1. business and industrial
2. company
3. merger and acquisition

COVER SHEET
P W - 1 0 2
S.E.C Registration Number
M A N I L A
E L E C T R I C
C O M P A N Y
(Company's Full Name)
L O P E Z
B U I L D I N G ,
P A S I G
C I T Y
O R T
I G A S
A V E N U E ,
(Business Address: No. Street City / Town / Province)
ATTY. ANTHONY V. ROSETE
1622-3186
Contact Person
Company Telephone Number
1 2 - 3 1
Month
Day
1 7 - Q
0 5
3 1
FORM TYPE
Month
Day
Annual Meeting
Fiscal Year
Secondary License Type, if Applicable
Dept. Requiring this Doc.
Amended Articles Number/Section
Total Amount of Borrowings
Total No. of Stockholders
Domestic
To be accomplished by SEC Personnel concerned
File Number
Document I.D.
STAMPS
Remarks = pls. use black ink for scanning purposes
LCU
Cashier
Foreign
Management’s Discussion and Analysis of Financial Position and Results
of Operations
The following discussion and analysis of financial position and results of operations of Manila Electric
Company or MERALCO or “Parent Company”, and its subsidiaries, collectively referred to as the
“Company” or “MERALCO Group” should be read in conjunction with the unaudited condensed interim
consolidated financial statements as at and for the three months ended March 31, 2011. The unaudited
condensed interim consolidated financial statements are prepared in accordance with the Philippine
Financial Reporting Standards or PFRS.
The unaudited condensed interim consolidated financial statements are presented in Philippine
peso, the Company’s functional and presentation currency as defined under PFRS. All values are rounded
to the nearest million peso, except when otherwise indicated. The exchange rate used to translate U.S.
dollars to Philippine peso in this report and in the accompanying unaudited condensed interim consolidated
financial statements is US$1.00 to P
= 43.39, the closing rate on March 31, 2011 quoted through the
Philippine Dealing System.
Financial Highlights and Key Performance Indicators
(In millions, except Financial ratios, Earnings per
share, and Operational data)
Condensed Statements of Financial Position
Total assets
Current assets
Cash and cash equivalents
Equity attributable to equity holders of the
parent
Total debt
Current liabilities
Debt to equity
Current ratio
Operational Data
Number of customers (in thousands)
Residential
Commercial
Industrial
Streetlights
March 31
2011
(Unaudited)
December 31
2010
(Audited)
P
= 186,026
63,494
33,955
P
= 178,968
55,757
24,370
P
= 7,058
7,737
9,585
3.9
13.9
39.3
58,214
23,279
49,224
58,969
21,221
44,405
(755)
2,058
4,819
(1.3)
9.7
10.9
0.40
1.29
0.36
1.26
4,449
425
10
4
4,412
421
10
4
37
4
-
0.8
1.0
-
Three months ended March 31
2010
2009
(Unaudited)
Condensed Statements of Income
Revenues
Costs and expenses
Net income
Net income attributable to equity holders of
the parent
Increase (Decrease)
Amount
%
P
= 57,367
53,689
2,220
P
= 61,022
58,031
2,095
(P
= 3,655)
(4,342)
125
(6.0)
(7.5)
6.0
2,132
2,010
122
6.1
Earnings per share - basic and diluted
1.89
1.78
0.11
6.1
Profit margin
Return on equity
Asset turnover
3.9%
3.6%
0.31
3.4%
3.6%
0.34
10,911
(426)
1,334
(900)
1,753
(6,152)
1,583
(456)
9,158
(5,726)
(249)
444
522.4
(93.1)
(15.7)
97.4
6,991
6,996
(5)
-
7.62%
8.21%
(0.59%)
(7.2)
4.01%
3.67%
0.34%
9.3
Condensed Statements of Cash Flows
Cash generated from operating activities
Cash used in investing activities
Capital expenditures
Cash used in financing activities
Operational Data
Electricity sales volume (in GWh)
System loss1
MERALCO
CEDC
1
Increase (Decrease)
Amount
%
Based on 12-month moving average
OVERVIEW
MERALCO is the Philippines’ largest electric power distribution company, with franchise service
area covering 9,337 square kilometers. It provides power to 4.9 million customers in 31 cities and 80
municipalities, which include Metro Manila, the provinces of Rizal, Cavite and Bulacan, and parts of
provinces of Pampanga, Batangas, Laguna and Quezon. Turnover of business establishments in the
franchise area accounts for almost 46% of the country’s Gross Domestic Product or GDP.
Through Clark Electric Distribution Corporation or CEDC, a 65%-subsidiary, it holds the power
distribution franchise for Clark Special Economic Zone in Clark, Pampanga. CEDC franchise area covers
32 square kilometres and 1,641 customers.
In 2010, consolidated energy sales of the Company represents 73% of the sales of the Luzon grid
and 55% of the Philippines’ total energy sales.
The Company is organized into three major operating segments, namely, power, real estate and
contracts, services and others. In 2010, MERALCO PowerGen Corporation or MPG, a wholly owned
subsidiary, was reorganized as the Company’s vehicle for potential entry into power generation. As at
March 31, 2011, MPG has begun development of the proposed power generation plants.
Power
Distribution
• MERALCO
• CEDC
Generation2
• MPG
2
In the process of development
BUSINESS SEGMENTS
Real Estate
Contracts, Services and Others
• Rockwell Land
Corporation or Rockwell
Land
• MERALCO Industrial Engineering Services
Corporation or MIESCOR, and subsidiaries
• MERALCO Financial Services Corporation
or Finserve
• Lighthouse Overseas Insurance Limited or
LOIL
• Republic Surety and Insurance Company,
Inc. or RSIC
• Corporate Information Solutions, Inc. or CIS
and subsidiaries
• e-MERALCO Ventures, Inc. or e-MVI
• MERALCO Energy, Inc. or MEI
RESULTS OF OPERATIONS
The table summarizes the unaudited consolidated results of operations and the contribution of
each business segment to the Company’s revenues, costs and expenses, and net income for the three
months ended March 31, 2011 and 2010.
(Amounts in millions)
Power3
Real
Estate
Contracts,
InterServices
segment
and Others
transactions
(Unaudited)
Consolidated
For the three months
ended March 31, 2011
Revenues
Costs and expenses
Net income
Net income
attributable to equity
holders of the parent
For the three months
ended March 31, 2010
Revenues
Costs and expenses
Net income
Net income
attributable to equity
holders of the parent
P
= 56,203
52,790
2,085
P
= 431
346
59
P
= 1,130
743
283
(P
= 397)
(190)
(207)
P
= 57,367
53,689
2,220
2,067
31
241
(207)
2,132
59,777
56,950
2,027
719
661
(15)
692
430
239
(166)
(10)
(156)
61,022
58,031
2,095
2,019
(7)
154
(156)
2,010
On a Consolidated Basis
Revenues
Consolidated revenues for the three months ended March 31, 2011 amounted to P
=57,367 million,
6% lower compared with P
= 61,022 million in the same period last year brought about by the decrease in the
revenues from the power segment, which accounts for 98% of the total. Sales from the power segment
decreased by P
= 3,574 million to P
= 56,203 million for the three months ended March 31, 2011 compared with
P
= 59,777 million for the same period in 2010 due to lower average-pass through charges and slightly lower
energy sales.
3
Principally power distribution
The following table shows the composition of the Company’s consolidated revenues for the three
months ended March 31, 2011 and 2010 by business segment:
(Amounts in millions)
Power4
Real estate
Contracts, services and
others
Inter-segment transactions
Consolidated
2011
Increase (Decrease)
Amount
%
%
P
= 56,203
431
%
2010
(Unaudited)
98
P
= 59,777
1
719
98
1
(3,574)
(288)
(6)
(40)
1,130
(397)
P
= 57,367
2
(1)
100
1
100
438
231
(P
= 3,654)
63
139
(6)
692
(166)
P
= 61,022
Costs and Expenses
Consolidated costs and expenses amounted to P
= 53,689 million for the three months ended March
31, 2011, P
= 4,342 million lower than the P
= 58,031 million for the three months ended March 31, 2010. The
decrease is generally due to lower purchased power costs during the first quarter of 2011.
The following table shows the breakdown of the Company’s consolidated costs and expenses for
the three months ended March 31, 2011 and 2010 by business segment:
(Amounts in millions)
2011
Power5
Real estate
Contracts, services and
others
Inter-segment transactions
Consolidated
P
= 52,790
346
743
(190)
P
= 53,689
%
2010
(Unaudited)
98
P
= 56,950
1
661
1
100
430
(10)
P
= 58,031
Increase (Decrease)
Amount
%
%
98
1
(4,160)
(315)
(7)
(48)
1
100
313
180
(P
= 4,342)
73
1,800
(7)
Net Income
For the three months ended March 31, 2011, the Company generated consolidated net income of
P
= 2,220 million, 6% higher compared with P
=2,095 million for the same period last year. The higher
consolidated net income is due to the effect of the much delayed implementation of rate adjustments for the
3rd and 4th Regulatory Years of the 2nd Regulatory Period and lower costs and expenses. The adjustment in
4
5
Ibid.
Ibid.
distribution rate for the 3rd Regulatory Year took effect in April 2010 after a voluntary suspension
implemented in January 2010 while the adjustment for the 4th Regulatory Year took effect January 2011.
The following table shows the breakdown of the Company’s consolidated net income for the three
months ended March 31, 2011 and 2010 by business segment:
(Amounts in millions)
2011
Power6
Real estate
Contracts, services and
others
Inter-segment transactions
Consolidated
Increase (Decrease)
Amount
%
%
P
= 2,085
59
%
2010
(Unaudited)
94
P
= 2,027
3
(15)
97
(1)
58
74
3
493
283
(207)
P
= 2,220
12
(9)
100
11
(7)
100
44
51
P
= 125
18
33
6
239
(156)
P
= 2,095
Net Income Attributable to Equity Holders of the Parent
Consolidated net income attributable to equity holders of the parent increased to P
= 2,132 million for
the three months ended March 31, 2011 from P
= 2,010 million in the same period last year. Consolidated
core income, which excludes one-time, exceptional charges, increased by P
= 1,272 million to P
=3,252 million
for the three months ended March 31, 2011 from P
= 1,980 million in 2010. Consolidated basic and diluted
earnings per share as at March 31, 2011 increased to P
= 1.89 from P
= 1.78 as at March 31, 2010, due to the
6% increase in the consolidated net income attributable to equity holders of the parent. The weighted
average number of common shares is 1,127 million for both three months ended March 31, 2011 and 2010.
On a Business Segment Basis
Power
Revenues
The Company’s power segment principally represents results of operations of power distribution
since the power generation business is still in the process of development. Power distribution revenues
registered P
= 56,203 million for the three months ended March 31, 2011, 6% lower compared with P
= 59,777
million for the same period in 2010. The composition of revenues from the power for the three months
ended March 31, 2011 and 2010 is summarized as follows:
6
Ibid.
(Amounts in millions)
2011
%
2010
Increase (Decrease)
Amount
%
%
(Unaudited)
Electric revenues
Pass-through charges
P
= 33,991
7,555
60
13
P
= 40,363
5,983
67
10
(P
= 6,372)
1,572
(16)
26
3,599
6
5,009
8
(1,410)
(28)
(28)
-
(70)
-
42
(60)
(228)
-
(271)
-
43
(16)
44,889
79
51,014
85
(6,125)
(12)
Wheeling charges
Distribution charge
7,630
14
5,898
10
1,732
29
Supply charge
Metering charge
2,272
1,412
4
3
1,762
1,103
3
2
510
309
29
28
11,314
21
8,763
15
2,551
29
P
= 56,203
100
P
= 59,777
100
(P
= 3,574)
(6)
Generation charge
Transmission charge
System loss charge
Power act reduction
Inter-class, lifeline
subsidies and others
Total
Pass-Through Charges
Pass-through charges, which accounts for 79% of the total, decreased by P
=6,125 million or 12% to
P
= 44,889 million for the three months ended March 31, 2011 compared with P
= 51,014 million for the same
period in 2010 as a result of lower average generation and transmission charges. The average passthrough charge of MERALCO was at P
=5.82 per kWh for the first three months ended March 31, 2011. In
addition, recoverable system loss charge decreased to P
= 3,599 million in 2011 from P
= 5,009 million in 2010
reflecting the Parent Company’s system loss rate of 7.62%, which is lower by 59 basis points compared
with 8.21% in 2010.
Wheeling Charges
Wheeling charges consist of distribution, supply and metering charges amounted to P
= 11,314
million, 29% higher versus the P
=8,763 million for the three months ended March 31, 2010, mainly as a
result of the implementation of the much-delayed Performance-based Rate or PBR adjustment. Average
distribution rate per kWh as at March 31, 2011 is P
= 1.60, up 30% compared with P
= 1.23 per kWh as at March
31, 2010. The equivalent energy sold for the three months ended March 31, 2011 was 6,991 GWh,
compared with 6,996 GWh for the same period in 2010. Sales to the industrial sector declined as a result of
the slowdown in merchandise export, the main driver of energy sales in 2010. Basic metals manufacturing,
non-metallic mineral products and textiles sub-sectors accounted for the decline in volume of energy sold.
Sales volumes to the commercial customers grew by 1% for the three months ended March 2011. The
increase in the number of residential customers offset the decline in their per capita kWh consumption
resulting in stable sales to residential customers year-on-year.
The following table summarizes the customer count and the corresponding electric consumption
per customer class for the three months ended March 31, 2011 and 2010:
Customer Class
Residential
Commercial
Industrial
Streetlights
Total
No. of Customers
(in thousands)
2010
2011
4,449
4,318
425
415
10
10
4
4
4,888
Electricity Sales
% Change
(in GWh)
No. of
Electricity
2011
2010 Customers
Sales
2,107
2,107
3
2,768
2,742
2
1
2,080
2,111
(2)
36
36
-
4,747
6,991
6,996
3
-
Costs and Expenses
Costs and expenses of the power segment decreased by P
=4,160 million or 7% to P
= 52,790 million
for the three months ended March 31, 2011 compared with P
= 56,950 million for the same period in 2010.
Breakdown of costs and expenses is summarized in the following table:
%
2010
%
(Unaudited)
P
= 51,825
91
2,929
5
1,439
3
83
-
(Amounts in millions)
2011
Purchased power
Operations and maintenance
Depreciation and amortization
Taxes, fees and permits
Provision for probable losses from
refund - net
Interest and other financial
charges
Interest and other financial income
Equity in net earnings of
associates and a joint venture
P
= 44,586
4,643
1,232
86
84
9
2
-
2,417
5
354
309
(274)
1
(1)
(191)
-
Increase (Decrease)
Amount
%
(P
= 7,239)
1,714
(207)
3
(14)
59
(14)
4
-
2,063
582
637
(104)
1
-
(328)
170
(51)
163
(199)
-
8
(4)
(Amounts in millions)
2011
%
2010
%
(Unaudited)
Present value impact on
customers' refund
Foreign exchange gain
Others
Total
(18)
P
= 52,790
100
56
(44)
(26)
P
= 56,950
100
Increase (Decrease)
Amount
%
(56)
44
9
(P
= 4,160)
(100)
(100)
(35)
(7)
For the three months ended March 31, 2011, purchased power costs amounted to P
= 44,586 million,
P
= 7,239 million or 14% lower compared with P
= 51,825 million for the three months ended March 31, 2010.
Average purchased power cost is P
= 5.84 per kWh in 2011 compared with P
= 6.68 per kWh in 2010. The
decrease in purchased power costs is attributable to the much lower volume purchased from the Wholesale
Electricity Spot Market or WESM during the quarter owing to the higher dispatch of the Independent Power
Producers or IPPs as well as the successor generation companies or SGCs and the lower energy
consumption across all customer classes. For the three months ended March 31, 2011, the Company
purchased 47% of its volume from bilateral contracts with IPPs and 46% from the National Power
Corporation or NPC SGCs and the remaining 7% from WESM.
Operations and maintenance expense increased by P
= 1,714 million or 59% to P
= 4,643 million for the
three months ended March 31, 2011 compared with P
= 2,929 million for the three months ended March 31,
2010 brought about by the recognition of provision for uncollectible accounts and labor related costs based
on recently-concluded collective bargaining agreement as well as BOD-approved incentive plan.
Depreciation and amortization expense for the three months ended March 31, 2011 amounted to
P
= 1,232 million, 14% lower compared with P
= 1,439 million for the three months ended March 31, 2010.
Decrease in depreciation expense is due to the retirement of various distribution assets made in 2010.
Taxes, fees and permits increased by P
= 3 million or 4% to P
= 86 million for the three months ended
March 31, 2011 compared with P
= 83 million in the same period in 2010 due to increase in ERC regulation
and supervision fees and permits from P
= 57 million to P
= 61 million.
Provision for probable losses from refund – net amounted to P
= 2,417 million for the three months
ended March 31, 2011 due to provisions for legal and regulatory claims during the quarter.
Interest and other financial charges decreased by P
= 328 million to P
= 309 million for the three months
ended March 31, 2011 from P
= 637 million for the three months ended March 31, 2010 as a result of the
refinancing of the Company’s debt in 2010 at significantly lower rates and decrease in the applicable
interest rate on customers’ bill deposits as approved by the ERC to 0.75% from the varying rates ranging
from 1% to 10%.
Interest and other financial income amounted to P
= 274 million, P
=170 million or 163% higher than the
P
= 104 million recognized for the three months ended March 31, 2010. The increase was due to additional
interest from higher average cash balance invested at longer terms.
Net Income Attributable to Equity Holders of the Parent
Net income from power attributable to parent for the three months ended March 31, 2011
amounted to P
= 2,067 million, P
= 48 million or 2% higher compared with the amount earned for the three
months ended March 31, 2010 due to increase in distribution revenue as a result of the PBR adjustment in
January 2011.
Real Estate
The Company, through Rockwell Land, is involved in construction and development of three
ongoing residential condominiums.
Revenues
Revenues from real estate segment decreased by P
= 288 million or 40% to P
= 431 million for the three
months ended March 31, 2011 compared with P
= 719 million for the same period in 2010.
(Amounts in millions)
Sales of condominium units
2011
P
= 431
%
100
2010
%
(Unaudited)
P
= 719
100
Increase (Decrease)
Amount
%
(P
= 288)
(40)
Revenues from real estate are recognized using the percentage-of-completion method, where
revenues are recognized based on the proportion of work performed during the accounting period. As at
March 31, 2011, Rockwell Land has three major residential condominium projects. The following table
shows the progress and contribution to revenue of Rockwell Land’s projects.
Project
2011
% of
completion
2010
Revenues
Amount
%
(In millions)
% of
completion
Revenues
Amount
%
(In millions)
Ongoing Developments
Number One Rockwell
The Grove
Edades Tower and Garden Villas
91
19
-
P
= 269
109
50
428
62
25
12
99
63
-
P
= 662
21
16
699
Completed
The Manansala
Joya Lofts and Towers
100
100
3 1
3 1
P
= 431 100
100
100
1 19 3
20 3
P
= 719 100
Total
92
3
2
97
Aggregate revenue generated by Number One Rockwell, The Grove, and Edades Tower and
Garden Villas, which collectively accounts for 99% of the total revenues, decreased by P
= 271 million or 39%
to P
= 428 million from P
= 699 million for the three months ended March 31, 2010. The decrease was due to
residual finishing of Number One Rockwell, the completion of which is expected to be by October 2011.
Revenues decreased by P
= 393 million from P
= 662 million for the three months ended March 31, 2010.
The The Manansala and Joya Lofts and Towers contributed P
= 3 million and P
= 20 million for the three
months ended March 31, 2011 and 2010, respectively, representing sale of units.
Costs and Expenses
Costs and expenses of the real estate business segment decreased to P
= 346 million for the three
months ended March 31, 2011, P
= 315 million or 48% lower compared with P
= 661 million for the three months
ended March 31, 2010 as shown below:
(Amounts in millions)
Cost of real estate sold
Operations and maintenance
Depreciation and amortization
Taxes, fees and permits
Interest and other financial charges
Interest and other financial income
2011
P
= 310
82
8
14
26
(94)
%
90
24
2
4
8
(28)
2010
(Unaudited)
P
= 589
116
6
20
(74)
%
89
18
1
3
(11)
Increase
(Decrease)
Amount
%
(P
= 279)
(34)
2
14
6
20
(47)
(29)
33
100
30
27
(Amounts in millions)
Foreign exchange loss
Total
2011
P
= 346
%
100
2010
%
(Unaudited)
4
P
= 661
100
Increase
(Decrease)
Amount
%
(4) (100)
(P
= 315) (48)
Cost of real estate sold for the three months ended March 31, 2011 totalled P
= 310 million, P
= 279
million or 47% lower compared with P
= 589 million for the three months ended March 31, 2010. The
decrease in cost of real estate sold is consistent with the decrease in revenue from real estate.
For the three months ended March 31, 2011, operations and maintenance expense of the real
estate segment decreased by P
= 34 million or 29% to P
= 82 million compared with P
= 116 million for the three
months ended March 31, 2010. The decrease is brought about by lower marketing and selling expenses
related to promotions and advertisements of Number One Rockwell.
Depreciation and amortization expense increased by P
= 2 million or 33% from P
= 6 million for the
three months ended March 31, 2010 to P
= 8 million for the three months ended March 31, 2011 pertaining to
the depreciation expenses of model units of The Grove and Edades Tower and Garden Villas.
Taxes, fees and permits for the three months ended March 31, 2011 amounted to P
= 14 million
representing real property taxes and business permits.
Interest and other financial charges increased by P
= 6 million or 30% to P
= 26 million for the three
months ended March 31, 2011 compared with P
= 20 million for the three months ended March 31, 2010. This
is due to additional availments in first quarter of 2010.
Interest and other financial income increased to P
= 94 million for the period ended March 31, 2011 or
27% higher compared with P
= 74 million for the same period in 2010. The increase represents higher
amortization of unearned interest on installment trade receivables.
Net Income Attributable to Equity Holders of the Parent
Net income attributable to equity holders of the parent from real estate segment for the three
months ended March 31, 2011 amounted to P
= 31 million, P
= 38 million higher compared with negative P
=7
million for the same period in 2010. The higher net income is largely due to 48% decrease in costs and
expenses partially offset by the 40% decrease in revenues.
Contracts, Services and Others
Revenues
Revenues generated from contracts, services and others business segment increased to P
= 1,130
million, or 63% higher compared with the P
= 692 million for the three months ended March 31, 2010.
The table below shows the breakdown of the revenues from contracts, services and others
business segment for the three months ended March 31, 2011 and 2010.
(Amounts in millions)
Contracts
Services and others
2011
P
= 479
651
P
= 1,130
%
42
58
100
2010
(Unaudited)
P
= 176
516
P
= 692
%
25
75
100
Increase (Decrease)
Amount
%
P
= 303
135
P
= 438
172
26
63
Contracts
Revenues from contracts amounted to P
= 479 million, P
= 303 million or 172% higher compared with
P
= 176 million for the three months ended March 31, 2010. The Company’s contracts business is generated
through MIESCOR. Contract revenue of MIESCOR relates to electro-mechanical engineering contracts
with the government and private sector customers, of which P
= 203 million or 42% of the total revenues,
came from contracts with Clark Development Corporation or CDC.
Services and Others
Revenues from services and others increased to P
= 651 million, 26% higher compared with
P
= 516 million generated in the three months ended March 31, 2010. Increase in revenues from services is
attributed to the improvement in the revenues of the Rockwell Business Center or RBC by 269% from P
=16
million to P
= 59 million. RBC’s occupancy rate rose from 26% as at March 31, 2010 to 85% as at March 31,
2011.
Costs and Expenses
Costs and expenses of the contracts, services and others business segment increased by P
= 313
million or 73% to P
= 743 million for the three months ended March 31, 2011 compared with P
= 430 million for
the three months ended March 31, 2010 as shown below:
(Amounts in millions)
Cost of contracts and services
Operations and maintenance
Depreciation and amortization
Taxes, fees and permits
Interest and other financial charges
Interest and other financial income
Total
2011
P
= 496
167
76
26
41
(63)
P
= 743
%
67
22
10
3
6
(8)
100
2010
%
(Unaudited)
P
= 263
61
127
30
40
9
2
12
3
(14)
(3)
P
= 430
100
Increase (Decrease)
Amount
%
P
= 233
40
36
24
29
49
P
= 313
89
31
88
1200
242
343
73
Cost of contracts and services amounted to P
= 496 million for the three months ended
March 31, 2011, P
= 233 million or 89% higher compared with P
= 263 million for the three months ended March
31, 2010. The higher cost of contracts and services is generally in line with the increase in revenues from
contracts.
For the three months ended March 31, 2011, operations and maintenance expense of the
contracts, services and others business segment increased by P
= 40 million or 31% to P
=167 million
compared with P
= 127 million for the three months ended March 31, 2010. The increase is due to higher
labor costs, contractors’ services and provision for doubtful accounts.
Depreciation and amortization expense increased by P
= 36 million or 88% to P
= 76 million compared
with P
=40 million for the three months ended March 31, 2010. The higher depreciation expense is
attributable to the increase in the depreciation expense of commercial buildings at the Rockwell Center
from P
= 12 million for the three months ended March 31, 2010 to P
= 45 million for the three months ended
March 31, 2011.
Taxes, fees and permits amounted to P
= 26 million for the three months ended March 31, 2011, an
increase of P
= 24 million from P
= 2 million for the same period in 2010. The increase is due to higher business
permits and licenses incurred by RBC, MIESCOR, and Rockwell Land for its Power Plant Mall and leasing
operations.
Interest and other financial charges increased by P
= 29 million or 242% to P
= 41 million for the three
months ended March 31, 2011 compared with P
= 12 million for the three months ended March 31, 2010. This
is attributable to interest due on short-term notes obtained by MIESCOR in 2010.
Interest and other financial income increased to P
= 63 million or 343% higher compared with P
= 14
million for the three months ended March 31, 2010. The increase represents increased charges from
leases for common use and service areas or CUSA and utility charges.
Net Income Attributable to Equity Holders of the Parent
Net income from contracts, services and others business segment attributable to the shareholder
of the parent is P
= 241 million, 56% higher compared with P
= 154 million for the three months ended March 31,
2010 reflecting impact of new contracts closed.
Liquidity and Capital Resources
The following table shows the Company’s unaudited consolidated cash flows for the three months
ended March 31, 2011 and 2010, as well as the consolidated capitalization and other consolidated selected
financial data as at March 31, 2011 and December 31, 2010:
(Amounts in millions)
Cash Flows
Net cash provided by operating activities
Net cash used in investing activities
Capital Expenditures
Net cash used in financing activities
Net increase in cash and cash equivalents
Capitalization
Interest-bearing long-term financial liabilities
Current portion
Noncurrent portion
Notes payable
Equity attributable to equity holders of the parent
Other Selected Financial Data
Total assets
Utility plant and others - net
Cash and cash equivalents
Three Months Ended March 31
2011
i
2010
i
(Unaudited)
P
= 10,911
P
=1,753
(426)
1,334
(900)
9,585
(6,152)
1,583
(456)
(4,855)
As at
March 31, 2011
(Unaudited)
As at
December 31, 2010
(Audited)
P
= 5,432
P
= 5,574
17,698
149
58,214
P
= 81,493
15,498
149
58,969
P
= 80,190
P
= 186,026
P
= 178,968
100,478
33,955
101,009
24,370
As at March 31, 2011, the Company’s consolidated cash and cash equivalents totalled P
= 33,955
million, P
= 9,585 million higher compared with the balance of P
= 24,370 million as at December 31, 2010.
Sources of consolidated cash and cash equivalents in the first quarter of 2011 were cash flows from
operating activities of P
= 10,911 million and proceeds from long-term loans of P
= 2,500 million. Cash dividends
paid amounted to P
= 1,417 million, settlement of debt principal and interest totalled P
= 729 million and, capital
expenditures amounted to P
= 1,334 million, of which P
= 1,325 million were paid.
Operating Activities
Consolidated net cash provided by operating activities for the three months ended March 31, 2011
increased to P
= 10,911 million, P
= 9,158 million higher compared with P
= 1,753 million for the same period in
2010 as a result of the distribution adjustments implemented. In 2010, the rate adjustment in place was
only for the 2nd Regulatory Year. In addition, the Company has recovered some generation and
transmission under-recoveries covering periods way back 2003.
Investing Activities
Consolidated net cash flows used in investing activities for the three months ended March 31, 2011
totalled P
= 426 million, 93% lower compared with P
= 6,152 million used in the three months ended March 31,
2010. Capital expenditures decreased by 16% to P
= 1,334 million compared with P
= 1,583 million for the three
months ended March 31, 2010.
Financing Activities
Consolidated net cash used in financing activities increased to P
=900 million compared with
P
= 456 million for the three months ended March 31, 2010. In January 2010, the Company obtained a
P
= 2,500 million interest-bearing long-term financial liability from a local bank. During the first quarter of 2011,
the Company paid P
= 448 million of maturing loans and P
= 1,417 million of dividends.
Debt Financing
Consolidated debt, including notes payable, increased by P
= 2,419 million or 12% to P
= 23,279 million
as at March 31, 2011 from P
= 20,860 million as at March 31, 2010 as a result of the P
= 2,500 million note
obtained from a local bank at a very low interest rate.
In 2010, Standard & Poor’s re-rated and upgraded MERALCO to ‘B+’ with ‘stable’ outlook to reflect
the significant and sustained improvement in the Company’s financial risk profile arising from higher tariffs
and stronger electricity sales.
In December 2010, MERALCO entered into a Note Facility Agreement for the issuance of P
= 23
million, 5-year fixed rate notes with final maturity in December 2015 and P
= 4,977 million 5.5-year fixed rate
notes due in June 2016. The 5-year fixed rate notes are payable at maturity while the 5.5-year fixed rate
notes are payable in annual installments of 1% of the original principal amount for the years 2011 to 2015
and the remaining balance is payable in 2016.
In November 2010, MERALCO signed a Fixed Rate Note Facility Agreement for the issuance of
P
= 1,997 million 7-year fixed rate notes and P
= 2,803 million 10-year fixed rate notes. The notes were issued
on December 2, 2010. The 7-year fixed rate notes are payable in annual installments of 0.5% of the
original amount for the years 2011 to 2016 and the remaining balance is payable in 2017. The 10-year
fixed rate notes are payable in annual installments of 0.5% of the original amount for the years 2011 to
2019 and the remaining balance is payable in 2020.
Equity Financing
Consistent with the provisions of PAS 32, “Financial Instruments: Disclosure and Presentation”, the
Company’s preferred shares were reclassified as debt while the dividends declared are recorded as
interest expense. Accumulated and unpaid dividends were accrued and classified as accrued interest
payable. Coupon rate on such preferred share is fixed at 10%. The preferred shares were issued to
service applications, which would require extension or new distribution facilities beyond a specific distance.
Beginning April 8, 2005, such requirement was discontinued. Instead, as provided in the “Implementing
Guidelines of the Magna Carta for Residential Electricity Consumers”, customers were required to advance
the costs of extension of lines and installation of additional facilities.
As at March 31, the Company’s capital stock consists of:
(Amounts in millions, except par value)
Common stock – P
= 10 par value
Authorized – 1,250,000,000 shares
Issued and outstanding
2011
2010
P
= 12,500
P
= 12,500
11,273
11,273
Of the total authorized common shares of 1,250 million, 1,127 million shares are issued and
outstanding as at March 31, 2011. This included the 7.2 million fully vested and paid shares under the 13th
ESPP offering and subscriptions under the 13thA and 14th ESPP offerings.
Consolidated cash dividends declared to shareholders as at March 31, 2011 and December 31,
2010 amounted to P
= 2,987 million and P
= 7,834 million, respectively.
The table below summarizes the cash dividends declared in 2011 and 2010:
Declaration Date
February 28, 2011
March 22, 2010
July 26, 2010
December 13, 2010
Record Date
Payment Date
Dividend
Per Share
March 28, 2011
April 20, 2011
P
= 2.65
P
= 2,987
P
= 2,987
April 21, 2010
August 23, 2010
December 29, 2010
May 11, 2010
September 16, 2010
January 17, 2011
P
= 3.15
2.50
1.30
P
= 3,551
2,818
1,465
P
= 7,834
Amount
(In millions)
RISK FACTORS
The major factors affecting the Company’s financial position and results of operations are:
a. Regulated rates and cost recoveries
b. Volume sales and Philippine economic conditions
c. Electricity supply
d. Currency exchange rates
e. Industry restructuring
Regulated Rates and Cost Recoveries
•
The most significant determinants of MERALCO’s rate structure vis-à-vis operating results are
“allowable returns” and “permitted cost recoveries”. Rates billed by the Company are approved by the
Energy Regulatory Commission or ERC and are set to allow a reasonable rate of return on
investments. The Company’s rate structure also allows pass-through of certain purchased power
costs, system loss up to an annual cap enforced by the ERC, and taxes.
In accordance with the provisions of the Electric Power Industry Reform Act or EPIRA of 2001, the
ERC approved the Distribution Wheeling Rate Guidelines or DWRG, later renamed, Rules for Setting
Distribution Wheeling Rates or RDWR, which took effect on January 29, 2005. The PerformanceBased Regulation or PBR is embodied in the DWRG.
Under PBR, tariffs are set according to forecasts of performance and capital and operating
expenditures. The RDWR also employs a penalty/reward mechanism that adjust tariffs upwards and
downwards depending on the utility’s actual performance. The Company filed its first rate adjustment
application based on the new rate-making scheme on September 1, 2006. After a series of hearings
and regulatory evaluations, the new PBR-based tariff was to have been implemented by July 2007.
On August 31, 2007, the ERC issued its Final Determination, which sets forth its evaluation of
MERALCO’s annual revenue requirement and approved the performance incentive scheme and price
control arrangements that will apply to MERALCO during the second Regulatory Period (from July 1,
2007 to June 30, 2011). The approved Maximum Average Prices or MAP were P
= 1.167 per kWh,
P
= 1.260 per kWh, P
=1.361 per kWh, and P
= 1.471 per kWh for the Regulatory Years or RYs 2008, 2009,
2010 and 2011, respectively.
The ERC mandated the shift from Return on Rate Base or RORB to PBR for all investor-owned
distribution utilities or DUs. The shift would be done in batches, with all investor-owned DUs expected
to have shifted by 2011. MERALCO, along with Cagayan Electric Power and Light Company or
CEPALCO and Dagupan Electric Corporation or DECORP, are the first three DU entrants to PBR.
DECORP and CEPALCO began implementing PBR tariffs in October 2008, while MERALCO started
implementing PBR tariffs in May 2009.
Similarly, the rate-setting mechanism of Clark Electric Distribution Corporation or CEDC, a 65% owned
subsidiary, is likewise in compliance with ERC regulations. After the unbundling of its rates in
accordance with the ERC guidelines, CEDC shall also become an entrant to the PBR. CEDC filed its
PBR reset application on September 24, 2010 covering the regulatory period October 1, 2011 to
September 30, 2015. To date, CEDC is awaiting for the release of its Draft Determination for public
comments.
•
The pass-through of allowable costs or costs that do not entail a revision of the rate base and/or rate of
return of the Company is governed by various adjustment mechanisms promulgated by the ERC.
In approving MERALCO’s unbundled rate in May 2003, the ERC prescribed a generation charge that
will be adjusted under the Generation Rate Adjustment Mechanism, or GRAM. This has since been
superseded by the Guidelines for the Automatic Adjustment of Generation Rates and System Loss
Rates by Distribution Utilities. The monthly automatic adjustment under the Automatic Generation Rate
Adjustment or AGRA mechanism provides timely price signals to consumers. While the GRAM only
provided for changes in the generation charge, the new mechanism also allows the monthly adjustment
of the system loss charge. The guidelines prescribe a semi-annual verification process.
Implementation of the guidelines started with the November 2004 billing cycle.
The ERC’s approval of MERALCO’s second filing under GRAM was questioned before the Supreme
Court or SC, for failure by MERALCO and the ERC to comply with Section 4 (e) Rule 3 of EPIRA’s
Implementing Rules and Regulations or IRR, which required publication, notice, and hearing of an
application prior to issuance of an Order. On August 16, 2006, the SC ruled with finality that strict
compliance with the requirements under the IRR of the EPIRA is jurisdictional and applies to any
adjustment to the retail rate, including those for pass-through costs. The AGRA was then suspended
beginning September 2006 and MERALCO could adjust generation and other pass-through charges
only after the filing and approval by the ERC of an appropriate application.
On June 7, 2007, the Joint Congressional Power Commission approved amendments to Section 4 (e),
Rule 3 of the EPIRA’s IRR that exempt the adjustments of pass-through electric rate components from
the jurisdictional and hearing requirements of the IRR. The amendments were subsequently
promulgated by the Department of Energy on June 21, 2007. Thereafter, the ERC lifted the
suspension of the AGRA, which allowed MERALCO to resume the monthly updating of generation and
system loss charges beginning July 2007.
On August 12, 2009, the ERC issued its Resolution No. 16, Series of 2009, adopting the “Rules
Governing the Automatic Cost Adjustment and True-up Mechanisms and Corresponding Confirmation
Process for Distribution Utilities”. These rules govern the recovery of pass-through costs, including
over- or under-recoveries in the following bill components: Generation Charge, Transmission Charge,
System Loss Charge, Lifeline rate subsidies, Local franchise and business taxes.
The rules will also synchronize the various confirmation processes for the foregoing charges, in which
the ERC will verify whether the DU incurred over- or under-recoveries in the implementation of the said
charges. Luzon DUs, such as MERALCO, were required to file not later than October 30, 2009 their
consolidated applications to resolve over- or under-recoveries accumulated from the start of their rate
unbundling until December 2008. Subsequent filings will be every three years thereafter.
On October 8, 2009, MERALCO filed a petition at the ERC seeking an amendment to the ERC’s
Resolution No. 16, Series of 2009. In particular, MERALCO proposed a modification to the formula
used in confirming the system loss charges of DUs, shifting the reckoning of the system loss cap from
a monthly to an annual reckoning to more fairly reflect the actual system loss performance of DUs.
On October 18, 2010, the ERC ruled on MERALCO’s Petition and agreed that there is a need to
address the mismatch between the billing periods of the DUs and of their suppliers in the confirmation
of the system loss. However, the Commission did not adopt MERALCO’s proposed modification to the
formula and instead prescribed a new formula. Resolution No. 21, Series of 2010 adopted the new
formula and correspondingly amended the one prescribed in Resolution No. 16, Series of 2009. The
Resolution also prescribed the period of filing for the DUs’ consolidated applications, which for Luzon
DUs will be by March 31, 2011 and setting March 31, 2011 (covering adjustments implemented from
the rate unbundling until the billing month of December 2010) and March 31, 2014 (covering
adjustments from January 2011 to December 2013) as the new deadlines for DUs in Luzon to file their
respective applications. Subsequent filings shall likewise be every three years thereafter.
On November 12, 2010, MERALCO filed an application with the ERC for the recovery of the total
generation costs refunded under the second GRAM, plus any additional amount that it will still refund to
its customers pursuant to the SC Resolution dated August 16, 2006, and the corresponding carrying
charges.
On March 31, 2011, MERALCO, in compliance with Resolution No. 21 (Series of 2010), filed its
consolidated application to confirm its under- or over-recoveries accumulated from June 2003 to
December 2010, docketed as ERC Case No. 2011-010 CF.
•
MERALCO’s recovery of costs through the system loss charge was limited to 9.5% of the total power
purchased by MERALCO in accordance with Republic Act or RA No. 7832, or the Anti-Electricity
Pilferage Act. System loss is comprised of technical losses, or the electrical energy lost in the process
of distributing power to its customers, and non-technical losses, mainly due to pilferage. Up to 2007,
MERALCO’s system loss levels were in excess of the 9.5% cap.
On August 6, 2008, the ERC released a draft Resolution that: (i) will reduce the system loss cap for
private DUs to 8% effective January 2008 and (ii) will change the treatment of company use, from a
component of the system loss charge to being part of operations and maintenance expenses. The
draft Resolution further stated that the treatment of company use of electricity as part of operations and
maintenance expenses shall commence on the next reset for utilities under the PBR and that the
manner by which the utility will be rewarded for its efforts in system loss reduction shall be addressed
in the Performance Incentive Scheme or PIS under the PBR. After receiving written comments and
conducting public consultations, the ERC eventually released on December 8, 2008 a Resolution
setting the recoverable rate of system loss for private DUs at 8.5%, effective January 2010.
On December 8, 2009, MERALCO filed a Petition to amend the said Resolution with an urgent prayer
for the immediate suspension of the implementation of the new system loss cap of 8.5% starting
January 2010. The proposed amendment is aimed at making the Resolution consistent with the
provisions of RA No. 9136 and RA No. 7832, by increasing the level of system loss cap to not less than
9%. On November 18, 2010, the first and only hearing on the Petition was conducted by the ERC.
Thereafter, MERALCO was directed to submit its Formal Offer of Evidence. The Petition is awaiting the
resolution by the Commission.
MERALCO’s system loss for the 1st Quarter of 2011 improved by 59 basis points from the 8.21%
registered for the 1st Quarter of 2010 to 7.62%. CEDC’s system loss, however, increased to 4.01% for
the three months ended March 31, 2011 compared with 3.67% for the same period in 2010.
Volume Sales and Philippine Economic Conditions
The sale of electric energy is driven mainly by prevailing economic conditions and the number of
customers being served by the Company. The Company’s franchise area accounts for almost 46% of the
Philippines’ GDP, with 33% from Metro Manila.
In 2010, Philippine’s GDP was 7.3%, the highest performance in more than 20 years. This was
brought about by strong foreign trade performance, global economic recovery and election-related
spending. From 2006 to 2010, Philippine GDP grew at a compounded annual rate of approximately 6.2%,
compared with 3.4% during the period from 2005 to 2009. For 2011, GDP growth is expected to be more
modest due to absence of election spending and the quite fragile global economic recovery.
For the first quarter of 2011, the Company’s energy sales volume was flat at 6,991 GWh compared
with 6,996 GWh for the three months ended March 31, 2010. Notwithstanding the slightly lower energy
sales, MERALCO still managed to grow customers by 3%, largely from the commercial and residential
sectors. The Company has 4.9 customers as at March 31, 2011.
Electricity Supply
The Company does not operate its own generation capacity yet and purchases all of the power that
it distributes from the National Power Corporation or NPC and Independent Power Producers or IPPs. For
the three months ended March 31, 2011, MERALCO purchased 40.6% of its requirements from NPC,
14.1% from the Wholesale Electricity Spot Market or WESM, a venue where suppliers and buyers trade
electricity as a commodity, and the balance from its IPPs.
On November 22, 2006, the NPC and the Company signed a Transition Supply Contract or TSC,
which expires at the earlier of the end of five years from effectivity date or, if open access is introduced
within the 5-year period, at the end of one year from the introduction of open access. On July 20, 2007,
MERALCO and NPC signed an Addendum to its TSC increasing the annual contracted quantities. The
amended schedule of contracted energy is 7,156 GWh in 2007, 7,624 GWh in 2008, and 7,666 GWh for
each of 2009 to 2011.
In relation to a Petition filed by the Bureau of Trade Regulation and Consumer Protection of the
Department of Trade and Industry against the Company, the ERC directed MERALCO to negotiate and
contract with the NPC for an increase in the TSC contracted volume to match this with the updated demand
forecast, net of the quantities under its IPP contracts. For the year 2011, NPC and MERALCO agreed to
increase the TSC volume from 7,666 GWh to 9,302 GWh or an additional volume of 1,636 GWh.
With respect to CEDC, its supply contract with the NPC for the purchase of electricity was renewed
for the period March 26, 2008 to March 25, 2013, with minimum contract energy per annum as follows:
Year
GWh
March 26, 2008 to March 25, 2008
250
March 26, 2008 to March 25, 2010
256
March 26, 2010 to March 25, 2011
263
March 26, 2011 to March 25, 2012
269
March 26, 2012 to March 25, 2013
276
Currency Exchange Rates
Changes in the value of the peso against other currencies, particularly the U.S. dollar, may affect
the Company’s operating results and financial condition in a number of respects. As at March 31, 2011,
while substantially all the Company’s revenues are denominated in Philippine peso, less than 1% of the
principal amount of the Company’s indebtedness, most of the Company’s capital expenditures, a
substantial portion of the Company’s power purchased costs and interest expense and a small portion of
the Company’s operations and maintenance expenses are denominated in, or indexed to, the U.S. dollars,
and may increase significantly in peso terms as a result of any substantial depreciation of the peso. The
peso continued to appreciate vis-à-vis the U.S. dollar, from P
= 45.17:US$1.00 as at March 31, 2010 to
P
= 43.39:US$1.00 as at March 31, 2011.
On October 22, 2008, the ERC released an order directing MERALCO to refund over a period of
12 months over-recoveries in the Currency Exchange Rate Adjustment or CERA mechanism incurred from
June 2003 to December 2006, estimated at P
= 833 million (inclusive of carrying charges), equivalent to
P
= 0.1461 per kWh.
On December 4, 2008, MERALCO filed a Motion that asked the ERC to defer the CERA refund
and to implement it no earlier than the February 2009 billing cycle. MERALCO’s motion for the deferral of
the CERA refund was granted by the ERC and MERALCO was authorized to implement a CERA refund
“equivalent to P
= 0.0400 per kWh starting the March 2009 billing cycle until such time that the full amount
shall have been refunded.
On April 25, 2009, the ERC released an Order reinstating its directive for MERALCO to refund the
CERA over-recovery at a rate of P
= 0.1461 per kWh. The refund of the CERA over-recoveries was
completed in April 2010.
Industry Restructuring
Under the EPIRA, the Philippine power industry continues to undergo fundamental restructuring.
These restructuring measures include:
• The deregulation of, and introduction of competition in, power generation and supply activities
and pricing;
• The privatization of the NPC’s power generating assets and IPP contracts;
• The unbundling of the relative costs of the various segments of the power supply chain and
reflecting these in the bills to customers;
• Freedom of consumers to choose electricity suppliers;
• Open and non-discriminatory access in the networks of distribution utilities, subject to the
fulfillment of certain conditions precedent;
• The implementation of the WESM; and
• Removal of inter-grid, intra-grid, and inter-class cross-subsidies.
ELECTRIC POWER INDUSTRY DEVELOPMENTS AND UPDATES
1.
Implementation of Performance-Based Regulation or PBR
As DUs, MERALCO and CEDC are subject to the rate-making regulations and regulatory
policies of the ERC. Billings to customers of the Parent Company are itemized or “unbundled” into
a number of bill components that reflect the various units incurred in providing electric service. The
adjustment to each bill component is governed by mechanisms promulgated and enforced by the
ERC, mainly: [i] the “Rules Governing the Automatic Cost Adjustment and True-up Mechanisms
and Corresponding Confirmation Process for Distribution Utilities,” which govern the recovery of
pass-through costs, including over- or under-recoveries of the bill components, namely,
(a) generation charge, (b) transmission charge, (c) system loss charge, (d) lifeline rate subsidies,
(e) local franchise and (f) business taxes; and [ii] the “Rules for the Setting of Distribution Wheeling
Rates or RDWR,” as modified by ERC Resolution No. 20, Series of 2008, which govern the
determination of the Parent Company’s distribution, supply, and metering charges.
The rate-setting mechanism of CEDC is likewise in accordance with ERC regulations.
After the unbundling of its rates based on ERC guidelines, CEDC became an entrant to the PBR
under Group D. CEDC is currently undergoing regulatory reset.
The following is a discussion of matters related to rate-setting of the Parent Company:
Rate Applications
Performance-Based Regulation or PBR
The Parent Company was among the first entrants to the PBR, together with Dagupan
Electric Corporation and Cagayan Electric and Power Company.
Rate-setting under PBR is governed by the RDWR. Unlike the Return on Rate Base or
RORB, methodology, which was in place up to June 2007 and wherein utility tariffs were
determined based on historical costs plus a reasonable rate of return, the PBR scheme sets tariffs
based on the DU’s forecasted asset base, and the required operating and capital expenditures
over a regulatory period to meet a level of operational performance determined by the ERC. The
PBR also employs a mechanism that penalizes or rewards a DU depending on its network and
service performance.
Rate filings and setting are done on a regulatory period basis where one regulatory period
or RP consists of four regulatory years. A regulatory year or RY, begins on July 1 and ends on
June 30 of the following year. As at March 31, 2011, the Parent Company is in the fourth RY of the
second RP. The second RP is from July 1, 2007 to June 30, 2011.
MAP 2010
On August 7, 2009, the Parent Company filed a petition for the verification of the MAP for
RY 2010 and its translation into tariffs by customer category. In accordance with the ERC’s
Guidelines for RY 2010 Rate Reset for First Entrant Distribution Utilities, the constrained MAP for
RY 2010 was computed to be P
=1.4917 per kWh.
On December 14, 2009, the ERC approved the Parent Company’s application. A Motion
for Reconsideration and Clarification was filed by a consumer against the said ERC decision. On
January 26, 2010, the Parent Company filed a manifestation with the ERC voluntarily suspending
the implementation of the ERC’s December 14, 2009 Decision, until such time the regulator
resolves and addresses all other issues raised by the intervenors may raise. On March 10, 2010,
the ERC resolved the Motion for Reconsideration and approved a new rate schedule that ensures
that there will be no rate distortion or no cross-subsidies, other than the lifeline subsidy, in the
Parent Company’s rates. Consequently, the Parent Company implemented the new rate schedule
effective its April 2010 billing cycle.
Certain electricity consumer groups likewise filed a Petition for Certiorari with the SC
questioning the Decision rendered by the ERC. The Parent Company has filed its comment thereto
and has likewise commented on the new issues raised by petitioners in their reply. The Parent
Company is awaiting further action by the SC on the Petition.
MAP 2011
On December 6, 2010, the ERC approved a MAP for RY 2011 of P
= 1.6464 per kWh and
ordered the Parent Company to implement starting the next billing cycle from receipt thereof its
approved Distribution, Supply and Metering Charges. The 2011 MAP rates were implemented
starting the January 2011 billing cycle.
Third RP Reset Application
On June 18, 2010, the Parent Company filed its application for the approval of its proposed
Annual Revenue Requirement or ARR and Performance Incentive Scheme or PIS, for the third RP
(July 1, 2011- June 30, 2015). The case is docketed as ERC Case No. 2010-069-RC.
The hearings for the case were completed in October 2010. On January 11, 2011, the
ERC released its “Draft Determination” on MERALCO's Reset Application embodying its initial
comments on MERALCO’s application. Public consultations were held on February 7 and March
15, 2011. MERALCO has already submitted its comments to the “Draft Determination”. Thereafter,
a “Final Determination” will be released, which will set forth the ERC’s approval on MERALCO’s
ARR, PIS, and MAPs for the third RP and MERALCO will file its first Rate Translation Application in
time for the implementation of the MAP for RY 2012 in the July 2011 billing.
2.
Application for Recoveries
The Parent Company filed with the ERC its applications for recoveries of advances for
pass-through costs. These advances consist mainly of unrecovered or differential generation and
transmission charges technically referred to as under-recoveries, which are recoverable from the
customers, as allowed by law.
Applications for the Recovery of Generation Costs and System Loss Charges
The Parent Company filed separate applications (ERC Case Nos. 2006-52RC, 2006062RC, 2006-076RC, 2007-001RC, 2007-038RC, 2007-078RC, 2007-101RC, 2007-120RC, 2007123RC and 2007-135RC) for the full recovery of generation costs, including value-added tax, or
VAT, incurred for the supply months of August 2006 to May 2007 or total under-recoveries of
P
= 12,679 million for generation charges and P
=1,295 million for system loss, or SL charges.
The separate applications for the full recovery of generation charges have been approved
by the ERC in its decisions released on January 18, 2008, September 3, 2008, and August 16,
2010.
As at March 31, 2011, the remaining balance of P
= 2,336 million of such unrecovered
generation costs are billed in 2011 at the rate of P
= 0.0314 per kWh until completed and is shown as
part of “Trade and other receivables - Unbilled” account.
With respect to the P
= 1,295 million SL charge under-recoveries, the ERC ordered the
Parent Company to file a separate application for the recovery of SL adjustments after the ERC
confirms the transmission rate to be used in the calculation of the SL rate in accordance with the
SL rate formula of the AGRA Guidelines. The application for recovery of the P
= 1,295 million system
loss charge under-recoveries was included in MERALCO’s consolidated application to confirm
under- or over-recoveries filed last March 31, 2011.
Application for Recovery of Transmission Costs
Consistent with the rules on Transmission Rate Adjustment Mechanism, the Parent
Company filed an application to recover transmission costs advances, net of transmission overrecoveries. The final Order from the ERC dated December 14, 2009 updated the net amount
recoverable of the Company to P
= 1,480 million, inclusive of carrying charges. As at March 31,
2011, the balance of P
= 88 million is adjusted in March 2011 transmission rate and included in
“Trade and Other Receivables” account in the unaudited condensed consolidated interim
statement of financial position.
Applications for Recovery of Advances for Other Pass-Through Costs
Inter-Class Cross Subsidy and Lifeline Subsidy
The Parent Company filed separate applications to recover advances incurred during the
implementation of the inter-class cross subsidy on November 14, 2007 and the lifeline subsidy on
February 19, 2008.
In December 2009, the Parent Company implemented the decisions of ERC on the
interclass and lifeline cross subsidies. As at March 31, 2011, the total amount of billed interclass
cross subsidy and lifeline subsidy advances amounted to P
= 405 million and P
= 267 million,
respectively. The unbilled balance of inter-class cross subsidy is P
= 644 million and is expected to
be recovered within the next 25 months. The balance of lifeline subsidy is P
= 589 million and will be
billed within the next 35 months. The amount recoverable within twelve months is included in the
“Other current assets” while the long-term portion is included in the “Other Noncurrent Assets”
account.
Application for Recovery of Local Franchise Taxes
On March 25, 2011, the Parent Company filed an Application for recovery of Local
Franchise Taxes or LFT it paid, but have not yet been billed to its customers, during the period
beginning 1993 to 2004 (2nd Quarter), to the following five (5) provinces, namely: Bulacan,
Batangas, Cavite, Laguna and Rizal; and fourteen (14) cities, namely: San Jose Del Monte,
Batangas, San Pablo, Tagaytay, Lucena, Mandaluyong, Marikina, Quezon, Caloocan, Pasay, Las
Piñas, Manila, Pasig and Calamba. The LFT is recognized as legitimate and reasonable DU
expense in the ERC’s Unbundling Decision. The recovery mechanism for LFT on a prospective
basis did not cover past payments for LFT by the Parent Company.
The amount of LFT which the Parent Company seeks to recover from its customers in the
five (5) provinces and fourteen (14) cities mentioned, is P
= 1,581 million, plus carrying charges
equivalent to P
= 1,290 million, or a total of P
= 2,871 million.
The ERC has yet to set the case for hearing.
Rules Governing the Automatic Cost Adjustment and True-up Mechanisms and
Corresponding Confirmation Process for Distribution Utilities
On August 12, 2009, the ERC issued Resolution No. 16, Series of 2009, adopting the
“Rules Governing the Automatic Cost Adjustment and True-up Mechanisms and Corresponding
Confirmation Process for Distribution Utilities.” These rules govern the recovery of pass-through
costs, including over- or under-recoveries in the following bill components: generation charge,
transmission charge, system loss charge, lifeline rate subsidies, and local franchise and business
taxes.
The rules synchronize the various confirmation and verification processes by the ERC for
the foregoing charges. In its Resolution, the ERC required DUs in Luzon to which the Parent
Company belongs, to file their consolidated applications to resolve under- or over-recoveries
accumulated from the start of their rate unbundling until December 2008 not later than October 30,
2009. Subsequent filings will be every three years thereafter. However, under ERC Resolution
No. 23, Series of 2009, dated October 12, 2009, such application was deferred. On October 18,
2010, the ERC promulgated ERC Resolution No. 21, Series of 2010, amending certain formula
contained in ERC Resolution No. 16, Series of 2009 and setting March 31, 2011 (covering
adjustments implemented until the billing month of December 2010) and March 31, 2014 (covering
adjustments from January 2011 to December 2013) as the new deadlines for DUs in Luzon to file
their respective applications. Subsequent filings shall likewise be every three years thereafter.
As at March 31, 2011, MERALCO has filed its consolidated application to confirm its
under- or over-recoveries accumulated from June 2003 to December 2010, docketed as ERC Case
No. 2011-010 CF.
Petition to Implement a Lower Generation Charge for the February 2010 Supply
Month
The Parent Company’s generation cost abruptly increased to P
= 15.9 billion for the supply
month of February 2010. This translates to a generation charge of P
= 6.76 per kWh to its customers
for the March 2010 billing. The sharp increase in generation cost was mainly due to the high prices
in the WESM, brought about by the tight supply of electricity, as several plants were either out on
preventive or emergency maintenance or were with de-rated capacity because of the “El Nino”
phenomenon. A Petition was filed by the Parent Company with the ERC to mitigate the effect of the
abrupt increase in generation cost through a voluntary deferral of a portion of generation costs,
with the differential to be recovered over a period. In an Order dated March 10, 2010, the ERC
provisionally approved a lower generation charge of P
= 5.8417 per kWh representing P
= 13.77 billion
as generation cost for the subject period. The Parent Company was also provisionally allowed to
charge deferred generation costs over a six month period starting April 2010 at the rate of P
=0.07
per kWh, corresponding to the incremental costs of the condensate fuel used by the First Gas
plants during the February 2010 supply month. The balance of the generation costs, which the
Parent Company is seeking to recover in the same petition, is now undergoing evaluation by the
ERC. All hearings have been completed with the case pending decision by the ERC.
3.
Revised System Loss Caps
On December 8, 2008, the ERC promulgated Resolution No. 17, Series of 2008, entitled
“A Resolution Adopting a New System Loss Cap for Distribution Utilities,” wherein the new system
loss cap effective January 2010 billing shall be 8.5% for private utilities, which is one percentage
point lower than the 2009 system loss cap of 9.5%. The actual company use (administrative loss)
shall be treated as part of the operations and maintenance expenses in the next reset for utilities
under PBR. The manner by which the utility will be rewarded for their efforts in system loss
reduction shall be addressed by the ERC in the Performance Incentive Scheme or PIS under PBR.
On December 8, 2009, MERALCO filed a Petition to amend the said Resolution with an
urgent prayer for the immediate suspension of the implementation of the new system loss cap of
8.5% starting January 2010. The proposed amendment is aimed at making the Resolution
consistent with the provisions of RA No. 9136 and RA No. 7832, by increasing the level of system
loss cap to not less than 9%. On November 18, 2010, the first and only hearing on the Petition was
conducted by the ERC. Thereafter, MERALCO was directed to submit its Formal Offer of Evidence
or FOE. The Petition is awaiting the resolution by the Commission.
Prior to the Petition, the ERC denied MERALCO’s appeal contained in a letter to the
Commission seeking deferment of the imposition of the revised system loss cap citing the abrupt
and substantial decline in industrial energy sales brought about by the then-prevailing economic
downturn, as well as the continued increase in residential sales, which has pushed up the share of
low voltage energy sales to the total consumption.
4.
Philippine Economic Zone Authority or PEZA Registration and Open Access Guidelines
On September 13, 2007, PEZA issued “Guidelines in the Registration of Electric Power
Generation Facilities/Utilities/Entities Operating Inside the Ecozones” and “Guidelines for the
Supply of Electric Power in Ecozones.” These Guidelines effectively give PEZA franchising and
regulatory powers in ecozones. The Guidelines are the subject of an injunction case filed by the
DUs at the RTC-Pasig, which issued a TRO and later, a Writ of Preliminary Injunction, enjoining
the implementation of said Guidelines.
Meantime, in support of the government’s objective of providing lower cost to ecozone
locators, the Company entered into a MOA with NPC on September 17, 2007 for the provision of
special ecozone rates to high load factor PEZA-accredited industries. The ERC allowed the
immediate implementation of the program, which is still ongoing.
5.
Decision on the P
= 0.167 per kWh Refund
Following the SC’s final ruling that directed the Parent Company to refund affected
customers P
= 0.167 per kWh covering the billing period from February 1994 to April 30, 2003, the
ERC approved the release of the refund in four phases, starting June 2003 until December 2010.
In an Order dated February 7, 2011, the ERC approved MERALCO’s proposal for
extension of the SC refund process for five years up to December 31, 2015, in view of the
difficulties encountered by (i) the customers in meeting the necessary documentation requirements
for approval and payment of the refund and (ii) the Company in contacting or locating customers
entitled to the refund. Likewise, in the said Order, the ERC found MERALCO's "Proposed
Procedures for the Extended Period of the SC Refund Schedule" to be reasonable and consistent
with its existing rules and procedures.
6.
Expanded Senior Citizens Act of 2010 or ESCA
RA No. 9994, otherwise known as the Expanded Senior Citizens Act of 2010 or ESCA,
was signed into law last February 16, 2010. The ESCA amends certain provisions of RA No. 9257,
which mandates the grant of benefits to senior citizens and to institutions catering to senior
citizens.
The ESCA grants senior citizens a minimum five percent (5%) discount on the monthly
electric bill, for services that are registered in the name of the senior citizen and whose monthly
consumption does not exceed 100 kWh. Moreover, the law gives a discount of at least 50% on the
consumption of electricity by senior citizens centers and residential care/group homes.
The ESCA took effect on April 22, 2010 and its Implementing Rules and Regulations or
IRR were promulgated by the Department of Social Welfare and Development or DSWD last June
18, 2010. The IRR provides that utility-regulatory agencies (such as the ERC) shall, within six
months after the IRR takes effect, “formulate supplemental guidelines to cover recovery rate
mechanisms and/or sharing of burden, among other concerns of the distribution utilities,” in the
implementation of the discounts provided under the law.
On January 5, 2011, the ERC released Resolution No. 23, Series of 2010 adopting the
“Rules Implementing the Discounts to Qualified Senior Citizen End-Users and Subsidy from the
Subsidizing End-Users on Electricity Consumption under Sections 4 and 5 of RA No. 9994”. The
Resolution was published in Daily Tribune on January 6, 2011, and in Manila Times on January 7,
2011. It became effective on January 22, 2011. MERALCO implemented the discount starting the
February 2011 billing.
7.
Purchase of Subtransmission Assets or STAs
On November 25, 2009, the Parent Company signed a Contract to Sell with National
Transmission Corporation or TransCo for the sale and purchase of various subtransmission assets
for P
= 86 million. On December 3, 2009, the Parent Company and TransCo jointly filed an
application with the ERC for the sale of said subtransmission lines/assets of TransCo to
MERALCO. On February 25, 2010, the ERC provisionally approved the sale of TransCo’s
subtransmission assets in favor of MERALCO under the terms provided in the Contract to Sell.
However, as at May 16, 2011, MERALCO has yet to make the payment of the purchase price to
TransCo, and TransCo has yet to turn over the possession and maintenance of said assets to
MERALCO, in view of a certain legal impediment on the part of TransCo, which is preventing it
from accepting the payment. MERALCO has filed with the ERC an urgent motion for the resolution
of this case.
OTHER QUANTITATIVE AND QUALITATIVE DISCLOSURES
(i) Any events that will trigger direct or contingent financial obligation that is material to the
company, including any default or acceleration of an obligation.
1. Mediation with NPC
The NPC embarked into a Power Development Program or PDP, which consisted of
contracting generating capacities and the construction of its own as well as private sector
generating plants, to avoid a power supply crisis. To address the concerns of the creditors of NPC,
namely, Asian Development Bank and the World Bank, the Department of Energy or DOE required
MERALCO to enter into a long-term supply contract with NPC.
On November 21, 1994, MERALCO entered into a 10-year CSE with NPC to commence
on January 1, 1995. Separately, the DOE further asked MERALCO’s support and commitment to
provide a market for half of the output of the Camago-Malampaya gas field, which was to generate
significant revenues for the Philippine Government.
MERALCO’s purchases from NPC exceeded the contract level in the first seven years of
the CSE. However, the 1997 Asian crisis resulted in a significant dip in energy sales, which
persisted in the years following the crisis.
While the events were beyond the control of MERALCO, NPC refused to honor the Parent
Company’s good faith notification. A dispute ensued and both parties agreed to go into mediation.
The mediation resulted in the signing on July 15, 2003 of a Settlement Agreement
conditioned on ERC’s approval. The Settlement Agreement was approved by the respective BODs
of NPC and MERALCO. The net settlement amount of P
= 14,320 million was agreed upon by NPC
and MERALCO and manifested before the ERC through a Joint Compliance dated January 19,
2006.
Subsequently, the Office of the Solicitor General or OSG filed a “Motion for Leave to
Intervene with Motion to Admit Attached Opposition to the Joint Application and Settlement
Agreement between NPC and the Parent Company.” As a result, MERALCO separately sought
judicial clarifications with RTC-Pasig. Pre-trials are ongoing. However, the OSG refused to
participate in the pre-trial and opted to seek a Temporary Restraining Order or TRO from the CA.
As a result thereof, the CA issued a TRO which was later extended to a Writ of Preliminary
Injunction enjoining all proceedings at the RTC-Pasig until the resolution of the case before the CA.
All parties were then directed to submit their respective memoranda to which MERALCO complied.
On April 25, 2011, MERALCO filed its Reply (to new matters raised in Petitioner’s Memorandum).
MERALCO is awaiting the decision of the CA on this matter.
In the event the Settlement Agreement is disapproved, MERALCO and NPC shall revert to
their respective positions before the mediation, which shall be resolved through arbitration. On the
other hand, a decision by the RTC-Pasig in favor of MERALCO shall mean that the agreement is
valid although enforcement of the Settlement Agreement is dependent on the final approval by the
ERC, which shall be the basis for the recognition of any liability or receivable.
2. Sucat-Araneta-Balintawak Transmission Line
The Sucat-Araneta-Balintawak transmission line is a two-part transmission line, which
completed the 230kV-line loop within Metro Manila. The two main parts are the Araneta to
Balintawak leg and, the Sucat to Araneta leg, which cuts through Dasmariñas Village, Makati City.
Up to May 2001, NPC operated and developed the nationwide transmission grid.
Thereafter, with the effectivity of the EPIRA, the authority and responsibility were transferred to
TransCo. The distribution lines of MERALCO are connected to the transmission grid of TransCo.
Beginning January 15, 2009, NGCP operates the transmission grid of TransCo under a
Concession Agreement.
On March 10, 2000, the residents along Tamarind Road, Dasmariñas Village, Makati City
or plaintiffs, filed a case with the RTC-Makati against NPC enjoining the latter from further
preparing and installing high voltage cables to the steel pylons erected near the plaintiffs’ homes
and from energizing and transmitting high voltage electric current through said cables because of
the alleged health risks and danger posed by the same. The RTC-Makati initially issued on March
13, 2000 an Order directing the parties to maintain the status quo and then later granted the
preliminary injunction prayed for by the plaintiffs on April 3, 2000. The decision was confirmed by
the SC on March 23, 2006, which effectively reversed a decision of the CA to the contrary.
The RTC- Makati subsequently issued a writ of execution based on the order of the SC, as
moved by the plaintiffs. MERALCO, in its capacity as an intervenor, was constrained to file an
Omnibus Motion to maintain status quo because of the significant effect of a de-energization of the
Sucat-Araneta line to the public and economy. The shutdown of the 230 kV line will result in
widespread and rotating brownouts within MERALCO’s franchise area with certain power plants
unable to run at their full capacities.
On September 8, 2009, the RTC-Makati granted the motions for intervention filed by
intervenors MERALCO and NGCP and dissolved the Writ of Preliminary Injunction issued, upon
the posting of a counter bond by defendant NPC in the amount of P
= 10 million, intervenor
MERALCO in the amount of P
= 2 million, and intervenor NGCP in the amount of P
= 2 million, subject
to the condition that NPC and intervenors pay all damages, which the plaintiffs may incur as a
result of the Writ of Preliminary Injunction.
Thereafter, the plaintiffs questioned the RTC-Makati order before the CA. As at March 31,
2011, this remains pending for resolution in the CA.
3. Real Property Tax Assessment
Six local governments units or LGUs assessed MERALCO for deficiency real property
taxes on certain assets of the Parent Company. The assets include any of electric poles, wires,
insulators, and transformers, collectively referred to as TWIP. Of these LGUs, one has secured a
favorable decision from the CA, whereby the appellate court directed the LGU concerned to
present an assessment of the foregoing properties and collect the pertinent tax in accordance with
the Local Government Code or LGC of 1991. Such Decision was further appealed to the SC
where it is now submitted for resolution. With respect to the cases of the five other LGUs, these
are pending with their respective administrative bodies or government offices.
Accordingly, MERALCO deemed it prudent to include in its third RP operating expenses,
payment of RPT on its TWIP commencing RY 2011. The Company, however, continues to pursue
its legal actions and avail of legal remedies with respect to the legality, validity and applicability of
the assessments, and in the event payment is warranted or appropriate, to recover any resulting
real estate tax payments through separate application under Article 11 of the “Rules for Setting
Distribution Wheeling Rates for Privately Owned Distribution Utilities Operating under Performance
Based Regulation (First Entry Group: Third Regulatory Period).”
4. Local Franchise Tax
Certain municipalities have served assessment notices on MERALCO for local franchise
taxes. As provided in the LGC, only cities and provincial governments may impose taxes on
establishments doing business in their localities. On the basis of the foregoing, the management of
MERALCO and its legal counsel believe that it has strong legal grounds to contest such
assessments.
5. Deferred Purchased Power Adjustment or PPA
On October 19, 2009, the ERC released its findings on the Parent Company’s
implementation of the collection of certain pass-through cost under-recoveries, which it had
previously approved. According to the ERC, MERALCO over-recovered P
= 268 million of deferred
PPA, transmission line costs related to QPPL and deferred accounting adjustments, or DAA
incurred in 2004 and, directed MERALCO to refund said amount to customers, along with P
= 184
million in carrying charges, via a rate of P
= 0.0169 per kWh beginning the next billing cycle after
receipt of the ERC’s ruling until the amount is fully refunded. However, the ERC has yet to rule on
MERALCO’s under-recovered deferred PPA of P
= 106 million. As at March 31, 2011, MERALCO
has filed a Motion for Reconsideration, which is pending decision of the ERC.
6. COA Audit
The SC, in its Decision dated December 6, 2006 on the MERALCO Unbundling case, ruled
that a COA audit was not a prerequisite for the determination of a utility’s rates in connection with
MERALCO’s rate unbundling case. While affirming the ERC’s authority on rate-fixing, the SC
nevertheless directed the ERC to request the COA to conduct a complete audit of the books,
records and accounts of MERALCO. Thus, in compliance with the SC directive, on January 15,
2007, the ERC engaged the COA to conduct an audit using calendar years 2004 and 2007 as test
years.
The COA audit was completed in August 2009.
On February 17, 2010, the Parent Company received a copy of the ERC Order related to
Case No. 2001-900 RC, entitled “In the Matter of the Application for the Approval of the Unbundled
Rates pursuant to the Provision of the Application for the Approval of the Unbundled Rates
pursuant to the Provision of RA No. 9136, MERALCO, Applicant,” which directed all intervenors in
the case to submit within 15 days from receipt of their respective comments on the COA’s “Report
No. 2009 01 Rate Audit Unbundled Charges.”
The Company has already submitted its comment on the COA audit report. Similarly, the
intervenors have filed their comments to the COA audit report and the Company has responded to
the same. With these developments, the Company is now awaiting the action of the ERC on the
COA Audit Report.
7. Other Claims
Related provisions for items estimable amounted to P
= 5,751 million, P
= 3,351 million, and
P
= 318 million in 2010, 2009 and 2008 respectively, gross of potential recoveries.
Management, after consultations with internal and external counsels with respect to other
contingencies, believes that the probable resolution of these issues will not materially affect the
Company’s financial position and results of operations.
(ii) All material off-balance sheet transactions, arrangements, obligations (including contingent
obligations), and other relationships of the company with unconsolidated entities or other
persons created during the reporting period.
Not Applicable.
(iii) Any material commitments for capital expenditures, the general purpose of such commitments,
and the expected sources of funds for such expenditures should be described;
2011 Capital Expenditure Requirements (In millions)
Electric capital projects
Non-electric projects and other capitalized items
Total Capital Expenditures
P
= 8,299
2,603
P
= 10,902
As at March 31, 2011, the Company has met, and expects that it will continue to meet its
capital expenditure requirements primarily from cash flow from operations, and working capital.
The Company is required by the ERC to take necessary steps, including making
necessary capital expenditures, to build and maintain its network so as to meet minimum
performance and service requirements and in any event to make capital expenditures in each
quarter at least equal to the amount of depreciation taken in the prior years. Most expenditure on
transmission and substation projects, supervisory control and distribution automation, and
distribution line projects are non-discretionary. The remaining capital expenditure is discretionary,
which encompasses allocation projects, telecommunications projects and other non-electrical
capital expenditure. If the actual peak demand is lower than the forecasted demand, a portion of
the non-discretionary capital expenditure may become discretionary.
The Company is required by the ERC to take necessary steps, including making
necessary capital expenditures, to build and maintain its network so as to meet minimum
performance and service requirements and in any event to make capital expenditures in each
quarter at least equal to the amount of depreciation taken in the prior years. Most expenditure on
transmission and substation projects, supervisory control and distribution automation, and
distribution line projects are non-discretionary. The remaining capital expenditure is discretionary,
which encompasses allocation projects, telecommunications projects, and other non-electrical
capital expenditure. If the actual peak demand is lower than the forecasted demand, a portion of
the non-discretionary capital expenditure may become discretionary.
The Company has an approved capital expenditure budget of P
= 10,902 million for the year
ending December 31, 2011, of which about 76% represents planned expenditures for the electric
projects of the power distribution business. It has to prioritize its projects to only those deemed
urgent in the 2011 project line up. Funding of capital expenditures will be sourced substantially
from internally generated cash flow and borrowings from local and foreign financial institutions.
The P
= 10,902 million approved capital expenditure budget is geared to support projects on
areas with large concentration of core customers, give priority to correction of normal deficiencies
in the system, stretch loading limits of company facilities and initiate practical and cost-effective
projects to correct system deficiencies.
(iv) Any known trends, events or uncertainties that have had or that are reasonably expected to
have a material favorable or unfavorable impact on net sales or revenues or income from
continuing operations should be described.
1. Retail Competition
On February 18, 2011, the ERC pursuant to its mandate under Section 3, Rule 12 of the
EPIRA IRR issued an Order setting public hearings for the purpose of determining whether or not
Open Access and Retail Competition may already be declared. The DOE, NPC, PEMC, and
PSALM were directed to appear at the hearings and present evidence on the matter. MERALCO is
an intervenor in said case. Hearings commenced on March 7, 2011 and the involved parties have
been directed to submit a legal memorandum on this matter. MERALCO filed its legal memoranda.
The latest hearing was conducted on April 6, 2011 and all parties were asked to file their
comments on the submitted legal memoranda, after which, the case will be deemed submitted for
resolution by the Commission. MERALCO has submitted its comments to the legal memoranda
filed by the other parties and is awaiting further instructions from the ERC on this matter.
2. Petition for Dispute Resolution
On September 9, 2008, MERALCO filed a Petition for Dispute Resolution with the ERC,
against PEMC, TransCo, NPC and PSALM as a result of the congestion in the transmission
system of TransCo arising from the outage of the San Jose-Tayabas 500kV Line 2 on June 22,
2008, followed by the outage of the 500kV 600 MVA Transformer Bank No.2 of TransCo‘s San
Jose, Bulacan substation on July 11, 2008. The Petition seeks to, among others, direct PEMC to
adopt the NPC-TOU rate or the new price determined through the price substitution methodology
of PEMC as approved by the ERC, as basis for its billing during the period of the congestion; direct
NPC and PSALM to refund the transmission line loss components of the line rentals associated
with NPC/PSALM bilateral transactions from the start of WESM operation on June 26, 2006.
In a Decision dated March 10, 2010, the ERC granted MERALCO's petition and ruled that
there is double charging of the Transmission Line Cost on MERALCO by NPC for the Transition
Supply Contract or TSC quantities to the extent of 2.98% loss factor, since the start of the TSC in
November 2006. Thus, NPC was directed to refund/collect line rental adjustment to/from
MERALCO. In the meantime, the ERC issued an Order on May 4, 2011 directing PEMC to submit
an alternative methodology for the segregation of line rental into congestion cost and line losses
from the start of the WESM.
3. PSALM versus PEMC and MERALCO
Due to the significant increases in WESM prices during the 3rd and 4th months of the
WESM operations, a concern was raised by the Parent Company with the PEMC to investigate
whether WESM rules were breached or if anti-competitive behavior has occurred.
While resolutions were initially issued by the PEMC directing adjustments of WESM
settlement amounts, a series of exchanges and appeals with the ERC ensued. A decision of the
ERC, which directed the WESM settlement price for the 3rd and 4th billing months to be NPC-TOU
rates, prompted PSALM to file a Petition for Review at the Court of Appeals, which denied the
same. A subsequent Motion for Reconsideration filed by PSALM was similarly denied. In
December 2009, PSALM filed a Petition for Review on Certiorari with the SC.
As at March 31, 2011, PSALM‘s petition for review is pending resolution by the SC.
4. Petition for Dispute Resolution with NPC on Premium Charges
On June 2, 2009, MERALCO filed a Petition for Dispute Resolution against NPC and
PSALM with respect to NPC‘s imposition of premium charges for the alleged excess energy it
supplied to MERALCO covering the billing periods May 2005 to June 2006. The premium charges
amounted to P
= 315 million during the May-June 2005 billing periods which has been paid for by the
Parent Company and P
= 318 million during the November 2005, February 2006 and April-June 2006
billing periods, which is being disputed and withheld by the Parent Company. MERALCO believes
that there is no basis for the imposition of the premium charges as there was no ERC-approved
TSC between petitioner and NPC and the premium charges imposed by NPC has not been
approved by the ERC.
As at March 31, 2011, the case is pending resolution by the ERC.
(v) Any significant elements of income or loss that did not arise from the registrant’s continuing
operations;
None
(vi) Any seasonal aspects that had a material effect on the financial condition or results of
operations.
Seasonality of Operations and Growth Drivers
Approximately 98% of the Company’s operating revenues pertain to sale of electricity
distributed by MERALCO and CEDC.
The electricity sales of MERALCO and CEDC exhibit a degree of quarterly seasonality. The
kWh sales in the 1st Quarter is lower than the average of the year as this period is characterized by
cooler temperature and softer consumer demand following heightened consumer spending in the last
quarter of the year. The 2nd Quarter is marked by higher than average kWh sales. This is due to a
number of factors, including: increased consumption of households and commercial establishments due
the summer season; increased production of industries to replenish stocks and in preparation for the
opening of classes; and, heightened construction activity to take advantage of the sunny weather.
Despite the onset of the rainy season which tapers cooling requirements of commercial establishments,
kWh sales typically peaks on the 3rd Quarter of the year. Manufacturing industries that cater to the
export market have their peak production schedule at this time as they rush to meet shipping deadlines
to foreign markets. Industries catering to the domestic market are also now starting production in
preparation for the Christmas season. Lastly, the 4th Quarter performance is about the average of the
year. Industrial production winds down while households and commercial establishments also cut
down on their cooling loads. Given this perspective on the seasonality of kWh sales, a higher proportion
of the MERALCO’s and CEDC’s revenues are earned on the second half of the year.
Aside from the quarterly seasonal pattern, kWh sales on a year-on-year basis adjust as a result
of a number of factors. Sales of electricity normally increase in periods of economic growth, low
inflation and electricity rates, and in periods of high temperatures over extended period of time, e.g. the
El Niño episodes.
The following table sets forth the Company’s quarterly sales in GWh.
Period
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total
2011
6,991
6,991
2010
6,996
7,954
7,710
7,587
30,247
2009
6,124
6,993
7,275
7,124
27,516
The businesses of all other subsidiaries are not highly seasonal.
(vii) Discussion of the Company’s and its majority-owned subsidiaries top five (5) key performance
indicators. It shall include a discussion of the manner by which the Company calculates or
identifies the indicators presented on a comparable basis.
Listed hereunder are MERALCO’s five major subsidiaries namely CEDC, Rockwell Land,
MIESCOR, e-MVI and RSIC. The following table summarizes their key financial performance and
indicators as at and for the three months ended March 31, 2011 and 2010, except for MIESCOR whose
first quarter reporting date ends on December 31.
8
7
330
Equity attributable to equity
holders of the parent
0.4
4.6%
175%
163%
7%
16%
-
1.7%
22.3%
73
143
438
P
= 642
2011
0.1
2.1%
16.7%
81
158
741
P
= 944
2010
6%
(10)%
(9)%
(41)%
(32)%
%
change
(5)%
(5)%
2%
74%
13%
0.3
3.8%
6.3%
30
30
438
P
= 479
2010
0.2
1.6%
6.3%
11
11
165
P
= 176
1.7
0.2
833
149
782
592
1,397
2009
December 31
99%
P
= 1,628
Three Months Ended
1.7
0.2
833
149
793
592
1,426
P
= 1,658
99%
December 31 September 30
%
change
2010
2009
MIESCOR
173%
173%
165%
172%
%
change
-%
-%
1%
-%
2%
2%
%
change
e-MVI
2.0
0.1
3.9%
29.1%
23
23
47
P
= 79
2011
26
26
31
P
= 79
0.1
4.8%
32.9%
2010
March 31
-
109
-
584
144
219
P
= 695
100%
2010
Three Months Ended
1.7
-
130
-
607
139
218
P
= 745
100%
2011
March 31 December 31
The manner of computing the financial ratios for subsidiaries is the same with computing for the financial ratios of the Company as presented in Financial Highlights and Key Performance Indicators.
Total Debt is composed of notes payable and interest-bearing long-term financial liabilities, current and noncurrent portions.
0.4
10.5%
Return on equity
Asset turnover
13.7%
Profit margin
6.1%
12
33
Financial Ratios
19
50
290
311
P
= 314
2010
Net income
Income attributable to equity
holders of the parent
P
= 364
2011
1.4
0.4
4,007
3,016
4,206
321
5,790
March 31
1.7
0.3
3,809
51%
P
= 13,080
2010
December 31
Three Months Ended
%
change
50%
2,859
4,279
560
6,567
P
= 13,854
51%
2011
March 31
March 31
2.5
-
139
-%
11%
-%
13%
6%
%
change
Rockwell Land
Three Months Ended
1.9
-
209
-
298
182
351
P
= 807
Costs and expenses
Revenues
Condensed Statements of Income
Current ratio
Debt-to-equity ratio
Financial Ratios
Current liabilities
-
182
Cash and cash equivalents
Total
396
Current assets
debt8
P
= 859
Total assets
65%
2010
65%
December 31
2011
CEDC
March 31
Condensed Statements of Financial Position
Percentage of ownership
financial ratios)
(Amounts in millions, except for
Financial Highlights and Ratios7 of Top 5 Subsidiaries
As at and for the three months ended March 31, 2011 and 2010
(12)%
(12)%
52%
-%
%
change
19%
-%
4%
3%
-%
7%
%
change
100%
-
11.5%
58.8%
20
20
22
P
= 34
2011
7
7
8
P
= 19
-
4.4%
36.8%
2010
March 31
2.5
-
294
-
169
207
737
P
= 1,057
2009
December 31
Three Months Ended
3.3
-
141
-
178
215
466
P
= 772
100%
2011
March 31
RSIC
186%
186%
175%
79%
%
change
(52)%
-%
5%
4%
(37)%
(27)%
%
change
ANNEX – Aging of Trade and Other Receivables
As at March 31, 2011
(Amounts in millions)
Total
Trade Receivables – Electricity MERALCO
A) Billed trade receivables
Regular General Service
Private
Government
General Power
Private
Government
Flat / Streetlights
Private
Government
B) Unbilled trade receivables
Regular General Service
Private
Government
General Power
Private
Government
Flat / Streetlights
Private
Government
Trade Receivables – Electricity –
CEDC
Total Trade Receivables –
Electricity
Other Trade Receivables
Gross Trade Receivables
Non-Trade Receivables
Total Receivables
Less: Allowance for
doubtful accounts
Net Receivables
Over
90 days
1 - 30 days
31 - 60 days
61 - 90 days
P
= 6,246
741
P
= 5,254
167
P
= 421
91
P
= 122
54
P
= 449
429
5,979
1,736
5,680
801
177
357
20
124
102
454
24
431
4
10
89
2
40
12
298
2,046
64
2,046
64
-
-
-
2,190
309
2,190
309
-
-
-
2
2
-
-
-
157
19,925
144
16,661
8
1,153
3
365
2
1,746
2,830
1,940
500
75
315
22,755
18,601
1,653
440
2,061
1,232
508
160
45
519
23,987
19,109
1,813
485
2,580
1,805
-
-
-
1,805
P
= 22,182
P
= 19,109
P
= 1,813
P
= 485
P
= 775
MANILA ELECTRIC COMPANY
AND SUBSIDIARIES
Condensed Interim Consolidated Financial Statements
As at March 31, 2011 (Unaudited) and December 31, 2010 (Audited)
And for the three months ended March 31, 2011 and 2010 (Unaudited)
COVER SHEET
P W - 1 0 2
SEC Registration Number
M A N I L A
E L E C T R I C
C OM P A N Y
A N D
S U B S I
D I A R I E S
(Company’s Full Name)
L o p e z
a s i g
B u i l d i n g ,
O r t i g a s
A v e n u e ,
P
C i t y
(Business Address: No. Street City/Town/Province)
0 3
Month
Atty. Anthony V. Rosete
16220
(Contact Person)
(Company Telephone Number)
3 1
Day
(Form Type)
(Fiscal Year)
0 5
1 1
Month
Day
(Annual Meeting)
(Secondary License Type, If Applicable)
Dept. Requiring this Doc.
Amended Articles Number/Section
Total Amount of Borrowings
Total No. of Stockholders
P
=–
P
=–
Domestic
Foreign
To be accomplished by SEC Personnel concerned
File Number
LCU
Document ID
Cashier
STAMPS
Remarks: Please use BLACK ink for scanning purposes.
MANILA ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED INTERIM CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
Notes
March 31,
2011
(Unaudited)
December 31,
2010
(Audited)
(Amounts in Millions)
ASSETS
Noncurrent Assets
Utility plant and others - net
Construction in progress
Investments in associates and a joint venture
Investment properties - net
Deferred pass-through fuel costs
Deferred tax assets - net
Other noncurrent assets - net
Total Noncurrent Assets
Current Assets
Cash and cash equivalents
Trade and other receivables - net
Inventories - at lower of cost or net realizable value
Land and development costs - at lower of cost or
net realizable value
Other current assets
Total Current Assets
7 and 8
7 and 8
9 and 11
10
9 and 11
P
=100,478
2,740
326
8,000
1,222
42
9,724
122,532
=
P101,009
2,241
321
8,037
1,222
42
10,339
123,211
33,955
22,182
2,234
24,370
25,609
2,043
1,820
3,303
63,494
1,708
2,027
55,757
P
=186,026
=
P178,968
EQUITY AND LIABILITIES
Equity Attributable to Equity Holders of the Parent
Common stock
Subscriptions receivable
Additional paid-in capital
Excess of acquisition cost over carrying value of
non-controlling interests
Employee share-based payment plan
Unrealized fair value gains on available-for-sale
investments
Share in cumulative translation adjustment of a subsidiary
and an associate
Retained earnings:
Appropriated
Unappropriated
Equity Attributable to Equity Holders of the Parent
Non-controlling Interests
Total Equity (Total Carried Forward)
P
=11,273
(684)
4,111
=
P11,273
(738)
4,111
(328)
787
(328)
743
98
96
12
12
6,000
36,945
58,214
6,000
37,800
58,969
4,315
62,529
4,227
63,196
12
-2-
Notes
March 31,
2011
(Unaudited)
December 31,
2010
(Audited)
(Amounts in Millions)
Total Equity (Total Brought Forward)
Noncurrent Liabilities
Interest-bearing long-term financial liabilities - net
of current portion
Customers’ deposits - net of current portion
Deposits from pre-selling of condominium units
Deferred tax liabilities - net
Long-term employee benefits
Provisions
Advances for construction - net of current portion
Other noncurrent liabilities
Total Noncurrent Liabilities
Current Liabilities
Notes payable
Trade payables and accrued expenses
Income tax payable
Customers’ refund
Current portions of interest-bearing long-term financial
liabilities
Total Current Liabilities
Total Liabilities
13
14
15
12, 14, 16 and 17
See accompanying Notes to Condensed Interim Consolidated Financial Statements.
P
=62,529
=
P63,196
17,698
24,201
880
2,448
9,392
15,241
3,369
1,044
74,273
15,498
23,761
741
3,322
9,547
12,875
3,271
2,352
71,367
149
33,177
3,551
6,915
149
31,138
413
7,131
5,432
49,224
123,497
5,574
44,405
115,772
P
=186,026
=
P178,968
MANILA ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF INCOME
Notes
Unaudited
For the Three Months
Ended March 31
2010
2011
(Amounts in Millions,
Except Per Share Data)
REVENUES
Sale of electricity
Sale of real estate
Sale of contracts, services and others
EXPENSES (INCOME)
Purchased power
Operations and maintenance
Provision for probable charges and expenses from claims
Depreciation and amortization
Cost of services
Interest and other financial income
Interest and other financial charges
Cost of real estate sold
Provision for probable losses from refund - net
Taxes, fees and permits
Equity in net earnings of associates and a joint venture
Accretion of present value impact on customers’ refund
Foreign exchange gains) - net
Others
18
18
19
19
19
INCOME BEFORE INCOME TAX
PROVISION FOR (BENEFIT FROM) INCOME TAX
Current
Deferred
NET INCOME
Attributable To
Equity holders of the parent
Non-controlling interests
Earnings Per Share Attributable to the Equity Holders
of the Parent
Basic
Diluted
See accompanying Notes to Condensed Interim Consolidated Financial Statements.
P
=56,203
431
733
57,367
44,586
4,495
2,265
1,316
496
(422)
388
310
151
126
(5)
=
P59,777
719
526
61,022
51,825
3,006
354
1,485
263
(192)
669
589
–
(17)
53,689
85
(43)
56
(40)
(26)
58,031
3,678
2,991
2,330
(872)
1,458
1,078
(182)
896
–
–
P
=2,220
=
P2,095
P
=2,132
88
P
=2,220
=
P2,010
85
=
P2,095
P
=1.89
=
P1.78
1.78
1.89
MANILA ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED INTERIM CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
Unaudited
For the Three Months
Ended March 31
2010
2011
(Amounts in Millions)
NET INCOME FOR THE YEAR
OTHER COMPREHENSIVE INCOME
Unrealized fair value gains on available-for-sale investments
Income tax effect
P
=2,220
=
P2,095
3
(1)
2
–
–
–
Share in cumulative translation adjustment of a subsidiary and
an associate
–
(2)
OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE YEAR, NET OF TAX
2
(2)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR,
NET OF TAX
Attributable To
Equity holders of the parent
Non-controlling interests
See accompanying Notes to Condensed Interim Consolidated Financial Statements.
P
=2,222
=
P2,093
P
=2,134
88
P
=2,222
=
P2,008
85
=
P2,093
=
P11,273
–
–
–
–
–
–
–
–
=
P11,273
At January 1, 2010
Net income
Other comprehensive income
Total comprehensive income
Appropriations - net of reversal
Collection of subscriptions receivable
Share-based payments
Dividends
(P
=960)
–
–
–
–
9
–
–
9
(P
=951)
(P
=738)
–
–
–
37
–
–
37
(P
=701)
Subscriptions
Receivable
See accompanying Notes to Condensed Interim Consolidated Financial Statements.
At March 31, 2010
At March 31,2011
P
=11,273
–
–
–
–
–
–
–
P
=11,273
At January 1, 2011
Net income
Other comprehensive income
Total comprehensive income
Collection of subscriptions receivable
Share-based payments
Dividends
Common
Stock
=
P4,112
–
–
–
–
–
–
–
–
=
P4,112
P
=4,111
–
–
–
–
–
–
–
P
=4,111
Additional
Paid-in
Capital
(P
=328)
–
–
–
–
–
–
–
–
(P
=328)
=
P569
–
–
–
–
–
44
–
44
=
P613
P
=743
–
–
–
–
29
–
29
P
=772
Employee
Share-based
Payment Plan
=
P71
–
–
–
–
–
–
–
–
=
P71
P
=96
–
2
2
–
–
–
–
P
=98
=
P–
–
–
–
–
–
–
–
=
P–
P
=–
–
–
–
–
–
–
–
P
=–
=
P684
–
(2)
(2)
–
–
–
–
–
=
P682
P
=12
–
–
–
–
–
–
–
P
=12
Share in
Unrealized
Cumulative
Translation
Fair Value
Gains on
Share in Adjustment of
AvailableRevaluation
a Subsidiary
Increment of
and
for-Sale
Investments
an Associate
an Associate
(Amounts in Millions)
Equity Attributable to Equity Holders of the Parent
(P
=328)
–
–
–
–
–
–
–
(P
=328)
Excess of
Acquisition
Cost Over
Carrying
Value of
Noncontrolling
Interests
MANILA ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
=
P4,198
–
–
–
1,802
–
–
–
–
=
P6,000
P
=6,000
–
–
–
–
–
–
–
P
=6,000
Appropriated
Retained
Earnings
=
P37,750
2,010
–
2,010
(1,802)
–
–
(3,551)
(5,352)
=
P34,407
P
=37,800
2,132
–
2,132
–
–
(2,987)
(2,987)
P
=36,945
Unappropriated
Retained
Earnings
(Note 12)
=
P57,369
2,010
(2)
2,008
–
9
44
(3,551)
(3,498)
=
P55,879
P
=58,969
2,134
–
2,134
37
29
(2,987)
(2,921)
P
=58,182
Equity
Attributable
to Equity
Holders of
the Parent
=
P3,777
85
–
85
–
–
–
(24)
(24)
=
P3,838
P
=4,227
88
–
88
–
–
–
–
P
=4,315
Noncontrolling
Interests
=
P61,146
2,095
(2)
2,093
–
9
44
(3,575)
(3,522)
=
P59,717
P
=63,196
2,222
–
2,222
37
29
(2,987)
(2,921)
P
=62,497
Total
Equity
MANILA ELECTRIC COMPANY AND SUBSIDIARIES
CONDENSED INTERIM CONSOLIDATED STATEMENTS
OF CASH FLOWS
Notes
Unaudited
For the Three Months
Ended March 31
2010
2011
(Amounts in Millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax
Adjustments for:
Depreciation and amortization
Provision for probable charges and expenses from claims
Interest and other financial income
Interest and other financial charges
Provision for probable losses from refund - net
Loss on disposal of utility plant and others - net
Provision for doubtful accounts, net of recoveries
Cost of guaranteed service levels payout
Equity in net earnings of associates and a joint venture
Present value impact on customers’ refund
Employee share-based payments
Reversal of write-down of inventory to net realizable value
Operating income before working capital changes
Decrease (increase) in:
Trade and other receivables
Inventories
Land and development costs
Other current assets
Increase (decrease) in:
Trade payables and accrued expenses
Long-term employee benefits
Customers’ deposits
Deposits from pre-selling of condominium units
Customer’s refund
Provisions
Net cash flows generated from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to:
Construction in progress
Utility plant and others
Intangibles
Interest and other financial income received
Proceeds from disposal of utility plant and others
Decrease (increase) in other noncurrent assets
Net cash used in investing activities
(Forward))
P
=3,678
=
P2,991
1,316
2,265
(340)
294
151
41
2
56
(5)
–
44
(8)
7,494
1,485
3,551
(183)
(112)
(468)
(9,237)
(272)
–
(1,094)
552
(155)
359
139
(216)
(50)
10,911
7,114
(244)
–
–
(90)
–
1,753
(870)
(388)
(67)
627
16
256
(426)
(1,364)
(74)
–
424
25
(5,163)
(6,152)
(137)
669
282
15
190
25
(43)
56
44
(1)
5,576
-2-
Notes
Unaudited
For the Three Months
Ended March 31
2010
2011
(Amounts in Millions)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Interest-bearing long-term financial liabilities, net of issue costs
Collection of subscriptions receivable
Payments of:
Interest-bearing long-term financial liabilities
Dividends
Interest and other financial charges
Notes payable
Increase (decrease) in other noncurrent liabilities
Net cash flows used in financing activities
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
CASH AND CASH EQUIVALENTS AT END OF PERIOD
See accompanying Notes to Consolidated Financial Statements.
P
=2,500
54
=
P181
8
(448)
(1,417)
(281)
(665)
–
(419)
(502)
941
(456)
(1,308)
(900)
9,585
(4,855)
24,370
17,068
P
=33,955
=
P12,213
MANILA ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
1. Corporate Information
Manila Electric Company or MERALCO or Parent Company, holds a congressional franchise
under Republic Act or RA No. 9209, effective June 28, 2003. RA No. 9209 grants the Parent
Company a 25-year franchise to construct, operate, and maintain an electric distribution system in
the cities and municipalities of Bulacan, Cavite, Metro Manila, and Rizal and certain cities,
municipalities, and barangays in the provinces of Batangas, Laguna, Pampanga, and Quezon. On
October 20, 2008, the Energy Regulatory Commission or ERC, granted the Parent Company a
consolidated Certificate of Public Convenience and Necessity for the operation of electric service
within its franchise coverage, effective until June 28, 2028, to coincide with the Parent
Company’s congressional franchise.
MERALCO is the largest distribution utility or DU, in the Philippines. The power segment,
primarily power distribution, consists of operations of the Parent Company and its subsidiary,
Clark Electric Distribution Corporation or CEDC. In 2010, the Parent Company began the
development of proposed power generation plants as part of its entry into power generation
through a wholly owned subsidiary, MERALCO PowerGen Corporation or MPG. Through its
other operating segments, it develops and sells real estate properties and provides engineering,
construction and consulting services, bill payments, collection services, energy systems
management and information systems and technology services. MERALCO and its subsidiaries
are collectively referred to as the Company or MERALCO Group.
The common shares of the Parent Company are listed and traded on the Philippine Stock
Exchange, or PSE.
The registered office address of the Parent Company is Lopez Building, Ortigas Avenue, Pasig
City, Philippines.
2. Basis of Preparation and Statement of Compliance
The accompanying condensed interim consolidated financial statements have been prepared on a
historical cost basis, except for the Parent Company’s utility plant and others, and investment
properties, which are carried at deemed cost and for derivative financial instruments and availablefor-sale, or AFS financial assets. AFS financial assets are measured at fair value. Derivative
financial instruments are shown as part of “Other current assets,” “Other noncurrent assets,”
“Trade payables and accrued expenses” and “Other noncurrent liabilities” accounts in the
consolidated statement of financial position. AFS financial assets are included as part of “Other
noncurrent assets” account in the consolidated statement of financial position.
The unaudited condensed interim consolidated financial statements do not include all the
information and disclosures required in the annual financial statements, and should be read in
conjunction with the Company’s annual audited financial statements as at and for the year ended
December 31, 2010.
-2-
The unaudited condensed interim consolidated financial statements are presented in Philippine
peso, which is the Company’s functional and presentation currency under Philippine Financial
Reporting Standards or PFRS. All values are rounded to the nearest million pesos, except when
otherwise indicated.
Statement of Compliance
The unaudited condensed interim consolidated financial statements of the Parent Company and
subsidiaries have been prepared in compliance with Philippine Financial Reporting Standards or
PFRS. PFRS includes statements named PFRS and Philippine Accounting Standards or PAS,
including Interpretations issued by the Philippine Financial Reporting Standards Council or
PFRSC.
Basis of Consolidation
The unaudited condensed interim consolidated financial statements include the financial
statements of the Parent Company and the following directly and indirectly-owned subsidiaries as
at March 31 2011 and 2010:
Subsidiaries
Corporate Information Solutions, Inc.
or CIS
CIS Bayad Center, Inc.
Outsourced Telleserve Corporation
or OTC
MERALCO Energy, Inc. or MEI
e-MERALCO Ventures, Inc. or e-MVI
Meralco PowerGen Corporation or
MPG
MERALCO Financial Services
Corporation or Finserve
Republic Surety and Insurance
Company, Inc. or RSIC
Lighthouse Overseas Insurance
Limited or LOIL
MIESCOR
MIESCOR Builders Inc. or MBI
Place of
Incorporation Principal Business Activity
Philippines
Philippines
e-Transactions
Bills payment collection
100
–
–
100
Philippines
Philippines
Philippines
Tellering services
Energy systems management
e-Business development
–
100
100
100
–
–
Philippines
Building and operation of plants and related
facilities
100
–
Philippines
Financial services provider
100
–
Philippines
Insurance
100
–
Bermuda
Philippines
Philippines
100
99
–
–
–
–
100
100
Philippines
Insurance
Engineering, construction and consulting services
Electric transmission and distribution operation
and maintenance
General services, manpower/maintenance
Engineering and construction of mass transit
system
Power distribution
–
65
60
–
Philippines
Real estate
51
–
Landbees Corporation or Landbees Philippines
Miescorrail, Inc. or Miescorrail
Philippines
CEDC
Rockwell Land Corporation or
Rockwell Land
Percentage of
Ownership
Direct Indirect
Subsidiaries are fully consolidated from the date of acquisition, being the date at which the
MERALCO Group obtains control, and continue to be consolidated until the date that such control
ceases.
The unaudited condensed interim consolidated financial statements are prepared using uniform
accounting policies for like transactions and other events with similar circumstances. All intragroup balances, income and expenses, unrealized gains and losses and dividends resulting from
intra-group transactions are eliminated in full.
-3-
Non-controlling interests represent the portion of profit or loss and net assets in CEDC, Rockwell
Land, and MIESCOR and its subsidiaries not held by the Parent Company and are presented
separately in the unaudited consolidated statement of income, unaudited consolidated statement of
comprehensive income and within equity in the unaudited consolidated statement of financial
position, separately from equity attributable to equity holders of the parent.
3. Accounting Policies and Disclosures
The accounting policies adopted in the preparation of the unaudited condensed interim
consolidated financial statements are consistent with those followed in the preparation of the
consolidated audited financial statements for the year ended December 31, 2010, except for the
adoption of the following Philippine Interpretations and amendments and improvements to
existing standards, which were effective beginning January 1, 2011. The adoption of these
changes and improvements did not have any significant effect on the Company’s unaudited
condensed interim consolidated financial statements, unless otherwise indicated.
Amendments to PFRS
Revised PAS 24, Related Party Disclosures
The standard has been revised to simplify the identification of related party relationships and rebalance the extent of disclosures of transactions between related parties based on the costs to
preparers and the benefits to users in having this information available in the financial statements.
Also, the revised standard provides a partial exemption from the disclosure requirements for
government-related entities.
Amendment to PAS 32, Financial Instruments: Presentation - Classification of Rights
Issues
The definition of a financial liability in the standard has been amended to classify rights issues
(and certain options or warrants) as equity instruments if: (a) the rights are given pro rata to all of
the existing owners of the same class of an entity’s non-derivative equity instruments, and (b) the
instruments are used to acquire a fixed number of the entity’s own equity instruments for a fixed
amount in any currency.
Amendment to IFRIC 14, Prepayments of a Minimum Funding Requirement
The interpretation has been amended to permit an entity to treat the prepayment of a minimum
funding requirement as an asset. The amendment should be applied to the beginning of the earliest
period presented in the first financial statements in which the entity applied the original
interpretation.
Philippine Interpretation IFRIC 19, Extinguishing Financial Liabilities with Equity
Instrument
The interpretation clarifies that equity instruments issued to a creditor to extinguish a financial
liability are consideration paid. As a result, the financial liability is derecognized and the equity
instruments issued are treated as consideration paid to extinguish that financial liability. The
interpretation states that equity instruments issued in a debt for equity swap should be measured at
the fair value of the equity instruments issued, if this can be determined reliably. If the fair value
of the equity instruments issued is not reliably determinable, the equity instruments should be
-4-
measured by reference to the fair value of the financial liability extinguished as of the date of
extinguishment. Any difference between the carrying amount of the financial liability that is
extinguished and the fair value of the equity instruments issued is recognized immediately in
profit or loss.
Improvements to PFRS
PFRS 3, Business Combinations
The improvements include: (a) clarification that the amendments to PFRS 7, Financial
Instruments: Disclosures, PAS 32, Financial Instruments: Presentation, and PAS 39,Financial
Instruments: Recognition and Measurement, that eliminate the exemption for contingent
consideration, do not apply to contingent consideration that arose from business combinations
whose acquisition dates precede the application of PFRS 3 (as revised in 2008); (b) guidance that
the choice of measuring non-controlling interest at fair value or at the proportionate share of the
acquiree’s net assets applies only to instruments that represent present ownership interests and
entitle their holders to a proportionate share of the net assets in the event of liquidation. All other
components of non-controlling interest are measured at fair value unless another measurement
basis is required by PFRS; and (c) clarification that the application guidance in PFRS 3 applies to
all share-based payment transactions that are part of a business combination, including unreplaced and voluntarily replaced share-based payment awards.
PFRS 7, Financial Instruments
The amendment emphasizes the interaction between quantitative and qualitative disclosures about
the nature and extent of risks associated with financial instruments.
PAS 1, Presentation of Financial Instruments
The amendment clarifies that an entity shall present an analysis of other comprehensive income
for each component of equity, either in the statement of changes in equity or in the notes to the
financial statements.
PAS 27, Consolidated and Separate Financial Statements
The improvement clarifies that the consequential amendments from PAS 27 made to PAS 21, The
Effect of Changes in Foreign Exchange Rates, PAS 28, Investments in Associates, and PAS 31,
Interests in Joint Ventures, apply prospectively for annual periods beginning on or after July 1,
2009, or earlier when PAS 27 is applied earlier.
PAS 34, Interim Financial Reporting
The amendment provides guidance how to apply disclosure principles in PAS 34 and additional
disclosure requirements around (a) the circumstances likely to affect fair values of financial
instruments and their classification; (b) transfers of financial instruments between different levels
of the fair value hierarchy; (c) changes in classification of financial assets; and (d) changes in
contingent liabilities and assets.
Philippine Interpretation IFRIC 13, Customer Loyalty Programmes
The amendment clarifies the meaning of fair value in the context of measuring award credits under
customer loyalty programmes.
-5-
4. Seasonality of Operations and Growth Drivers
Sale of electricity accounts for approximately 98% of the Company’s operating revenues. This
pertains to electricity distributed by the Parent Company and a subsidiary, CEDC.
The volume of electricity sales of the Parent Company and CEDC exhibits a degree of quarterly
seasonality. Kilowatthour (kWh) sales in the first quarter are lower than the average of the year as
this period is characterized by cooler temperature and softer consumer demand following
heightened consumer spending in the last quarter of the preceding year. The second quarter is
marked by higher than average kWh sales. This is due to a number of factors, including: increased
consumption of households and commercial establishments during the summer season; increased
production of industries to replenish stocks in preparation for the resumption of school; and
heightened construction activity in the summer months. Despite the onset of the rainy season
which tapers cooling requirements of commercial establishments, kWh sales typically peak in the
third quarter of the year. The third quarter reflects the peak production schedule of manufacturing
industries to meet shipment deadlines of foreign markets. Industries catering to the domestic
market also start production in preparation for the holidays. Finally, the fourth quarter
performance is about the average of the year. Industrial production winds down while households
and commercial establishments also cut down on their cooling loads. Thus, a higher proportion of
the Parent Company and CEDC’s revenues are earned during the second half of the year.
Aside from the quarterly seasonal pattern, kWh sales on a year-on-year basis adjust as a result of a
number of factors. Sales of electricity generally increase in periods of economic growth, low
inflation and low electricity rates, and in periods of higher temperature over an extended period of
time, including the impact of El Niño phenomenon.
The businesses of all other subsidiaries are not affected by seasonality.
5. Management’s Use of Judgments, Estimates and Assumptions
The preparation of the Company’s unaudited condensed interim consolidated financial statements
requires management to make judgments, estimates and assumptions that affect the reported
amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent assets and
liabilities, at the end of the reporting period. However, uncertainty about these assumptions and
estimates could result in outcomes that require a material adjustment to the carrying amount of the
asset or liability affected in future periods.
In the process of applying the Company’s accounting policies, management has made, which have
the most significant effect on the amounts recognized in the unaudited condensed interim
consolidated financial statements.
The Company has possible claims from or obligation to other parties from past events and whose
existence may only be confirmed by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the Company. Management has determined that the
present obligations with respect to contingent liabilities and claims with respect to contingent
assets do not meet the recognition criteria, and therefore has not recorded any such amounts.
-6-
6. Segment Information
For management purposes, the Company’s operating businesses are organized and managed
separately according to the nature of services provided, with each segment representing a strategic
business unit that offers different products and/or services, as follows:
•
Power — The power segment is principally distribution and supply of electricity covering
franchise areas in the Luzon islands. Power distribution within the franchise area accounts for
54% of the requirements of the country. This is primarily provided by MERALCO and CEDC,
the latter covering the Clark Economic Zone.
MPG is in the process of developing the Company’s planned 1,500 MW power generation
capacity.
•
Real Estate — This segment, which is provided by Rockwell Land, is involved in luxury
residential and commercial real estate development and leasing.
•
Services and others — The services segment is involved principally in engineering,
construction and consulting services, e-transaction services, insurance and power generation.
These services are provided by MIESCOR, MBI, Landbees and Miescorrail (collectively
referred to as “MIESCOR Group”), Corporate Informations Solutions or CIS, CIS Bayad
Center and OTC (collectively referred to as “CIS Group”) MEI, eMVI, RSIC, LOIL and
Finserve.
The chief operating decision-maker or management monitors the operating results of each
business unit separately for the purpose of making decisions about resource allocation and
performance assessment. Performance is evaluated based on net income for the year, earnings
before interest, taxes and depreciation and amortization, or EBITDA; EBITDA margin; and core
net income. Net income for the year is measured consistent with consolidated net income in the
consolidated financial statements.
EBITDA is measured as net income excluding depreciation and amortization, impairment of
noncurrent assets, financing costs, carrying charges, interest and other financial income, equity in
net earnings of associates and a joint venture, foreign exchange gains (losses) - net, gains (losses)
on derivative financial instruments - net, provision for (benefit from) income tax and other nonrecurring gains (losses) - net, if any.
Core net income for the year is measured as net income attributable to equity holders of the Parent
Company adjusted for foreign exchange gains or losses, gains or losses on derivative financial
instruments, asset impairment on noncurrent assets, One- time adjustments and other nonrecurring gains or losses, net of tax effect of the foregoing adjustments.
Transfer prices between operating segments are set on an arm’s-length basis in a manner similar to
transactions with third parties. Segment revenues, segment expenses and segment results include
transfers among business segments. Those transfers are eliminated on consolidation.
The Company mainly operates and generates substantially all of its revenues from the Philippines
(i.e., in one geographical location). Thus, geographical segment information is not meaningful.
The Company has no revenues from transactions with a single external customer accounting for
10% or more of the Company’s revenues from external customers.
P
= 56,203
4,489
(1,232)
274
191
(310)
(1,328)
–
P
= 2,085
Revenues
Segment results
Depreciation and amortization
Interest and other financial income
Equity in net earnings of associates and a joint venture
Interest and other financial charges
Provision for income tax - net
Non-controlling interests
Net income attributable to equity holders of the Parent
Power
March 31
2011
4,600
(1,439)
104
199
(637)
(800)
–
=
P2,027
=
P59,777
2010
25
(8)
94
–
(26)
)26)
–
P
= 59
P
= 431
Real Estate
March 31
2011
-7-
10
(6)
74
–
(20)
(73)
–
(P
=15)
=
P719
441
(76)
63
–
(41)
(104)
–
P
= 283
P
= 1,130
300
(40)
14
–
(12)
(23)
–
=
P239
=
P692
–
–
(9)
(187)
(11)
–
(88)
(P
= 397)
–
–
–
(156)
–
–
85
(P
=166)
For The Three Months Ended March 31
Services
Inter-segment Transactions
March 31
March 31
2010
2011
2010
2011
2010
(Unaudited)
(Amounts in Millions)
4,955
(1,316)
422
4
(388)
(1,458)
(88)
P
= 2,132
P
= 57,367
Total
March 31
2011
5,264
(1,485)
192
43
(669)
(896)
(85)
=
P2,010
=
P61,022
2010
-8-
The following table shows the reconciliation of the consolidated EBITDA to consolidated net
income:
For the Three Months
Ended March 31
2010
2011
Unaudited
(Amounts in Millions)
Consolidated EBITDA
Depreciation and amortization
Interest and other financial expenses
Equity in net earnings of associates and a joint venture
Present value impact on customers’ refund
Foreign exchange gains - net
Interest and other income
Consolidated income before income tax
Provision for income tax
Consolidated net income for the period
P
=4,956
(1,316)
(388)
4
–
–
422
3,678
(1,458)
P
=2,220
=
P4,926
(1,485)
(669)
43
(56)
40
192
2,991
(896)
=
P2,095
The following table shows the reconciliation of the consolidated core net income to the
consolidated net income:
For the Three Months
Ended March 31
2010
2011
Unaudited
(Amounts in Millions)
Consolidated core net income for the year
Add (deduct) non-core items, net of tax:
Provisions
Foreign exchange gain - net
Mark-to market gain
Net income for the period attributable to equity holders
of the Parent
Net income for the period attributable to non-controlling
interest
Consolidated net income for the period
P
=3,252
(1,120)
–
–
=
P1,980
–
28
2
2,132
2,010
(88)
P
=2,220
(85)
=
P2,095
Cost:
Balance as at January 1, 2010
Transfers from construction in progress
Additions
Disposals/retirements
Transfer to investment properties
Reclassification and others
Balance as at December 31, 2010
Less accumulated depreciation and amortization:
Balance as at January 1, 2010
Charge for the year
Disposals/retirements
Reclassification and others
Balance as at December 31, 2010
Net book value
Cost:
Balance as at January 1, 2011
Transfers from construction in progress
Additions
Disposals/retirements
Reclassification and others
Balance as at March 31, 2011
Less accumulated depreciation and amortization:
Balance as at January 1, 2011
Charge for the year
Disposals/retirements
Reclassification and others
Balance as at March 31, 2011
Net book value
8
Notes
8
Notes
–
–
–
–
–
=
P14,870
42,244
4,649
(3,645)
105
43,353
=
P77,859
Land
Subtransmission
and Distribution
=
P15,001
–
20
–
(151)
–
14,870
–
–
–
–
–
P
=14,870
43,353
955
(294)
(19)
43,995
P
= 77,449
=
P117,752
6,594
1,556
(4,747)
–
57
121,212
P
=14,870
–
–
–
–
14,870
Land
P
= 121,212
354
274
(347)
(49)
121,444
Subtransmission
and Distribution
1,802
121
–
(9)
1,914
=
P3,047
=
P4,727
239
34
–
–
(39)
4,961
Buildings and
Improvements
1,914
38
–
–
1,952
P
= 3,052
P
= 4,961
–
–
–
43
5,004
Buildings and
Improvements
3,075
99
–
–
3,174
P
=1,145
P
=4,311
–
2
–
6
4,319
3,882
426
(1)
(212)
4,095
=
P1,798
=
P5,647
398
34
(1)
–
(185)
5,893
3,758
482
(1,182)
17
3,075
=
P1,236
=
P4,974
–
545
(1,182)
–
(26)
4,311
December 31, 2010 (Audited)
Office Furniture,
Fixtures and
Other
Communication
Equipment
Equipment
(Amounts in Millions)
4,095
93
(6)
–
4,182
P
= 1,773
P
= 5,893
50
1
(10)
21
5,955
March 31, 2011 (Unaudited)
Office Furniture,
Fixtures and
Other
Communication
Equipment
Equipment
(Amounts in Millions)
The movements of utility plant and others as at March 31, 2011 and December 31, 2010 are as follows:
7. Utility Plant and Others
-9-
1,105
157
(52)
216
1,426
=
P899
=
P1,922
–
453
(65)
–
15
2,325
Transportation
Equipment
1,426
56
(6)
(23)
1,453
P
= 884
P
= 2,325
–
9
(6)
9
2,337
Transportation
Equipment
1,337
123
(1)
(91)
1,368
=
P1,300
=
P2,336
27
129
(1)
–
177
2,668
Others
1,368
40
–
–
1,408
P
=1,303
P
=2,668
–
8
–
35
2,711
Others
54,128
5,958
(4,881)
26
55,231
=
P101,009
=
P152,359
7,258
2,771
(5,996)
(151)
(1)
156,240
Total
55,231
1,281
(307)
(42)
56,163
P
= 100,477
P
= 156,240
404
294
(363)
65
156,640
Total
- 10 -
8. Construction in Progress
The movements of construction in progress are as follows:
Note
March 31,
2011
(Unaudited)
December 31,
2010
(Audited)
(Amounts in Millions)
Balance at beginning of period
Net additions
Transfers to utility plant and others
Balance at end of period
7
P
=2,241
903
(404)
P
=2,740
=
P3,627
5,872
(7,258)
=
P2,241
Total interest capitalized and included in the “Construction in progress” account amounted to
=
P24 million and =
P119 million as at March 31, 2011 and December 31, 2010, respectively.
9. Other Noncurrent Assets
This account consists of:
Note
March 31,
2011
(Unaudited)
December 31,
2010
(Audited)
(Amounts in Millions)
Unbilled receivables - net of current portion
Pass-through value added tax or VAT - net
Deferred input VAT
Supreme Court GRAM case refund
Receivable from Bureau of Internal Revenue
or BIR
Intangible assets
AFS investments
Advance payments to suppliers
Deferred reinsurance premium
Pension asset
Installment contracts receivable - net
of current portion
Goodwill
Others - net
11
P
=2,234
3,122
938
780
=
P3,063
3,024
1,006
780
577
567
491
377
181
49
577
513
403
253
214
50
39
36
333
P
=9,724
39
36
381
=
P10,339
- 11 -
10. Cash and Cash Equivalents
This account consists of:
March 31,
2011
(Unaudited)
December 31,
2010
(Audited)
(Amounts in Millions)
Cash on hand and in banks
Cash equivalents
P
=3,094
30,861
P
=33,955
=
P3,631
20,739
=
P24,370
Cash in banks earns interest at prevailing bank deposit rates. Cash equivalents are temporary cash
investments, which are made for varying periods up to three months depending on the Company’s
immediate cash requirements, and earn interest at the prevailing short-term investment rates.
11. Trade and Other Receivables
This account consists of:
Note
March 31,
2011
(Unaudited)
December 31,
2010
(Audited)
(Amounts in Millions)
Trade:
Electricity:
Billed
Unbilled
Current portion of installment contracts
receivable
Service contracts and others
Nontrade
Less allowance for doubtful accounts
9
P
=15,314
4,611
=
P17,776
5,011
1,613
1,217
1,232
23,987
1,805
P
=22,182
2,183
1,326
1,014
27,310
1,701
=
P25,609
12. Equity
Unappropriated Retained Earnings
The balance of unappropriated retained earnings as at March 31, 2011 and December 31, 2010
include the balance of revaluation increment in utility plant and others and investment properties
carried at deemed cost amounting to =
P18,644 million and =
P18,735 million, respectively. Such
amounts are restricted for dividend declaration purposes until they are realized through
depreciation or disposal of the related assets.
- 12 -
The following are cash dividends declared on common shares in 2010 and 2009:
Declaration Date
Record Date
Payment Date
Dividend
Per Share
Amount
(In Millions)
February 28, 2011
December 13, 2010
July 26, 2010
March 22, 2010
March 28, 2011
December 29, 2010
August 23, 2010
April 21, 2010
April 20, 2011
January 17, 2011
September 16, 2010
May 11, 2010
=
P2.65
1.30
2.50
3.15
=
P2,987
1,465
2,818
3,551
The Parent Company pays regular cash dividends equivalent to 50% of core earnings, which may
be supplemented by a special dividend determined on a “look-back” basis. Any declaration and
payment of a special dividend is dependent on the availability of unrestricted retained earnings
and cash. The declaration, record and payment dates shall be consistent with the guidelines of the
Philippine Securities and Exchange Commission and the PSE.
On March 28, 2011, the BOD authorized the Company to acquire as treasury shares, the
subscribed shares and rights of employees who opt to withdraw from the Employee Stock
Purchase Plan or Plan, in accordance with the provisions of the Plan.
13. Interest-bearing Long-term Financial Liabilities
This account consists of the following:
March 31,
2011
(Unaudited)
December 31,
2010
(Audited)
(Amounts in Millions)
Long-term portion of interest-bearing financial
liabilities Long-term debt
Current portion of interest-bearing financial liabilities:
Long-term debt
Redeemable preferred stock
P
=17,698
=
P15,498
3,532
1,900
5,432
P
=23,130
3,654
1,920
5,574
=
P21,072
The current portion of redeemable preferred shares includes shares, which have matured and have
been called for redemption totaling =
P1,307 million and =
P1,318 million as at March 31, 2011 and
December 31, 2010, respectively. Interest is no longer accrued on the preferred shares, which has
been called for redemption.
On December 21, 2010, the Parent Company signed a 7-year, =
P2,500 million floating rate Term
Loan Agreement with a local bank. The loan was fully drawn on January 10, 2011. Interest is
repriced every six months based on 6 month PDST-F plus a spread.
On April 6, 2011, Rockwell Land obtained =
P4,000 million 7-year fixed-rate corporate notes to beef
up and refinance certain obligations.
- 13 -
14. Customers’ Deposits
This account consists of:
March 31, 2011
Current
Portion
(see Note 16)
Meter deposits:
Principal
Accrued interest
Bill deposits:
Principal
Accrued interest
Long-term
Portion
December 31, 2010
Current
Long-term
Portion
Portion
Total (see Note 16)
(Amounts in Millions)
Total
P
=1,205
1,155
P
=–
–
P
=1,204
1,155
=
P1,226
1,175
=
P–
–
=
P1,226
1,175
540
133
P
=3,033
17,125
7,076
P
= 24,201
17,665
7,209
P
= 27,233
541
137
=
P3,079
16,675
7,086
=
P23,761
17,216
7,223
=
P26,840
For the three months ended March 31, 2011 and year ended December 31, 2010, the Parent
P44 million and
Company refunded meter deposits, inclusive of interest amounting to =
=
P336 million, respectively.
Effective January 1, 2011, the interest rate on bill deposits is 0.5% per annum.
15. Provisions
Provisions consist of amounts provided for legal and regulatory claims, as well as probable losses
and possible refunds on for transmission charge over-recoveries, among others.
Movements in 2011 and 2010 are as follows:
December 31, 2010 (Audited)
March 31, 2011 (Unaudited)
Losses and
Losses and
Claims
Refunds
Total
Claims
Refunds
Total
(Amounts in Millions)
Balance at beginning of period
Provisions
Settlements
Balance at end of period
P
=9,474
666
(51)
P
= 10,089
P
=3,401
151
–
P
=3,552
P
= 12,875
817
(51)
P
= 13,641
=
P4,978
4,636
(140)
=
P9,474
=
P2,514
887
–
=
P3,401
=
P7,492
5,523
(140)
=
P12,875
- 14 -
16. Trade Payables and Accrued Expenses
This account consists of the following:
Note
March 31,
2011
(Unaudited)
December 31,
2010
(Audited)
(Amounts in Millions)
Trade accounts payable
Output VAT – net
Accrued expenses:
Taxes
Interest
Liability for guaranteed service levels payout
Current portions of:
Meter deposits
Interest on meter deposits
Bill deposits
Security deposit
Interest on bill deposits
Deferred lease income
Retentions payable
Derivative liability
Dividends payable on:
Common stock
Redeemable preferred stock
Accrued employee benefits
Advances for construction
Regulatory fees
Excess collections over recognized receivables
Accrued development costs
Transmission backbillings
Reinsurance liability
Government grants
Accrued universal charges
Other current liabilities
17
14
14
14
14
12
P
=15,228
3,325
=
P15,538
2,435
1,352
488
502
1,387
487
446
P
=1,205
1,155
540
220
133
27
36
1
=
P1,226
1,175
541
192
137
27
23
1
3,204
286
972
849
375
274
198
131
108
106
–
2,462
P
=33,177
1,672
284
1,300
774
318
185
525
131
225
106
219
1,784
=
P31,138
17. Related Party Transactions
The following provides the total amount of transactions, which have been provided and/or
contracted by the Company with related parties for the relevant financial year. The outstanding
balances are unsecured, interest-free (except those relating to deferred pass-through fuel costs) and
settled in cash. There have been no guarantees provided or received for any receivables from or
payables to related parties.
- 15 -
Sale of Electricity under Various Service Contracts
Several offices, service branches, manufacturing facilities of the Company’s shareholders and
affiliates are located within the franchise area of MERALCO. Thus, MERALCO sells electricity to
such shareholders and affiliates. The rates charged to related parties are the same ERC-mandated
rates charged to all unrelated customers within the franchise area. For the three months ended
March 31, 2011 and 2010, revenues billed to major shareholders and affiliates represents less than
2% of the total revenue from sale of electricity.
Purchase of Goods and Services
In the ordinary course of business, the Company purchases goods and services from its affiliates
and sells power to such affiliates. The details of the transactions are as follows:
Related Party
Relationship
Nature of Transaction
Amount
Owed by
Related
Year Purchases
Party
Amount
Owed to
Related
Party
(Amounts in Millions)
GEPMICI
Associate
Purchase of meters
and devices
Indra Philippines
Associate
IT solutions provider
Philippine Electric Corporation
Affiliate
Purchase of power
transformers
2011
2010
2011
2010
2011
P
=43
7
45
54
174
P
=–
–
5
5
–
P
=9
–
22
1
18
2010
245
–
6
18. Revenues and Purchased Power
Electricity Revenue
Electricity revenues account for 98% of the total revenues for the period ended March 31, 2011
and 2010. Following is a breakdown of electricity revenues:
For the Three Months
Ended March 31
2010
2011
(Unaudited)
(Amounts in Millions)
Pass-through charges:
Generation charge
Transmission charge
System loss charge
Power act reduction
Inter-class, lifeline subsidies and others
Wheeling charges:
Distribution charges
Supply charge
Metering charge
P
=33,991
7,555
3,599
(28)
(228)
=
P40,363
5,983
5,009
(70)
(271)
7,630
2,272
1,412
P
=56,203
5,898
1,762
1,103
=
P59,777
- 16 -
Purchased Power
Actual purchased power costs are pass-through costs and revenue-neutral to the Parent Company.
The details are as follows:
For the Three Months
Ended March 31
2010
2011
(Unaudited)
(Amounts in Millions)
Generation charge
Transmission charge
P
=36,601
7,985
P
=44,586
=
P45,219
6,606
=
P51,825
The details of purchased power follow:
For the Three Months
Ended March 31
2010
2011
(Unaudited)
(Amounts in Millions)
First Gas Power Corporation and FGP Corp.
National Power Corporation or NPC/ Power Sector Assets
and Liabilities Management Corporation or PSALM
(including NPC successor generating companies)
Wholesale Electricity Spot Market / Philippine
Electricity Market Corporation or PEMC
National Transmission Commission or Transco/National
Grid Corporation of the Philippines
Quezon Power (Philippines) Limited Company
Others
P
=12,972
=
P14,394
17,501
16,377
2,637
10,791
7,985
3,460
31
P
=44,586
6,569
3,688
6
=
P51,825
- 17 -
19. Expenses and Income
Operations and Maintenance
For the Three Months
Ended March 31
2010
2011
(Unaudited)
(Amounts in Millions)
Salaries, wages and employee benefits
Provision for doubtful accounts, net of recoveries
Contracted services
Transportation and travel
Corporate expenses
Materials and supplies
Others
P
=2,297
1,520
335
93
74
66
110
P
=4,495
=
P1,907
190
642
90
55
67
55
=
P3,006
Salaries, Wages and Employee Benefits
For the Three Months
Ended March 31
2010
2011
(Unaudited)
(Amounts in Millions)
Salaries and wages
Net pension costs
Health, medical and related benefits
Employee share-based payments
Other long-term employee benefits
Social security costs
P
=1,494
390
251
48
85
29
P
=2,297
=
P1,300
435
32
43
71
26
=
P1,907
- 18 -
Interest and Other Financial Charges
For the Three Months
Ended March 31
2010
2011
(Unaudited)
(Amounts in Millions)
Interest expense on interest-bearing long-term financial
liabilities, net of interest capitalized
Interest expense on bill deposits
Carrying charge on ERC-approved over-recoveries
Interest expense on notes payable
Interest expense on meter deposits
Amortization of:
Debt issue costs
Loan premium
Others
P
=288
23
23
6
3
=
P301
310
–
3
20
17
–
28
P
=388
7
(6)
34
=
P669
Interest and Other Financial Income
For the Three Months
Ended March 31
(Unaudited)
2010
2011
(Amounts in Millions)
Interest income on placements
Amortization of unearned interest on installment trade
receivables
Others
P
=254
=
P106
92
76
P
=422
81
5
=
P192
- 19 -
20. Contingencies
Overpayment of Income Tax related to SC Refund
MERALCO filed a Petition assailing the denial by the BIR of its tax refund claim of =
P5,796 million,
net of =
P894 million, as approved by the BIR for taxable year 2001. In a Decision dated December 6,
2010, the Court of Tax Appeals Second Division granted MERALCO’s claim and ordered the BIR to
refund or to issue tax credit certificate in favor of MERALCO in the amount of =
P5,796 million. On
December 23, 2010, a Motion for Clarification and Partial Reconsideration was filed by MERALCO
and on December 28, 2010, a Motion for Reconsideration was filed by the BIR. In a Resolution dated
April 15, 2011, the motions of MERALCO and the BIR were denied by the CTA’s Second Division.
MERALCO is now awaiting for the appeal of BIR to the CTA En Banc.
Application for Recovery of Local Franchise Taxes
On March 25, 2011, the Parent Company filed an Application for recovery of Local Franchise Taxes
or LFT it paid, but have not yet been billed to its customers, during the period beginning 1993 to 2004
(2nd Quarter), to the five provinces, namely: Bulacan, Batangas, Cavite, Laguna and Rizal; and 14
cities, namely: San Jose Del Monte, Batangas, San Pablo, Tagaytay, Lucena, Mandaluyong, Marikina,
Quezon, Caloocan, Pasay, Las Piñas, Manila, Pasig and Calamba. The LFT is recognized as legitimate
and reasonable DU expense in the ERC’s Unbundling Decision. The recovery mechanism for LFT on
a prospective basis did not cover past payments for LFT by the Parent Company.
The amount of LFT which the Parent Company seeks to recover from its customers in the five
provinces and 14 cities mentioned is =
P1,581 million, plus carrying charges equivalent to =
P1,290
million, or a total of =
P2,871 million.
The ERC has yet to set the case for hearing.
21. Other Matters
Petition for Dispute Resolution
On September 9, 2008, MERALCO filed a Petition for Dispute Resolution with the ERC, against
PEMC, TransCo, NPC and PSALM as a result of the congestion in the transmission system of
TransCo arising from the outage of the San Jose-Tayabas 500kV Line 2 on June 22, 2008,
followed by the outage of the 500kV 600 MVA Transformer Bank No.2 of TransCo’s San Jose,
Bulacan substation on July 11, 2008. The Petition seeks to, among others, and direct PEMC to
adopt the NPC-TOU rate or the new price determined through the price substitution methodology
of PEMC as approved by the ERC, as basis for its billing during the period of the congestion;
direct NPC and PSALM to refund the transmission line loss components of the line rentals
associated with NPC/PSALM bilateral transactions from the start of WESM operation on June 26,
2006.
In relation to said Petition, PEMC has agreed to implement the segregation of the line rental
amounts associated with the Parent Company’s bilateral contracts from the WESM energy trading
amount in accordance with the WESM Rules, as requested by the Parent Company.
- 20 -
In the meantime, the ERC issued an Order on May 4, 2011 directing PEMC to submit an
alternative methodology for the segregation of line rental into congestion cost and line losses from
the start of the WESM.
Applications for the Recovery of Pass-through Charges
On March 31, 2011, MERALCO in compliance with Resolution No. 21 (Series of 2010), filed its
consolidated application to confirm its under- or over-recoveries accumulated from June 2003 to
December 2010, docketed as ERC case no. 2011-010 CF.
The consolidated filing includes generation charge net under-recoveries of =
P1,000 million,
transmission charge net over-recoveries of =
P111 million, lifeline subsidy net under-recoveries of
=
P9 million and system loss net over-recoveries of =
P425 million, all exclusive of carrying charges.
Customers’ Refund
Customers’ refund represents unclaimed refund related to the SC decision promulgated on April
30, 2003. In June 2003, the ERC, in the implementation of the SC decision, ordered MERALCO to
refund to its customers an equivalent =
P0.167 per kWh for billings covering the period February
1994 to April 2003. The refund was implemented in four phases up to December 2010.
In an order dated February 7, 2011, the ERC approved the Parent Company’s proposal for the
extension of the SC refund process for five years up to December 31, 2015, in view of difficulties
encountered by (i) the customers in meeting the necessary documentation requirements for
approval and payment of the refund and (ii) the Parent Company in contacting or locating
customers entitled to the refund.