion. Consolidated liabilities amounted to P86.4 billion while Equity Attributable to Equity Holders of the Parent increased by 2% to P93.0 billion. Current ratio as of September 30, 2013 was at 1.9x (versus year-end 2012’s 2.6x), while the net debt-to-equity ratio was at 0.4x (versus year-end 2012’s 0.5x).

“We will augment our strong cash flows with opportunistic cash-raising activities in the capital markets and project financing in the operating level. This will allow us to fund our investment opportunities in a prudent manner,” Aboitiz said.