COVER SHEET A 1 9 9 6 1 1 5 9 3 S.E.C. Registration Number M A N I L A S U B S I D I W A T E R A R I C O M P A N Y I N C . A N D E S (Company’s Full Name) 2 F A D M . B L D G . 4 8 9 K A T I P U N A N R D . (Business Address: No. Street City / Town / Province) Atty. JHOEL P. RAQUEDAN 981-8129 Contact Person 1 2 3 1 Month Day Fiscal year Company Telephone Number SEC FORM 17- Q S T O C K 0 4 FORM TYPE Month Day Annual Meeting Secondary License Type, If Applicable A1996-11593 Dept. Requiring this Doc. Amended Articles Number/Section Total Amount of Borrowings Total No. of Stockholders Domestic Foreign ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- To be accomplished by SEC Personnel concerned File Number ____________________________________ LCU Document I.D. ____________________________________ Cashier STAMPS SECURITIES AND EXCHANGE COMMISSION SEC FORM 17-Q QUARTERLY REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE AND SRC RULE 17(2)(b) THEREUNDER 1. For the quarterly period ended June 30, 2011 2. Commission Identification No. A1996-11593 3. BIR Tax Identification No. 005-038-428 4. Exact name of issuer as specified in its charter MANILA WATER COMPANY, INC. 5. Province, country or other jurisdiction of incorporation or organization Quezon City, Philippines 6. Industry Classification Code: (SEC Use Only) 7. Address of issuer's principal office: 2F MWSS Admin. Bldg., 489 Katipunan Road, Balara, Quezon City Postal Code: 1105 8. Issuer's telephone number, including area code (632) 917-5900 local 1418 / (632) 981- 8129 9. Former name, former address and former fiscal year, if changed since last report: Not Applicable 10. Securities registered pursuant to Sections 8 and 12 of the Securities Regulation Code (SRC): Title of each class Authorized Capital Stock Common Shares (P1.00 par value) Number of Shares Outstanding Common Shares (P1.00 par value) Number of shares outstanding 3,100,000,000 2,032,826,47611 Amount of debt outstanding as of June 30, 2011 (Fixed Rate Bonds): Php 4 billion The Company has no other registered securities either in the form of shares, debt or otherwise. 11. Are any of Registrant’s securities listed on a Stock Exchange? Yes [ X ] No [ ] 12. Indicate by check mark whether the registrant: (a) has filed all reports required to be filed by Section 17 of the Code and SRC Rule 17 thereunder or Sections 11 of the RSA and RSA Rule 11(a)-1 thereunder, and Sections 26 and 141 of the Corporation Code of the Philippines, during the preceding twelve (12) months (or for such shorter period the registrant was required to file such reports) Yes [X] No [ ] (b) Has been subject to such filing requirements for the past ninety (90) days. 1 2,010,018,466 Outstanding Common Shares 22,808,010 Shares Under the Stock Ownership Plans, the listing of which has been approved in principle by the 2,032,826,476 PSE -1- Yes [X] No [ ] PART I - F FINANCIAL IINFORMATION Item I: FIN NANCIAL ST TATEMENTS S NILA WATER R COMPANY Y, INC. AND S SUBSIDIARIES MAN CONSOLIDATED D BALANCE E SHEETS As off June 30, 201 11 and Decem mber 31, 2010 0 (In Th housands) June 30, 2011 Unaud dited ASSETS Current As ssets Cash and ccash equivalen nts Short-term cash investme ents es-net Receivable Materials a and supplies-ne et ent assets Other curre Tota al Current Ass sets Non-Curre ent Assets Property, p plant and equip pment-net Service con ncession assetts-net Deferred ta ax assets Available-fo or-sale financia al assets Investmentt in joint venturre Other non-ccurrent assets-net Tota al Non-Curren nt Assets TOTAL AS SSETS LIABILITIE ES AND STOCKHOLDERS' E EQUITY Current Lia abilities Accounts and a other payables Income tax x payables Service con ncession obliga ation Payables to o stockholders Current porrtion of long-term debt Tota al Current Liab bilities Non-curren nt liabilities Long-term debt-net of currrent portion ncession obliga ation-net of current portion Service con Provision fo or real property y taxes Pension lia abilities Other non-ccurrent liabilitie es Tota al Non-currentt Liabilities P P P Stockholders' Equity Attributablle to equity ho olders of Manila Water Co., Inc Capital sstock Com mmon stock Prefe erred stock Addition nal paid-in capiital Subscrip ption receivablle Total pa aid-in capital Commo on stock options outstanding Retained earnings Apprroriated Unap ppropriated Cumulative translation n adjustment Unrealizzed gain on available for sale e Treasurry stock Noncontrolling Interest Tota al Stockholderrs' Equity TOTAL LIA ABILITIES & STOCKHOLDE S ERS' EQUITY P -2- Dec. 31, 2010 Audited 12,124,420 P 3,517,792 776,299 51,230 1,256,327 17,726,068 2,412,912 1,546,339 482,168 55,824 1,402,320 5,899,5 563 2,028,609 40,012,909 390,743 1,713,265 4,029 667,319 44,816,874 62,542,942 P 1,973,298 37,459,958 411,121 1,848,906 5,595 1,022,247 42,721,125 48,620,6 688 3,283,497 P 292,348 1,204,160 104,976 1,209,878 6,094,859 3,147,896 213,696 794,474 91,167 1,174,649 5,421,8 882 26,352,350 6,478,826 569,953 267,125 1,460,188 35,128,442 41,223,301 12,959,221 7,162,116 622,150 231,369 2,245,973 23,220,8 829 711 28,642,7 2,932,598 2,032,598 900,000 3,513,057 (98,630) 6,347,025 56,275 15,136,809 7,000,000 8,136,809 2,932,598 2,032,598 900,000 3,513,057 (127,0 074) 6,318,5 581 32,275 792 13,816,7 000 7,000,0 6,816,792 2,650 144,931 (500,0 000) 19,815,2 229 162,748 19,977,9 977 688 48,620,6 111,874 ((500,000) 21,151,983 167,658 21,319,641 62,542,942 P MAN NILA WATER R COMPANY Y, INC. AND S SUBSIDIARIES UNA AUDITED CO ONSOLIDATE ED STATEMENTS OF IN NCOME For th he Six Months Ended June e 30, 2011 an nd 2010 (In Th housands exc cept earnings s per share) QUARTER R 2 2011 REVENUE Water Environmen ntal charges Sewer Revenue fro om projects outsside East Zone Others April - Jun ne 2,937,543 3,132,478 3 2,424,957 2 2,536,229 383,371 450,084 88,546 77,445 13,167 36,409 27,502 32,311 P COSTS AND D EXPENSES Depreciation n and amortizatiion Salaries, wa ages & employe ee benefits Power, light and water Managemen nt, technical & p prof. fees Repair and m maintenance Taxes and liicenses Collection fe ees Costs of ma anagement contracts Wastewaterr costs Business meetings and rep presentation Transportatiion and travel Occupancy Water treatm ment chemicals Cost of Inve entory Sold Postage, telephone and tele egram Cost of proje ects outside easst zone Advertising Insurance Regulatory Premium on n performance bonds b Provision for doubtful accou unts Others EFORE OTHER R INCOME(EXP PENSES) INCOME BE Revenue fro om rehabilitation n works Cost of reha abilitation works Foreign currrency differentia als Foreign exchange gains(lossses) Amortization n of deferred cre edits oint venture Equity share e in net loss of jo Gain(loss) o on disposal and inventory valuation Interest inco ome Interest expense Others Mark-to-marrket gain/(losses s) on derivativess INCOME BE EFORE INCOME TAX Provision for income tax FTER INCOME TAX INCOME AF Noncontrolling Interest ME NET INCOM OTHER COMPREHENSIVE E INCOME ailable-for-sale investment i in Changes in fair value of ava equity securrities TOTAL COM MPREHENSIVE E INCOME 2010 YEAR R-TO-DATE 2011 2010 Janua ary - June 5,803,028 5,476 6,315 4,513 3,729 4,717,181 801,84 40 692 2,320 173 3,761 156,025 65,114 18 8,580 62,868 77 7,925 1,193,071 449,480 252,140 183,647 72,478 1,256 (29,268) 30,250 61,069 15,659 27,145 20,871 25,637 14,238 15,696 8,641 10,724 3,774 11,809 6,896 1,920 (43,491) 52,500 1,183,916 446,740 228,532 167,570 69,667 37,801 31,624 27,527 26,246 24,714 23,752 22,205 19,782 10,723 39,380 8,988 (22,221) 4,869 4,386 3,873 2,079 582 5,097 2,348,417 859,783 536,293 343,887 133,972 31,071 (3,777) 59,908 82,370 31,898 50,374 35,086 46,613 22,082 15,696 15,44 48 26,154 5,861 17,506 14,54 48 3,839 (42,591) 62,396 2,354 4,387 903 3,247 510 0,384 304 4,927 134 4,335 9,626 79 57 7,953 56 6,969 36 6,229 55 5,606 47 7,398 28 8,423 39 9,617 16 6,536 39 9,380 12 2,343 13 3,879 9 9,210 14 4,696 7 7,645 4 4,158 (32 2,173) 13 3,999 1,939,407 1,431,209 (1,430,030) 141,421 (158,198) 1,753,627 1,365,215 (1,365,611) 225,538 (225,153) 107 1,928 3,121 2,915 5,875 (2,915 5,695) (187 7,003) 7,807 167 107 - 2,528 12 2,335 1,982 P (542) 36,902 147,636 (481,793) 1,297 (19,354) 1,607,955 419,002 1,188,953 (3,896) 1,185,057 75,800 (330,546) (554) (4,512) 1,493,911 361,210 1,132,701 (2,258) 1,130,443 3,454,611 2,892,051 (2,890,287) (154,291) 112,905 (1,566) 36,902 205,626 (808,067) 1,297 (141,560) 2,707,621 701,502 2,006,119 (4,910) 2,001,209 P (30,953) 1,154,104 (938) 1,129,505 (34,711) 1,966,498 0.48 0.48 0.46 0.46 0.8 81 0.8 81 P 159 9,106 (656 6,555) (554) (3 3,387) 2,601 1,629 629 9,451 2,178 1,972 2,371) (2 9,807 1,969 EARNINGS PER SHARE Basic Diluted -3- 0.80 0.80 MANILA A WATER COMP PANY, INC. AND SUBSIDIARIES UNAUD DITED CONSOLID DATED STATEM MENTS OF CHAN NGES IN EQUITY Y For the Six S Months Ended d June 30, 2011 and 2010 (In Thou usands) At Januarry 1, 2011 Additions//(Deductions) Subsccription Receivable Issuance//subscriptions of sha ares Employee e share options Increase during d the period Dividendss on common shares s Dividendss on preferred shares Total com mprehensive income for the year Balance as a of June 30, 2011 At Januarry 1, 2010 Additions//(Deductions) Subsccription Receivable Issuance//subscriptions of sha ares Employee e share options Increase during d the period Dividendss on common shares s Dividendss on preferred shares Total com mprehensive income for the year Balance as a of June 30, 2010 P P Paid-up Capital 2,805,524 4 28,444 4 8 2,833,968 2,794,624 4 16,898 8 2,811,522 2 Sha areRetained Share bas sed premium Paym ments Earnings 3,513,057 32,275 13,816,792 2,003,461 24,000 (569,191) (112,000) 3,513,057 56,275 15,139,062 3,451,157 3,451,157 22,110 24,000 46,110 10,996,463 1,969,806 (467,108) (92,000) 12,407,161 Available for SaleFinancial Trea asury Assets Sto ock 147,580 (500 0,000) (35,706) 111,874 (500 0,000) 52,548 12,528 65,076 (500 0,000) 0,000) (500 Total attributable to owners of Noncontrolling interest parent Total Equity 19,815,228 8 162,748 19,977,976 28,444 28,444 4 2,027,461 2,027,461 (569,191) (569,191) (112,000 0) (112,000) (35,706 6) 2,658 (33,048) 21,154,236 6 165,406 21,319,642 16,816,902 2 8 16,898 6 1,993,806 (467,108 8) (92,000 0) 8 12,528 18,281,026 6 153,824 2,371 156,195 16,970,726 16,898 1,993,806 (467,108) (92,000) 14,899 18,437,221 MAN NILA WATER R COMPANY Y, INC. AND S SUBSIDIARIES UNA AUDITED CO ONSOLIDATE ED STATEMENTS OF CA ASH FLOWS S For th he Six Months Ended June e 30, 2011 an nd 2010 (In Th housands) 2011 20 010 A of June As CASH FLO OWS FROM OP PERATING AC CTIVITIES Net Income e before income e tax Adjustmentts to reconcile net n income to operating o income before changes in working ca apital a Depreciation and amortization able losses Provvision for proba Interrest Expense-n net of amount capitalized c Sharre based paym ments Interrest Income Operating in ncome before changes in wo orking capital Changes in operatiing assets and d liabilities Decrease(inccrease) in Receiva ables Materialss and supplies Other cu urrent assets Increase(Deccrease) in: Accountts and other pa ayables Payable es to stockholde ers Net cash ge enerated from operations Income Taxxes Paid Net Cash provided p by ope erating activitiess CASH FLO OW FROM INV VESTING ACTIIVITIES Interest received o: Additions to Prop perty, plant and d equipment-ne et Concession Assetss Shorrt-term cash investments Available-for-sale fiinancial assetss er noncurrent assets a Othe Net cash ussed in investing g activities CASH FLO OW FROM FINA ANCING ACTIIVITIES Customers guaranty & oth her deposits es Other non-ccurrent liabilitie Loan Paym ments Loan Availm ments Payments of o Dividends Service con ncession obliga ation Interest Paid o shares Proceeds frrom issuance of Net Cash provided p by fina ancing activitiess NET INCREASE IN CASH H AND CASH EQUIVALENT TS ASH EQUIVAL LENTS, BEGIN NNING OF YE EAR CASH & CA CASH AND D CASH EQUIV VALENTS, END OF YEAR P P 2,707,,621 2 2,601,629 859,,783 (42,,591) 808,,067 24,,000 (205,,625) 4,151,,255 903,247 (32,173) 656,555 24,000 (159,106) 3 3,994,152 (295,,589) 4,,593 211,,087 (186,779) (16,996) (758,003) 172,,038 13,,809 4,257,,193 (595,,506) 3,661,,687 (101,633) (37,857) 2 2,892,884 (569,090) 2 2,323,794 163,,763 190,441 (320,,963) (3,043,,666) (1,971,,453) 100,,001 172,,731 (4,899,,587) (178,203) 3,007,805) (3 2 2,237,096 (20,862) (23,256) (802,589) 23,,097 (779,,257) (568,,338) 14,139,,665 (681,,128) (615,,953) (597,,122) 28,,444 10,949,,408 9,711,,508 2,912 2,412 12,124,,420 32,259 178,573 (538,215) 334,685 (592,442) (92,523) (300,026) 16,898 (960,791) 560,414 4,037,841 4 4,598,255 NOTES TO THE INTERIM FINANCIAL STATEMENTS A. The interim financial statements as of June 30, 2011 include all adjustments, normal and recurring, which are necessary to present fairly the results for the period shown. The results for the interim periods are not necessarily indicative of results for the full year. B. The accompanying financial statements have been prepared under the historical cost convention method and in accordance with accounting principles generally accepted in the Philippines. Accounting principles and policies applied for the quarter ended June 30, 2011 are the same as those applied in the preceding calendar year, except as stated in the succeeding sections. C. The Manila Water Company, Inc. (the “Company” or the “Parent Company”) does not have any significant seasonality or cyclicality in the interim operation, except for the usually higher demand during the months of April and May. D. Aside from the normal water and wastewater capital expenditure disbursements, the Company did not acquire assets or incur liabilities that are material in amount for the period ended June 30, 2011. E. Future events may occur which may cause the assumptions used in arriving at the estimates to change. The effect of any change in estimates will be recorded in the financial statements as they become reasonably determinable. F. Business segment information is reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources among operating segments. The segment information is reported based on the nature of service the Company and its subsidiaries is providing and its geographical location. G. There were no known material events subsequent to the end of the interim period that have not been reflected in the financial statements for the interim period, or disclosed in the Notes to the Financial Statements. H. The Company has not been subjected and is not subject to any bankruptcy, receivership or similar proceedings. It has not been subject of any material reclassification, purchase or sale of any significant amount of assets not in the ordinary course of business. I. The Company is contingently liable for lawsuits or claims filed by third parties (substantially laborrelated) which are pending decision by the courts or are under negotiation, the outcomes of which are not presently determinable. The Company has been advised by its legal counsel that it is possible, but not probable, that the action will succeed and accordingly, no provisions for probable losses on these cases were recognized. DISCUSSION AND ANALYSIS OF MATERIAL EVENT/S AND UNCERTAINTIES A. There were no known trends, demands, commitments, events or uncertainties that have material impact on the Company’s liquidity. B. There were no known events that would trigger the Company to record contingent financial obligation that would cause a material effect. C. There were no off-balance sheet transactions, arrangements, obligations created during the reporting period. D. The Company expects P = 11.7 billion capital expenditures in 2011 for the rehabilitation and construction of facilities to improve water and sewer services in the East Zone Service Area. These will be funded from the current cash reserves, internal funds generation and proceeds of available loan facilities. -6- E. There were no known trends, events or uncertainties that have had or that are reasonably expected to have a material favorable or unfavorable impact on the Company’s net sales/revenues/income from operations. F. There were no significant changes in income or loss arising from the non operating activities of the Company. BASIS OF PREPARATION The consolidated financial statements of the Company and its subsidiaries (collectively the “Group”) have been prepared using the historical cost basis, except for available-for-sale (AFS) financial assets and derivative financial instruments that have been measured at fair value. The Company and its subsidiaries, Northern Waterworks and Rivers of Cebu, Inc., Manila Water Total Solutions, Inc., Manila Water International Solutions, Inc., AAAWater Corporation, Boracay Island Water Company, Inc., Manila Water Asia Pacific Pte. Ltd and Jindal Manila Water Development Co. Ltd. (collectively, the “Subsidiaries”),use presentation and functional currency that are denominated in the Philippine Peso (P = ). Our consolidated financial statements include the financial statements of the Company and the following subsidiaries. Percentage of Ownership Name of Subsidiary Location Principal Activity 2011 2010 Manila Water International Solutions Inc. (MWIS) Philippines Management of waterworks, waste waterworks and treatment facilities 100 100 Manila Water Total Solutions Corp. (MWTS) Philippines Management and consultancy on water, wastewater and environmental projects 100 100 AAAWater Corporation (AWC) Philippines Concession services to water and wastewater utilities 100 100 Philippines Concession services to water and wastewater utilities 70 70 Northern Waterworks and Rivers of Cebu, Inc. (NWRC) Philippines Construction and management of waterworks, wastewater and treatment facilities 90 90 Boracay Island Water Company, Inc. (BIWC) Philippines Concession services to water and wastewater utilities 80 80 Singapore Investment holding 100 100 Singapore Investment holding 100 100 India Develop new business and enter into contractual arrangement in the field of water supply, wastewater services and environmental services 50 50 Laguna AAAWater Corp. (LAWC) Manila Water Asia Pacific Pte.Ltd (MWAP) Manila Water South Asia Holding Pte.Ltd (MWSAH) Jindal Manila Water Development Co. Ltd MWIS was registered with the Securities and Exchange Commission (SEC) on October 13, 2006. It changed its registered name from West Zone Water Services Inc. on May 29, 2008. Noncontrolling interests represent the portion of the profit or loss and net assets in NWRC not wholly owned and are represented separately in the consolidated statement of income and changes in equity and within the equity section in the consolidated balance sheet, separately from the Group’s equity. -7- Transactions with noncontrolling interests are handled in the same way as transactions with the external parties. The Parent Company purchased 100% ownership of AAAWater Corporation (AWC) from Asia Water Limited and All Asia Development Corporation on July 20 and 24, 2009, respectively. AWC owned 70% of Laguna AAAWater Corporation (LAWC), a company formed via a joint venture entered into by AWC and the local government of the Province of Laguna (POL), with shareholdings of 70% and 30% respectively. Boracay Island Water Company, Inc. (BIWC) was incorporated and registered with SEC on December 7, 2009. BIWC is 80% owned by the Company and 20% by Philippine Tourism Authority (PTA)2. BIWC entered into a Concession Agreement with PTA on December 17, 2009 as concessionaire for a 25 year concession to manage, operate and refurbish all fixed assets required to provide water and wastewater services to the island. Manila Water Asia Pacific Pte. Ltd. (MWAP) and Manila Water South Asia Holding Pte. Ltd. (MWSAH) were incorporated on April 29, 2010 and July 5, 2010 respectively as investment holding company. MWAP is 100% owned by the Company and MWSAH is 100% owned by MWAP. Jindal Manila Water Development Co. Ltd. (JMWDC) was incorporated and registered on May 3, 2010 at Delhi, India. JMWDC is equally owned by the Company and Jindal Water Infrastructure Ltd. ACCOUNTING POLICIES AND DISCLOSURES Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less from dates of acquisition and that are subject to an insignificant risk of change in value. Other short-term cash placements are classified as short-term cash investments. Short-term Cash Investments Short term cash investments are short-term placements with maturities of more than three months but less than one (1) year from the date of acquisition. These earn interest at the respective short-term investment rates. Financial Assets and Financial Liabilities Date of recognition The Group recognizes a financial asset or a financial liability in the consolidated statement of financial position when it becomes a party to a particular instrument. Purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace are recognized on the settlement date. Derivative instruments are recognized on trade date basis. Initial recognition of financial instruments All financial assets are initially recognized at fair value. Except for financial assets at fair value through profit or loss (FVPL), the initial measurement of financial assets includes transaction costs. The Group classifies its financial assets in the following categories: financial assets at FVPL, held-to-maturity (HTM) investments, AFS financial assets, and loans and receivables. The Group classifies its financial liabilities as financial liabilities at FVPL and other financial liabilities. The classification depends on the purpose for which the investments were acquired and whether these are quoted in an active market. Management determines the classification of its investments at initial recognition and, where allowed and appropriate, reevaluates such designation at every reporting date. Financial instruments are classified as liability or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or a component that is a financial liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity net of any related income tax benefits. 2 This is now called Tourism Infrastructure and Enterprise Zone Authority (TIEZA) -8- Determination of fair value The fair value for financial instruments traded in active markets at the financial reporting date is based on its quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation methodologies. Valuation methodologies include net present value techniques, comparison to similar instruments for which market observable prices exist, option pricing models, and other relevant valuation models. Day 1 profit For transactions other than those related to customers’ guaranty and other deposits, where the transaction price in a non-active market is different from the fair value from other observable current market transactions in the same instruments or based on a valuation technique whose variables include only data from observable market, the Group recognizes the difference between the transaction price and fair value (a ‘Day 1’ profit) in the consolidated statement of comprehensive income under “Other income” unless it qualifies for recognition as some other type of asset. In cases where use is made of data which is not observable, the difference between the transaction price and model value is only recognized in the consolidated statement of comprehensive income when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the ‘Day 1’ profit amount. Derivatives recorded at FVPL An embedded derivative is separated from the host contract and accounted for as a derivative if all of the following conditions are met: a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and c) the hybrid or combined instrument is not recognized at FVPL. Embedded derivatives are measured at fair value with fair value changes being reported through profit or loss, and are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. The Group determines whether a modification in the cash flows is significant by considering the extent to which the expected future cash flows associated with the embedded derivative, the host contract, or both have changed and whether the change is significant relative to the previously expected cash flows from the contract. The Group has certain derivatives that are embedded in the host financial such as the peso bond. Financial assets at FVPL Financial assets at FVPL include financial assets held for trading and financial assets designated upon initial recognition as at FVPL. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments or a financial guarantee contract. Gains or losses on investments held for trading are recognized in profit or loss. HTM investments HTM investments are quoted nonderivative financial assets with fixed or determinable payments and fixed maturities for which the Group’s management has the positive intention and ability to hold to maturity. Where the Group sells other than an insignificant amount of HTM investments, the entire category would be tainted and reclassified as AFS financial assets. After initial measurement, these investments are measured at amortized cost using the effective interest rate method, less impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an -9- integral part of the effective interest rate. The amortization is included in “Interest income” account in the consolidated statement of comprehensive income. Gains and losses are recognized in income when the HTM investments are derecognized or impaired, as well as through the amortization process. As of June 30, 2011 and December 31, 2010, no financial assets have been designated as HTM. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. These are not entered into with the intention of immediate or short-term resale and are not designated as AFS financial assets or financial assets at FVPL. These are included in current assets if maturity is within twelve (12) months from the reporting date; otherwise, these are classified as noncurrent assets. This accounting policy relates to the consolidated statement of financial position captions “Cash and cash equivalents”, “Short-term cash investments”, and “Receivables”. After initial measurement, loans and receivables are subsequently measured at amortized cost using the effective interest rate method, less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. The amortization is included in “Interest income” in the consolidated statement of comprehensive income. The losses arising from impairment of such loans and receivables are recognized in “Provision for probable losses” in the consolidated statement of comprehensive income. AFS financial assets AFS financial assets are those which are designated as such or do not qualify to be classified as financial assets at FVPL, HTM investments or loans and receivables. These are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. These include equity investments, money market papers and other debt instruments. After initial measurement, AFS financial assets are subsequently measured at fair value. The effective yield component of AFS debt securities, as well as the impact of restatement on foreign currency-denominated AFS debt securities, is reported in earnings. The unrealized gains and losses arising from the fair valuation of AFS financial assets are excluded net of tax from net income and are reported as “Unrealized gain on AFS financial assets” under other comprehensive income. When the investment is disposed of, the cumulative gain or loss previously recognized under other comprehensive income is recognized as “Other income” in profit and loss. Where the Group holds more than one investment in the same security, these are deemed to be disposed of on a first-in first-out basis. Interest earned on holding AFS financial assets are reported as interest income using the effective interest rate. Dividends earned on holding AFS financial assets are recognized under the “Other income” account when the right of the payment has been established. The losses arising from impairment of such investments are recognized as provisions for impairment losses in profit and loss. Fair value of AFS financial assets which cannot be measured reliably because of lack of reliable estimates of future cash flows and discount rates necessary to calculate the fair value of unquoted equity instruments, are carried at cost. The Group’s AFS financial assets are presented as noncurrent in the consolidated statements of financial position. Other financial liabilities Other financial liabilities include short-term and long-term debts. All loans and borrowings are initially recognized at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, short-term and long-term debts are subsequently measured at amortized cost using the effective interest method. - 10 - Gains and losses are recognized under the “Other income” and “Other expenses” accounts in the consolidated statement of comprehensive income when the liabilities are derecognized or impaired, as well as through the amortization process under the “Interest expense” account. Customers’ Guaranty and Other Deposits Customers’ guaranty and other deposits are initially measured at fair value. After initial recognition, these deposits are subsequently measured at amortized cost using the effective interest rate method. Amortization of customers’ guaranty and other deposits are included under “Interest expense” in the consolidated statement of comprehensive income. The difference between the cash received and its fair value is recognized as “Deferred credits”. Deferred credits are amortized over the remaining concession period using the effective interest rate method. Derecognition of Financial Assets and Liabilities Financial Assets A financial asset (or, where applicable, a part of a financial asset or part of a group of financial assets) is derecognized where: 1. the rights to receive cash flows from the asset have expired; 2. the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or 3. the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained the risk and rewards of the asset but has transferred the control of the asset. Where the Group has transferred its rights to receive cash flows from an asset or has entered into a passthrough arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged or cancelled or has expired. Where an existing financial liability is replaced by another financial liability from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss. Impairment of Financial Assets The Group assesses at each financial reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Loans and receivables For loans and receivables carried at amortized cost, the Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses for impairment. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be recognized, are not included in a collective assessment for impairment. - 11 - Evidence of impairment may include noncollection of the Group’s receivables, which remain unpaid after 30 days from bill generation. The Group shall provide the customer with not less than seven days’ prior written notice before any disconnection. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred). The carrying amount of the asset is reduced through use of an allowance account and the amount of loss is charged to profit or loss. Interest income continues to be recognized based on the original effective interest rate of the asset. Receivables, together with the associated allowance accounts, are written off when there is no realistic prospect of future recovery. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in profit or loss, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of such credit risk characteristics as industry, customer type, customer location, past-due status and term. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience. AFS financial assets For AFS financial assets, the Group assesses at each financial reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity investments classified as AFS financial assets, this would include a significant or prolonged decline in the fair value of the investments below their costs. Where there is evidence of impairment, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the consolidated statement of comprehensive income - is removed from other comprehensive income and recognized in profit and loss. Impairment losses on equity investments are not reversed through profit and loss. Increases in fair value after impairment are recognized directly in other comprehensive income. In the case of debt instruments classified as AFS financial assets, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount and is accrued based on the rate of interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part of “Interest income” in the consolidated statement of comprehensive income. If, in subsequent year, the fair value of a debt instrument increased and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit and loss, the impairment loss is reversed through profit and loss. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. Materials and Supplies Materials and supplies are valued at the lower of cost or net realizable value (fair value less costs to sell). Cost is determined using the moving average method. - 12 - Property and Equipment Property and equipment, except land, are stated at cost less accumulated depreciation and amortization and any impairment in value. Land is stated at cost less any impairment in value. The initial cost of property and equipment comprises its purchase price, including import duties, taxes and any directly attributable costs of bringing the property and equipment to its working condition and location for its intended use, including capitalized borrowing costs incurred during the construction period. Expenditures incurred after the property and equipment have been put into operation, such as repairs and maintenance, are normally charged to operations in the period in which the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as additional cost of the related property and equipment. Depreciation and amortization of property and equipment commences once the property and equipment are available for use and are calculated on a straight-line basis over the estimated useful lives (EUL) of the property and equipment as follows: Office furniture and equipment Transportation equipment 3 to 5 years 5 years Leasehold improvements are amortized over the EUL of the improvements or the term of the lease, whichever is shorter. Technical equipments are amortized over the EUL or the term of the related management contract, whichever is shorter. The EUL and depreciation and amortization method are reviewed periodically to ensure that the period and method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment. When property and equipment is retired or otherwise disposed of, the cost and the related accumulated depreciation and amortization and accumulated impairment, if any, are removed from the accounts and any resulting gain or loss is credited to or charged against current operations. Service Concession Arrangement The Group accounts for its concession arrangement with MWSS, Province of Laguna (POL), a local government unit organized and existing under Philippine laws, and PTA, under the Intangible Asset model as it receives the right (license) to charge users of public service. The Service Concession Asset (SCA) is amortized using the straight-line method over the life of the concession. In addition, the Parent Company recognizes and measures revenue from rehabilitation works in accordance with PAS 11 and PAS 18 for the services it performs. Investment in Joint Venture The Group has an interest in a joint venture which is a jointly controlled entity, whereby the venturers have a contractual arrangement that establishes joint control over the economic activities of the entity. The agreement requires unanimous consent for financial and operating decisions among the venturers. The Group recognizes its interest in the joint venture using the equity method. Under the equity method, the investment in joint venture is initially recognized at cost and the carrying amount is increased or decreased to recognize the venturer's share of the profit or loss of the joint venture after the date of acquisition. The venturer's share of the profit or loss of the joint venture is recognized in the venturer's profit or loss. Impairment of Nonfinancial Assets An assessment is made at each balance sheet date to determine whether there is any indication of impairment of any long-lived assets, or whether there is any indication that an impairment loss previously recognized for an asset in prior years may no longer exist or may have decreased. If any such indication exists, the asset’s recoverable amount is estimated. An asset’s recoverable amount is calculated as the higher of the asset’s value in use or its net selling price. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged to operations in the year in which it arises. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount of an asset, however, not to an amount higher than the carrying amount that would have been determined (net of any accumulated depreciation and amortization), had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is credited to current operations. Revenue Recognition Water and sewer revenue are recognized when the related water and sewerage services are rendered. Water and sewerage are billed every month according to the bill cycles of the customers. As a result of bill cycle cut-off, monthly service revenue earned but not yet billed at end of the month are estimated and accrued. These estimates are based on historical consumption of the customers. Eighteen percent (18%) of the water revenue are recognized as environmental charges as provided for in the Agreement. Interest income is recognized as it accrues, taking into account the effective yield of the assets. Revenue from rehabilitation works is recognized and measured by the Group in accordance with PAS 11 and PAS 18 for the services it performs. Costs related to rehabilitation works is recorded as part of SCA. When the Group provides construction or upgrade services, the consideration received or receivable is recognized at its fair value. The Company accounts for revenue and costs relating to operation services in accordance with PAS 18. Revenue from pipeworks and management contracts are recognized using the percentage of completion method of accounting, measured principally on the basis of the physical proportion of the contract work to the estimated completion of a project. Consultancy fees are recognized when the related services are rendered. Other customer related fees such as reconnection and disconnection fees are recognized when these services have been rendered. The Group assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent. The Group has concluded that it is acting as a principal in all of its revenue arrangements. Foreign Currency-Denominated Transactions Foreign exchange differentials arising from foreign currency transactions are credited or charged to operations. As approved by the MWSS Board of Trustees (BOT) under Amendment No. 1 of the Concession Agreement, the following will be recovered through billings to customers: a. Restatement of foreign currency-denominated loans; b. Excess of actual Concession Fee payments over the amounts of Concession Fees translated using the base exchange rate assumed in the business plan approved every rate rebasing exercise (P = 44.00 starting January 1, 2008 and P = 51.86 starting January 1, 2003) c. Excess of actual interest payments translated at exchange spot rates on settlement dates over the amounts of interest translated at drawdown rates; and d. Excess of actual payments of other financing charges relating to foreign currency-denominated loans translated at exchange spot rates on settlement dates over the amount of other financing charges translated at drawdown rates. - 14 - In view of the automatic reimbursement mechanism, the Parent Company recognized a deferred FCDA (included as part of “Other noncurrent assets” or “Accounts and other payables” account in the balance sheet) with a corresponding credit (debit) to FCDA revenues for the unrealized foreign exchange losses (net of foreign exchange gains) which have not been billed or which will be refunded to the customers. The write-off of the deferred FCDA or reversal of deferred credits pertaining to concession fees will be made upon determination of the rebased foreign exchange rate which is assumed in the business plan approved by the RO during the latest Rate Rebasing exercise, unless indication of impairment of the deferred FCDA would be evident at an earlier date. Borrowing Costs Borrowing costs that are directly attributable to the acquisition, development, improvement and construction of fixed assets (including costs incurred in connection with rehabilitation works) that are recorded as SCA are capitalized as part of the cost of fixed assets. All other borrowing costs are expensed in the period they occur. The Group uses the general borrowings approach when capitalizing borrowing costs wherein the amount of borrowing costs eligible for capitalization is determined by applying a capitalization rate to the expenditures on that asset. The capitalization of those borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Capitalization of borrowing costs ceases when substantially all activities necessary in preparing the related assets for their intended use are complete. Borrowing costs include interest charges and other related financing charges incurred in connection with the borrowing of funds. Premiums and/or discounts on long-term debt are included in the “Long-term debt” account in the Group’s consolidated statement of financial position and are amortized using the effective interest rate method. Retirement Cost Retirement cost is actuarially determined using the projected unit credit method. The projected unit credit method reflects the services rendered by the employees to the date of valuation and incorporates assumptions concerning employees’ projected salaries. Actuarial valuations are conducted with sufficient regularity, with option to accelerate when significant changes to underlying assumptions occur. Retirement cost includes current service cost, interest cost, actuarial gains and losses and the effect of any curtailment or settlement. The liability recognized by the Group in respect of the defined benefit pension plan is the present value of the defined benefit obligation at the balance sheet date together with adjustments for unrecognized actuarial gains or losses and past service costs that shall be recognized in later periods. The defined benefit obligation is calculated by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using risk-free interest rates of government bonds that have terms to maturity approximating to the terms of the related pension liabilities or applying a single weighted average discount rate that reflects the estimated timing and amount of benefit payments. Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses of the plan at the end of the previous reporting year exceeded 10% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These actuarial gains and losses are recognized over the expected average remaining working lives of the employees participating in the plan. Share-based Payment Transactions Certain employees and officers of the Group receive remuneration in the form of share-based payment transactions, whereby they render services in exchange for shares or rights over shares (‘equity-settled transactions’) The cost of equity-settled transactions with employees is measured by reference to the fair value at the date of grant. The fair value is determined by using the Black-Scholes model. The cost of equity-settled transactions is recognized in the consolidated statement of income, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (‘vesting date’). The - 15 - cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the number of awards that, in the opinion of the directors of the Group at that date, will ultimately vest. No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied. Where the terms of an equity-settled award are modified, as a minimum, an expense is recognized as if the terms had not been modified. An additional expense is recognized for any increase in the value of the equity-settled award (measured at the date of modification). The total increase in value of the equitysettled award is amortized over the remaining vesting period. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognized for the award is recognized immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share Treasury Stock Treasury stock is recorded at cost and is presented as a deduction from equity. When these shares are reissued, the difference between the acquisition cost and the reissued price is charged/credited to additional paid-in capital. When the shares are retired, the capital stock account is reduced by its par value and the excess of cost over par value upon retirement is debited to additional paid-in capital to the extent of the specific or average additional paid-in capital when the shares were issued and to retained earnings for the remaining balance. Income Tax Current tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantially enacted by the balance sheet date. Deferred tax Deferred income tax is provided, using the balance sheet liability method, for all temporary differences, with certain exceptions, at the balance sheet date between the tax bases of assets and liabilities and its carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognized for all taxable temporary differences with certain exceptions. Deferred income tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable income will be available against which the deferred income tax asset can be used or when there are sufficient taxable temporary differences which are expected to reverse in the same period as the expected reversal of the deductible temporary differences. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the deferred income tax assets to be utilized. Unrecognized deferred income tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable income will allow all or part of the deferred income tax assets to be recovered. Deferred income tax assets and liabilities are measured at the tax rate that is expected to apply in the year when the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantially enacted as of the balance sheet date. - 16 - Deferred tax assets and liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority. Earnings per Share (EPS) Basic EPS is computed by dividing net income applicable to common and participating preferred stock by the weighted average number of common and equivalent preferred shares outstanding during the year and adjusted to give retroactive effect to any stock dividends declared and changes to preferred share participation rate during the period. The participating preferred shares participate in the earnings at a rate of 1/10 of the dividends paid to a common share. Diluted EPS is computed by dividing earnings attributable to common and participating preferred shares by the weighted average number of common shares outstanding during the period, after giving retroactive effect of any stock dividends during the period and adjusted for the effect of dilutive options. Outstanding stock options will have a dilutive effect under the treasury stock method only when the average market price of the underlying common share during the period exceeds the exercise price of the option. Where the effects of the assumed exercise of all outstanding options have anti-dilutive effect, basic and diluted EPS are stated at the same amount. Assets Held in Trust Assets which are owned by MWSS and POL but are operated by the Group under the Group’s concession agreement are not reflected in the consolidated statement of financial position but are considered as Assets Held in Trust. Provisions A provision is recognized when the Group has: (a) a present obligation (legal or constructive) as a result of a past event; (b) it is probable (i.e. more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessment of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as an interest expense. Where the Group expects a provision to be reimbursed, the reimbursement is not recognized as a separate asset but only when the reimbursement is virtually certain. Provisions are reviewed at each financial reporting date and adjusted to reflect the current best estimate. Events After Balance Sheet Date Any post year-end event up to the date of the auditor’s report that provide additional information about the Group’s position at the balance sheet date (adjusting events) is reflected in the consolidated financial statements. Any post year-end event that is not an adjusting event is disclosed in the notes to the consolidated financial statements when material. Contingencies Contingent liabilities are not recognized in the consolidated financial statements. These are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but disclosed when an inflow of economic benefits is probable. MANAGEMENT’S JUDGEMENTS AND USE OF ESTIMATES The preparation of the accompanying consolidated financial statements in conformity with PFRS requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of relevant facts and circumstances as of the date of the consolidated financial statements. Actual results could differ from such estimates. - 17 - Management believes the following represent a summary of these significant estimates and judgments: Service Concession Arrangement In applying Philippine Interpretation IFRIC 12, the Group has made a judgment that the Concession Agreement qualifies under the Intangible Asset model. Impairment of AFS financial assets The Group treats AFS financial assets as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is ‘significant’ or ‘prolonged’ requires judgment. The Group treats ‘significant’ generally as 20% or more and ‘prolonged’ as greater than six (6) months for quoted securities. In addition, the Group evaluates other factors, including the future cash flows and the discount factors of these securities. Investments in Subsidiaries The Parent Company considers Laguna AAAWater Company (LAWC) and Boracay Island Water Company (BIWC) as it subsidiaries because it exercises control over the said entities. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities and is presumed to exist when, directly or indirectly, it holds more than half of the issued share capital, or controls more than half of the voting power, or exercises control over the operation and management of the entity. Use of Estimates Key assumptions concerning the future and other sources of estimation and uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Revenue and Cost Recognition The Group’s revenue recognition policies require management to make use of estimates and assumptions that may affect the reported amounts of revenue and costs. The Group’s revenue from pipeworks and management contracts recognized based on the percentage of completion are measured principally on the basis of the estimated completion of a physical proportion of the contract work, and by reference to the actual costs incurred to date over the estimated total costs of the project. Estimating allowance for doubtful accounts The Group maintains allowance for doubtful accounts based on the results of the individual and collective assessments under PAS 39. Under the individual assessment, the Group is required to obtain the present value of estimated cash flows using the receivable’s original effective interest rate. Impairment loss is determined as the difference between the receivable’s carrying amount and the computed present value. Factors considered in individual assessment are payment history, past due status and term. The collective assessment would require the Group to group its receivables based on the credit risk characteristics (industry, customer type, customer location, past-due status and term) of the customers. Impairment loss is then determined based on historical loss experience of the receivables grouped per credit risk profile. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for the individual and collective assessments are based on management's judgment and estimate. Therefore, the amount and timing of recorded expense for any period would differ depending on the judgments and estimates made for the year. Estimating useful lives of property and equipment The Group estimates the useful lives of its property and equipment based on the period over which the assets are expected to be available for use. The Group reviews annually the estimated useful lives of property and equipment based on factors that include asset utilization, internal technical evaluation, technological changes, environmental and anticipated use of the assets tempered by related industry benchmark information. It is possible that future results of operations could be materially affected by changes in the Group’s estimates brought about by changes in the factors mentioned. A reduction in the - 18 - estimated useful lives of property and equipment would increase depreciation and amortization and decrease noncurrent assets. Asset impairment The Group assesses the impairment of assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The factors that the Group considers important which could trigger an impairment review include the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of usage of the acquired assets or the strategy for the Group’s overall business; and significant negative industry or economic trends. As described in the accounting policy, the Group estimates the recoverable amount as the higher of the net selling price and value in use. In determining the present value of estimated future cash flows expected to be generated from the continued use of the assets, the Group is required to make estimates and assumptions regarding the expected future cash generation of the assets (property and equipment, concession assets, and other noncurrent assets), discount rates to be applied and the expected period of benefits. Deferred tax assets The Group reviews the carrying amounts of deferred income taxes at each balance sheet date and reduces deferred tax assets to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the deferred tax assets to be utilized. However, there is no assurance that the Group will generate sufficient taxable income to allow all or part of the deferred tax assets to be utilized. Furthermore, the Group does not recognize certain deferred taxes on deductible temporary differences where doubt exists as to the tax benefits they will bring in the future. Share-based payments The expected life of the options is based on the expected exercise behavior of the stock option holders and is not necessarily indicative of the exercise patterns that may occur. The expected volatility is based on the average historical price volatility of several water utility companies within the Asian region which may be different from the expected volatility of the shares of stock of the Group. Pension and other retirement benefits The determination of the obligation and cost of pension and other retirement benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts which include, among others, discount rate, expected return on plan assets and salary increase rate. While the Group believes that the assumptions are reasonable and appropriate, significant differences in actual experience or significant changes in assumptions materially affect retirement obligations. Fair value of financial instruments Where the fair values of financial assets and financial liabilities recorded in the consolidated balance sheets or disclosed in the rates cannot be derived from active markets, they are determined using internal valuation techniques using generally accepted market valuation models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, estimates are used in establishing fair values. These estimates may include considerations of liquidity, volatility, and correlation Derivative asset on bond call option was valued using the Black’s option model. Valuation inputs such as discount rate were based on credit adjusted spot rate as of value date while interest rate volatility was computed based on historical rates or data. - 19 - Contingencies The Group is currently involved in various legal proceedings. The estimate of the probable costs for the resolution of these claims has been developed in consultation with internal and outside counsels handling the defense in these matters and is based upon an analysis of potential results. The Group is contingently liable for lawsuits or claims filed by third parties (substantially labor-related and civil cases) which are either pending decision by the courts or are under negotiation, the outcomes of which are not presently determinable. The Group has been advised by its internal and outside counsels that it is possible, but not probable, the action will succeed and accordingly, no provision for probable losses on these cases was recognized. The Group currently does not believe these proceedings will have a material adverse affect on the Group’s financial position. It is possible, however, that future results of operations could be materially affected by changes in the estimates or in the effectiveness of the strategies relating to these proceedings. COMMITMENTS Parent Company’s Concession Agreement The significant commitments of the Parent Company under the Agreement and Extension are as follows: a. To pay MWSS concession fees; b. To post a performance bond, bank guarantee or other security acceptable to MWSS amounting to US$70.00 million in favor of MWSS as a bond for the full and prompt performance of the Parent Company’s obligations under the Agreement. The aggregate amounts drawable in one or more installments under such performance bond during the Rate Rebasing Period to which it relates are set out below. Rate Rebasing Period First (August 1, 1997 - December 31, 2002) Second (January 1, 2003 - December 31, 2007) Third (January 1, 2008 - December 31, 2012) Fourth (January 1, 2013 - December 31, 2017) Fifth (January 1, 2018 - December 31, 2022) Sixth (January 1, 2013 - December 31, 2027) Seventh (January 1, 2028 - December 31, 2032) Eighth (January 1, 2033 - May 6, 2037) Aggregate amount drawable under performance bond (in US$ millions) US$70 70 60 60 50 50 50 50 Within 30 days from the commencement of each renewal date, the Parent Company shall cause the performance bond to be reinstated in the full amount set forth above as applicable for that year. Upon not less than 10-day written notice to the Parent Company, MWSS may make one or more drawings under the performance bond relating to a Rate Rebasing Period to cover amounts due to MWSS during that period; provided, however, that no such drawing shall be made in respect of any claim that has been submitted to the Appeals Panel for adjudication until the Appeals Panel has handed down its decision on the matter. In the event that any amount payable to MWSS by the Group is not paid when due, such amount shall accrue interest at a rate equal to that of a 364-day Treasury Bill for each day it remains unpaid; c. To increase its annual share in MWSS operating budget by 100% from P = 198 million to P = 395 million, subject to annual CPI as a result of the Extension; d. To meet certain specific commitments in respect of the provision of water and sewerage services in the East Zone, unless deferred by MWSS Regulatory Office (MWSS-RO) due to unforeseen circumstances or modified as a result of rate rebasing exercise; - 20 - e. To operate, maintain, renew and, as appropriate, decommission facilities in a manner consistent with the National Building Standards and best industrial practices so that, at all times, the water and sewerage system in the East Zone is capable of meeting the service obligations (as such obligations may be revised from time to time by the MWSS-RO following consultation with the Parent Company); f. To repair and correct, on a priority basis, any defect in the facilities that could adversely affect public health or welfare, or cause damage to persons or third party property; g. To ensure that at all times, the Parent Company has sufficient financial, material and personnel resources available to meet its obligations under the Agreement; and h. To ensure that no debt or liability that would mature after the life of the Agreement will be incurred unless with the approval of MWSS Failure of the Parent Company to perform any of its obligations that is deemed material by MWSS-RO may cause the Agreement to be terminated. LAWC’s Concession Agreement The significant commitments of LAWC under its concession agreement with POL are as follows: a. To pay POL concession fees; b. To manage, occupy, operate, repair, maintain, decommission, and refurbish the transferred facilities; c. To design, construct and commission the new facilities during the cooperation period; d. To provide and manage the services; e. To bill and collect payment from the customer for all services; f. To extract raw water exclusively from all sources of raw water; and g. To negotiate in good faith with POL any amendment or supplement to the concession agreement to establish, operate and maintain wastewater facilities if doing such is financially and economically feasible. BIWC’s Concession Agreement The significant commitments of BIWC under its concession agreement with PTA are as follows: a. To meet certain specific commitments in respect of the provision of water and sewerage services in the service area, unless deferred by the PTA Regulatory Office (PTA-RO) due to unforeseen circumstances or modified as a result of rate rebasing exercise; b. To pay concession fees, subject to the following provisions: 1. Assumption of all liabilities of the Boracay Water Supply and Sewerage System (BWSS) as of Commencement Date and service such liabilities as they fall due. BWSS has jurisdiction, supervision and control over all waterworks and sewerage systems with the island of Boracay prior to commencement date. The servicing of such liabilities shall be applied to the concession fees; 2. Payment of an amount equivalent to 5% of the monthly gross revenue of BIWC, inclusive of all applicable taxes. Such payments shall be subject to adjustment based on the gross revenue of BIWC as reflected in its separate financial statements; 3. Provision of the amount of the PTA BOD’s approved budget in 2010, payable in 4 installments at the first month of each quarter and not exceeding: - 21 - Month January April July October Maximum Amount P = 5,000,000 4,000,000 3,000,000 3,000,000 4. Provision of the annual operating budget of the PTA-RO, payable in 2 equal tranches in January and July and not exceeding: Year 2011 2012 2013 and beyond c. Maximum Amount P = 15,000,000 20,000,000 20,000,000, subject to annual CPI adjustments To establish, at Boracay Island, a PTA-RO building with staff house, the cost of which should be reasonable and prudent; d. To pay an incentive fee pegged at P = 1.00 per tourist, local and foreign, entering the service area; e. To raise financing for the improvement and expansion of the BWSS water and wastewater facilities; f. To operate, maintain, repair, improve, renew and, as appropriate, decommission facilities, as well as to operate and maintain the drainage system upon its completion, in a manner consistent with the National Building Standards and best industrial practices so that, at all times, the water and sewerage system in the service area is capable of meeting the service obligations (as such obligations may be revised from time to time by the PTA-RO following consultation with BIWC); g. To repair and correct, on a priority basis, any defect in the facilities that could adversely affect public health or welfare, or cause damage to persons or third party property; and h. To ensure that at all times, BIWC has sufficient financial, material and personnel resources available to meet its obligations under the Agreement. In addition, the Parent Company, as the main proponent of BIWC shall post a bank security in the amount of US$ 2.5 million to secure the Parent Company’s and BIWC’s performance of their respective obligations under the agreement. The amount of the performance security shall be reduced by Parent Company following the schedule below: Amount of Performance Security (in US$ Millions) US$2.5 2.5 1.1 1.1 1.1 Rate Rebasing Period First Second Third Fourth Fifth On or before the start of each year, BIWC shall cause the performance security to be reinstated in the full amount set forth as applicable for that year. Upon not less than 10 days written notice to BIWC, PTA may take one or more drawings under the performance security relating to a Rate Rebasing Period to cover amounts due to PTA during that period; provided, however, that no such drawing shall be made in respect of any claim that has been submitted to the Arbitration Panel for adjudication until the Arbitration Panel has handed its decision on the matter. In the event that any amount payable to PTA by BIWC is not paid when due, such amount shall accrue interest at a rate equal to that of a 364-day Treasury Bill for each day it remains unpaid. Failure of BIWC to perform any of its obligations that is deemed material by PTA-RO may cause the concession agreement to be terminated. - 22 - Technical services agreement Simultaneous with the execution of BIWC’s concession agreement, BIWC and the Parent Company executed a Technical Services Agreement by which, the Parent Company is being paid by BIWC a technical services fee equivalent to 4% of the annual gross revenue of BIWC, for rendering the following services to BIWC: a. Financial management, including billing and collection services, accounting methods and financial control devices; and b. Operations and project management, including facility operations and maintenance, and infrastructure project management. Agreement with Ayala Land, Inc. (ALI) In April 2010, the Parent Company and ALI entered into a Memorandum of Agreement (MOA) to establish a water utility services company which will manage and operate all water systems in Nuvali, as well as adjacent Ayala Land projects in Laguna. Under the Agreement, the Parent Company shall infuse P = 82 million cash and will be responsible for all external water systems and the operation and management of the JV Company to be established. Likewise, ALI shall infuse P = 18 million cash and P = 59 million “rights/lease” to internal and external water systems and will be responsible for all internal water systems. The joint venture company has not been established as of June 30, 2011. - 23 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management’s discussion and analysis (“MD&A”) of the Manila Water Company’s financial condition and results of operations should be read in conjunction with the Company’s unaudited financial statements, including related notes. This report may contain forward-looking statements that involve risks and uncertainties. The actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to, economic, regulatory, socio-political, financial, and other risk factors. Any references in this MD&A to “our”, “us”, “we”, or the “Group” shall refer to Manila Water Company, Inc., including its subsidiaries. Any reference to “Manila Water Company”, “Manila Water” or the “Company” shall refer to the parent company only. Additional information about the Group, including recent disclosures of material events and annual/ quarterly reports, are available at our corporate website at www.manilawater.com. Overview of the Business Manila Water Company is a Philippine company that holds exclusive rights to service the eastern side (“East Zone”) of Metro Manila, under a 25-year Concession Agreement (CA) entered into between the Company and Metropolitan Waterworks and Sewerage System (MWSS) in August 1997. The Company provides water treatment, water delivery, sewerage and sanitation services to more than six million people in the East Zone, comprising a broad range of residential, commercial and industrial customers. Under the terms of the CA, the Company was granted the use of land and operational fixed assets and the exclusive right, as agent of MWSS, to produce and treat raw water, distribute and market water, and collect, transport, treat, dispose and eventually re-utilize wastewater, including reusable industrial effluent discharged by the sewerage system for the East Zone. The Company is entitled to recover over the concession period its operating, capital maintenance and investment expenditures, business taxes, and concession fee payments, and to earn a rate of return on these expenditures for the remaining term of the concession. As the Company has the exclusive rights to service the East Zone, no other entity can provide water services within this area and has no competitors therein. The East Zone encompasses parts of Manila, San Juan, Taguig, Pateros, Antipolo, Taytay, Jala-Jala, Baras, Angono, San Mateo, Rodriguez, Marikina, Pasig, Mandaluyong, Makati and most of Quezon City. On October 19, 2009, the Company’s application for the 15-year renewal of the CA was acknowledged and approved by the Department of Finance (DOF) following the special authority granted by the Office of the President. With the renewal of the CA, the term of the concession was extended for another fifteen (15) years from 2022 to 2037. Under the terms of the renewal of the CA, the Company is entitled to recover the operating and capital expenditures, business taxes, concession fee payments and other eligible costs, and to earn a reasonable rate of return on these expenditures for the remaining term of the concession. Manila Water has also expanded its services outside of the East Zone. In July 2008, the Company won a contract for leakage reduction in Ho Chi Minh City, Vietnam. In December 2009, the Company through Boracay Island Water Company (BIWC), entered into a Concession Agreement with PTA covering the provision of water and wastewater services in the island of Boracay. In September 2009, the Company acquired 70% of Laguna AAAWater Corporation (LAWC) which has an existing Concession Agreement with the Province of Laguna covering the provision of water services in certain areas of Laguna. With the expansion program of Manila Water and the formulation of several subsidiaries, the Company has designed and is now implementing transfer pricing policies. The policies ensure that the inter-company transactions are done at arm’s length and there are no cross-subsidies between the Parent and its subsidiaries. The transfer prices which are based on market prices were set for all expenditures related to provision of services, works and supplies. These include salaries for seconded employees and those rendering support and management services, rental of equipment, cost of staff training and development, supplies and materials. . - 24 - Key Performance Indicators The Group’s key operational performance indicators are discussed below: Billed volume Billed volume, which is reported in terms of million cubic meters (mcm), indicates the volume of water sold by the Company for the period. Year-to-date billed volume increased by 0.4% from 203.3 mcm to 204.1 mcm. However, overall average consumption per customer decreased from 48.7 to 45.2 cubic meter due to the connection of low consumption customers. Collection efficiency Year-to-date collection efficiency was recorded at 99.5%, while average accounts receivable days improved to 14 days from 18 days in 2010. Service connections As a result of the completion of various expansion projects, new service connections increased by 35,994, bringing the total service connections to 836,338 as of June 2011, serving a total of 1,181,578 households. Non-revenue water ratio Non-revenue water (NRW) refers to system losses, or the volume of water lost in the network through leakage or pilferage. It is computed by deducting total water billed (billed volume) from the total water supplied (water supply) to the customers, while NRW ratio is derived by dividing the NRW by the water supply. A lower level of NRW ratio means greater network efficiency. As of the June 2011, NRW ratio is down to 11.5%, an improvement of 2.0% points from last year’s level of 13.5%. This is mainly due to effective supply and pressure management and the completion of NRW projects. Water quality The Company continued to exceed the Department of Health (DOH) bacteriological compliance standard of 95%. Water quality compliance has been maintained at 100%. For the month of June, a total of 6,192 test samples were collected from the customers’ taps (including schools, hospitals, and public places), water treatment works and service reservoirs. The water samples were bacteriologically examined to ensure safety and potability and to detect the presence of any chemical substance that may affect the quality of water for domestic use. The Company operates a testing laboratory that is accredited by the DOH and has been ISO/IEC17025:2005 – certified since 2006. This means that the laboratory meets the requirements for carrying out tests and/or calibration, including sampling. The Group’s key financial performance indicators are discussed below: Operating revenue growth Operating revenues as of June 30, 2011 amounted to P 5,803 million, 6% higher than last year. This increase was driven by the approved adjustments in tariff for the year. EBITDA and EBITDA margin Earnings before interest, tax, depreciation and amortization (EBITDA) grew by 7% from last year to P4,314 million, resulting in an EBITDA margin of 74%. This was brought about by the effective management of operating costs which grew by 3% year-on-year. - 25 - Net income and net income margin Net income was up by 2% from last year to P2,006 million, with net income margin at 35% due to the combined effect of a 7% growth in operating income and 11% increase in financing and other charges. Without the P142 million mark-to-market loss on the call option of the Company’s P4 billion bonds, net income would have been at P2,417 million, 9% higher than last year. Net income margin for the first half of the year registered at 35%. Results of Operations Results of operations detailed as to business segment is shown below. The segments where the Group operates follow: Revenue Operating expenses Operating income(loss) Revenue from rehabilitation works Cost from rehabilitation works Interest income Interest expense Other expense Income before income tax Provision for tax Net income (loss) Net income attributable to: Equity holders of MWCI Noncontrolling interest June 30, 2011 Outside East East Zone Zone Water and Management Sewer Services Contracts (In thousands Pesos) P 5,603,463 P 65,114 P 134,451 (2,174,523) (82,370) (91,521) 3,428,940 (17,256) 42,930 2,769,937 122,114 (2,769,937) (120,350) 203,577 2,048 (792,873) (15,194) (145,861) (453) 2,693,783 (17,256) 31,095 (696,486) (5,017) P 1,997,297 P (17,256) P 26,078 P 5,803,028 (2,348,414) 3,454,614 2,892,051 (2,890,287) 205,625 (808,067) (146,314) 2,707,622 (701,503) P 2,006,119 P 1,997,297 P (17,256) P 21,168 4,910 P 26,078 P 2,001,209 4,910 P 2,006,119 Segment assets, exclusive of deferred assets Deferred assets P 60,173,619 349,968 P 60,523,587 62,005 P 62,005 2,307,319 40,775 P 2,348,094 62,542,943 390,743 P 62,933,686 Segment liabilities P 39,727,652 P 159,132 P 1,336,517 P 41,223,301 P 3,367,720 P 832,674 P 922 P 121,701 P 27,109 P 3,489,421 P 860,705 Segment additions to equipment and SCA Depreciation and amortization P 1,997,297 Consolidated Net Income for the first quarter of 2011 was derived largely from East Zone operations. Projects outside the East Zone such as the water concessions in Boracay and Laguna and the leak management project in Vietnam increased net income by 1%. - 26 - Operating Highlights The following table summarizes the operational performance of the East Zone Concession: For the six months ended June 30 2011 2010 Billed volume (in million cubic meters) Increase (Decrease) Amount % 204.1 203.3 0.8 0.39 Number of water connections('000) 836 800 36 4.5 Average consumption (in cu.m per month) 45.2 48.7 -3.5 -7.2 Water supplied (in million cubic meters) 230.3 236.4 -6.1 -2.6 Non-revenue water (water losses ratio) 11.5% 13.5% 24-hour availability 99% 99% - - Staff per 1000 connections 1.4 1.4 (0.03) (2.17) - - 100% Water quality compliance 100% -2.0% pts Billed volume reached 204.1 mcm as of June 30, 2011. This figure was 0.4% higher than last year’s level of 203.3 mcm. The number of connections increased by 5% year-on-year. Average consumption per connection decreased by 7% to 45.2 cu.m. as the increase in new water connections came from low consumption groups, mostly from the Rizal towns. NRW ratio improved by 2 percentage points to 11.5% as a result of pressure management, effective supply management and completion of NRW projects. The Company continued to exceed service targets by achieving 100% compliance with water quality standards, with 24-hour availability in more than 99% of its current service coverage, and a manpower efficiency of 1.4 staff per 1000 connections. Operating highlights of Boracay Island Water and Laguna AAAWater are summarized as follows: Boracay For the six months ended Increase (Decrease) June 30 2011 2010 Amount % Billed volume (in million cubic meters) 1.2 1.1 0.2 17.1 Number of water connections('000) 4,409 3,765 644 17.1 Non-revenue water (water losses ratio) 24.0% 35.0% -11.0% pts - 27 - Laguna For the six months ended June 30 2011 2010 Billed volume (in million cubic meters) Number of water connections('000) Non-revenue water (water losses ratio) Increase (Decrease) Amount % 2.2 2.0 0.3 13.7 22,654 18,036 4618 25.6 38.0% -6.0% pts 44.0% As of June 30, 2011, billed volume for Boracay grew by 17% versus last year to 1.2 mcm as a result of the increase in new service connections and the higher tourist inflow. NRW level improved by 11 percentage points to 24% from 35% last year. Billed volume for Laguna grew by 14% over last year as a result of additional new service connections from the subdivision take overs which grew by 26% versus last year. NRW level improved by 6 percentage points to 38% due to the completion of NRW related projects in the Sta. Rosa-Biñan line. Financial Highlights The following table summarizes the income statement highlights of the Group: Statement of Income In thousand pesos Total revenues P Total cost and expenses, excluding depreciation/amortization EBITDA Depreciation and Amortization Income before other income/ expenses Interest expense Interest income Net foreign currency gains/ (losses) Mark-to-market gains/(losses) Others Income before income tax Provision for income tax Net Income Minority interest Net Income attributable to MWC P Changes in fair value of available-forsale financial assets Total Comprehensive Income P For the six months ended June 30 2011 2010 5,803,028 P 5,476,315 1,488,632 4,314,396 859,783 3,454,612 (808,067) 205,625 (41,387) (141,560) 38,398 2,707,621 701,502 2,006,119 (4,910) 2,001,209 P (34,711) 1,966,498 P 1,451,139 4,025,176 903,247 3,121,930 (656,555) 159,106 (19,195) (3,387) (268) 2,601,629 629,451 1,972,178 (2,371) 1,969,807 Increase/(Decrease) Amount % 326,712 6 37,493 289,219 (43,463) 332,683 (151,511) 46,519 (22,191) (138,173) 38,666 105,992 72,051 33,941 (2,539) 31,402 3 7 -5 11 23 29 116 12,528 (47,239) -377 1,982,335 (15,837) -1 4 11 2 2 Operating revenues as of June 30, 2011 was at P5,803 million, 6% or P327 million higher than the previous year. The growth was mainly tariff driven, reflecting the impact of the 1 peso rate rebasing increase plus inflation adjustment in water tariff and the increase in environmental charge from 16% to 18% which became effective last February 16. Operating cost and expenses (before depreciation and amortization) increased by P37 million or 3% to P1,489 million. The increase came mostly from higher power and premises costs, which both grew by 15%. However, adjustments were made on the prior years’ provisions on bad debts and real property taxes which resulted to lower operating expenses. EBITDA, which essentially measures the Group’s operating cash earnings for the period, improved by 7% to P4,314 million from P4,025 million last year. EBITDA margin was maintained at 74%. - 28 - Net income for the first half of 2011 was at P2,006 million, up by 2% versus last year due to the 7% increase in operating income. The increase however was offset by higher finance charges. Interest expenses grew by 23% due to the P10 billion corporate notes issued last April 2011 and the additional drawdowns from the $150 million NEXI loan facility. The Company also recorded a mark-to-market loss on the call option of its P4 billion bond of P142 million. Without this loss, net income would have been at P2,147 million, a 9% year-on-year growth. Earnings per share was computed at P0.81. Analysis of operating revenues Revenues in thousand pesos Water Environmental Sewer Others Total Revenues For the six months ended June 30 2011 2010 P 4,717,452 P 4,514,025 P 801,840 692,320 156,025 173,761 127,711 96,209 P 5,803,028 P 5,476,315 P Increase/(Decrease) Amount % 203,427 4.5 109,519 15.8 (17,736) -10.2 31,502 32.7 326,712 6.0 The Company derived up to 81% of its operating revenues from water bills, 17% from environmental and sewer charges, and 2% from other miscellaneous charges. Operating revenues increased as a result of the increase in tariff which became effective last February 16, 2011. Revenues from management contracts amounting to P65 million is comprised of revenues from project management fees in Ho Chi Minh City, Vietnam. Changes in average consumption are broken down as follows: Average consumption per connection In cubic meters per month Residential Semi-commercial Commercial Industrial Overall For the six months ended June 30 2011 2010 33.3 36.0 97.7 105.4 210.0 217.2 313.6 295.8 45.2 48.7 Increase/(Decrease) Volume % -3 -7.5 -8 -7.3 -7 -3.3 18 6.0 -4 -7.2 Total average consumption decreased by 7% across customer types except for industrial accounts. Average consumption for residential and semi-commercial accounts decreased as new service connections covered low consumption customers from the expansion areas. - 29 - Analysis of operating costs Below is a summary of the increases or decreases in operating costs: For the six months ended June 30 COSTS AND EXPENSES in thousands Depreciation/Amortization Salaries, wages & employee benefits Power, light and water Management, technical & professional fees Costs of management contracts Others Collection fees Business meetings and representation Occupancy Transportation and travel Wastewater costs Repair and maintenance Costs of projects outside East Zone Water treatment chemicals Insurance Cost of inventory sold Postage, telephone and telegram Regulatory Advertising Premium on performance bonds Taxes and licenses Provision for doubtful accounts Total Operating Costs (Php) P P 2011 859,783 P 536,293 343,887 133,972 82,370 62,396 59,908 50,374 46,613 35,086 31,898 31,071 26,154 22,082 17,506 15,696 15,448 14,548 5,861 3,839 (3,777) (42,591) 2,348,415 P Increase 2010 (Decrease) 903,247 P (43,464) 510,384 25,909 304,927 38,960 134,335 (363) 36,229 46,141 13,999 48,397 56,969 2,939 47,398 2,976 39,617 6,996 28,423 6,663 55,606 (23,708) 79,626 (48,555) 13,879 12,275 16,536 5,546 14,696 2,810 39,380 (23,684) 12,343 3,105 7,645 6,903 9,210 (3,349) 4,158 (320) 57,953 (61,730) (32,173) (10,418) 2,354,387 P (5,972) (%) -5 5 13 0 127 346 5 6 18 23 -43 -61 88 34 19 -60 25 90 -36 -8 -107 32 0 The increase in operating costs was accounted for mainly by the increases/decreases of the following accounts: Depreciation/amortization Depreciation charge decreased as a result of the CA extension where amortization was spread over the extended life of the concession until 2037 instead of the original concession life which was until 2022. Change in estimate with the adoption of IFRIC 12 was fully implemented in November 2010. Salaries, wages & employee benefits This was due to annual increases in basic pay, other employee benefits, performance based incentives and rewards, and training cost. Power, light and water Total consumption increased by 3.433 million kwh or 8% due to the completion of the new water and wastewater facilities. Effective cost per kwh increased by P0.07 as compared to last year. Costs of management contracts This was due to the increase in the number of metering zones completed under the leak reduction project in Vietnam. Other Costs This was due to the increase in consumption of other direct materials such as chemicals used for water sampling and rental of generator sets. Collection fees This was due to the increase in the number of customer from the expansion areas. - 30 - Business meetings and representation This was due to the increase in various activities in support of the various business expansion programs of the company. Occupancy This was due to the increase in number of security guards and janitors resulting from the completion of new water and wastewater facilities. Transportation and Travel The increase was due to higher fuel consumption as a result of tankering services in Montalban and the increase in fuel prices. Wastewater costs The decrease was due to lower volume of desludged waste from septic tanks in the current period as desludging activity was accelerated in 2010. Repair and maintenance The decrease was due to lower maintenance requirement with the replacement of technical equipments and refurbishment of existing facilities. Cost of projects outside east zone This represents expenses incurred related to projects outside East Zone which are still in the exploratory stage. Water treatment chemicals Requirement for alum increased due to the poor quality of raw water drawn from the La Mesa bypass. Insurance This was due to the increase in value of insurable assets with the completion of water and wastewater facilities. Cost of inventory sold The decrease was due to the lower volume of material sold to subsidiaries in 2011. Postage, telephone and telegram The increase was due to additional requirements for radios and communication subsidy for employees brought about by business expansion. Regulatory The increase was due to the compounded CPI adjustments charged to OPEX on the base Regulatory fee of P396M which was charged to CAPEX thru the recognition of its net present value as concession obligation. Advertising The decrease was due to lesser media advertisements on water interruptions with the continuous network improvements. Premium on performance bond The decrease was due to appreciation of peso versus the US dollar. Taxes and licenses The decrease was due to the partial reversal of 2010 provision to correct over-accrual of real property tax. Provision for doubtful accounts Partial reversals of prior years’ provision were effected as collection efficiency continued to improve. Provision was adjusted based on the historical loss rate particularly on 60 – 90 days accounts receivable. - 31 - Analysis of other income and expenses, and income tax Interest expenses (net of interest income) increased by P105 million due to additional drawdowns from the P10 billion notes issued last April 2011 and on the NEXI loan facility last January 2011. Mark-to-market loss on derivative assets increased due to lower valuation during the quarter resulting from the decrease in risk free rates and the approach of the exercise date of the call option on P4 billion bond of the Company. Assets and Liquidity Cash reserves and investments registered at P17,355 million. This was P11,547 million higher than the cash balance at the end of 2010 due to the additional drawdowns from NEXI loan facility and the P10 billion notes issued. The Company’s cash reserves and investments are composed of cash and cash equivalents, short term investments, and financial assets classified as available for sale, which are mostly denominated in local currency. Collection efficiency was at 99.5% for the first half of 2011, while days receivable improved to 14 days. Service concession assets stood at P40,013 million, approximately P2,553 million (net of amortization) higher than the level at the end of 2010. Service concession assets are composed of direct capital investments of the Company and the present value of future concession fee payments. Under the Intangible Asset Model of the Philippine standard-IFRIC 12, the Company records all capital investments pertaining to the rehabilitation and construction works on the East Zone project, as well as concession fee payments, as intangible assets or service concession assets, in recognition of the concessionaire’s rights to the recovery of the value of these investments in accordance with the terms of the Concession Agreement. Total current assets exceeded total current liabilities by a ratio of 2.91 times. Debts and Other Liabilities Current liabilities increased by P673 million (including the current portion of debt and service concession obligations) due to additional claims from to suppliers and contractors. Total long-term debt including current portion was at P27,562 million. Meanwhile, service concession obligations amounted to P7,683 million, P274 million lower than the 2010 year-end level. This amount pertains to the present value of future concession fee obligations of the Company. Previously, unlike long term debts, service concession obligations were not considered legal obligations of the Company until they were officially billed to the Company by MWSS. However, the new accounting rules Philippine interpretation- IFRIC 12 required the Company to recognize the present value of these future obligations as part of both concession assets and liabilities. On September 7, 2010, Laguna AAAWater Corporation entered into a loan agreement with China Banking Corporation and Metropolitan Bank & Trust Company to finance the company’s investment program to expand water supply and sanitation services. Pursuant to the program, the lenders agreed to provide loans to LAWC up to P500 million bearing an effective interest rate of 7.26%. P250 million was drawn last November 2010. On October 21, 2010, the Manila Water entered into a term loan agreement amounting to US$150 million to partially finance its capital expenditures within the East Zone. The loan which has a tenor of 10 years and is financed by a syndication of four banks- ING N.V. Tokyo, Mizuho Corporate Bank, Ltd., The Bank of TokyoMitsubishi UFJ Ltd. and Sumitomo Mitsui Banking Corporation, is insured by NEXI. As of June 30, 2011, the Company has drawn US$84 million from the said facility. On April 8, 2011, the Company issued P10.0 billion notes (“Fixed Rate Corporate Notes”), P5.0 billion with an interest rate of 6.3385% payable in 5 years (“Five-Year FXCN Note”). The balance of P 5.0 billion has an interest rate of 7.3288% with a 10 year (“Ten-Year FXCN Note”) term from the issue date. Interest on both notes is payable quarterly. - 32 - Net long-term debt-to-equity was at 0.48x, from 0.42x in the prior year. The Group maintained a favorable level of total liabilities/equity ratio (excluding concession obligations) at 1.57x. Stockholders’ equity Stockholders’ equity increased by P1,341 million since December 31, 2010, as a result of higher retained earnings. Book value per share was computed at P10.21 per share. There were no new equity shares issued from January to June this year, except for the exercise of stock options in relation to the Group’s employee benefits. Cash flows from operating activities Net cash generated from operations increased by 58% year-on-year. This was due to the increase in payables to suppliers and contractors because of higher capex. Also, there is an increase in other current assets brought about by mobilization costs for various projects Cash flows from investing activities Net cash used in investing activities decreased by 510% from the same period last year. The increase in cash outlay was brought about by more placements in short-term cash investments. Cash flows from financing activities Net cash used in financing activities amounted to P10,949 million as of June 30, 2011. A total of P14,139 million in loans was availed during the period from existing facilities while P1,781 million was used to pay for principal loan payments, additional interest on new loan drawdowns and higher service concession obligation due during the quarter. - 33 - Summary of Appendices A. B. C. D. E. F. Board of Directors and Senior Management Team Financial Risk Management Manila Water Stock and Dividends Information Summary of corporate disclosures during the 2nd quarter of 2011 Regulatory Key Performance Indicators and Business Efficiency Measures Tariff table - 34 - APPENDIX A BOARD OF DIRECTORS AND SENIOR MANAGEMENT TEAM The Board has eleven (11) members elected by the Company’s stockholders entitled to vote at the annual meeting. The directors hold office for one (1) year and until their successors are elected and qualified in accordance with the Company’s By-Laws. The following are the members of the Board with the corporate secretarial officers as of June 30, 2011. Name Fernando Zobel de Ayala Jaime Augusto Zobel de Ayala Gerardo C. Ablaza Jr. Antonino T. Aquino Delfin L. Lazaro John Eric T. Francia Ricardo Nicanor N. Jacinto Keiichi Asai Simon Gardiner Jose L. Cuisia Jr. Oscar S. Reyes Solomon M. Hermosura Jhoel P. Raquedan Position Chairman of the Board and Executive Committee Director Director Director Director Director Director Director Director Independent Director Independent Director Corporate Secretary Asst. Corporate Secretary The following is a list of the Company’s key executive officers as of June 30, 2011. Name Gerardo C. Ablaza Jr. Luis Juan B. Oreta Virgilio C. Rivera Jr. Ruel T. Maranan Geodino V. Carpio Position President and CEO Chief Finance Officer and Treasurer Group Director, Regulation and Corporate Development Group Director, Corporate Resources Group Director, Operations For more information about each of the members of the Board and management team, please visit our website at www.manilawater.com. - 36 - APPENDIX B FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group’s principal financial instruments comprise of cash and cash equivalents, short-term cash investments, AFS financial assets and long-term debt. The financial debt instruments were issued primarily to raise financing for the Group’s operations. The Group has various financial assets such as cash and cash equivalents, short-term cash investments, trade receivables and payables which arise directly from the conduct of its operations. The main purpose of the Group’s financial instruments is to fund its operations and capital expenditures. The main risks arising from the use of financial instruments are liquidity risk, foreign currency risk, interest rate risk, equity price rate risk and credit risk. The Parent Company’s BOD reviews and approves the policies for managing each of these risks. The Group monitors market price risk arising from all financial instruments and regularly report financial management activities and the results of these activities to the Parent Company’s BOD. The Group’s risk management policies are summarized below: Interest Rate Risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group’s exposure to interest rate risk relates primarily to its financial instruments with floating and/or fixed rates. Fixed rate financial instruments are subject to fair value interest rate risk while floating rate financial instruments are subject to cash flow interest rate risk. For cash flow interest rate risk, the Group’s policy is to manage its interest cost using a mix of fixed and variable rate debts. Approximately, 72% of the Group’s borrowings have fixed rates of interest as of June 30, 2011 and December 31, 2010. For fair value interest rate risk, the Group’s investment policy requires it to buy and hold AFS financial assets, unless the need to sell arises, and to reduce the duration gap between financial assets and financial liabilities to minimize interest rate risk. Securities are also marked-to-market monthly to reflect and account for both unrealized gains and losses. The following tables show information about the nominal amount of the Group’s financial instruments that are exposed to cash flow and fair value interest rate risks which are presented by maturity profile. June 30, 2011 Within 1 year Cash equivalents and Short-term cash investments Interest Rates (Range) 0.00% to 4.57% AFS Financial Assets Bonds Government Securities RTBN Interest Rates (Range) 6.25% to 9% Corporate Bonds Interest Rates (Range) 6.125% to 8.88% Within 5 Years (In Thousands) P = 14,829,796 P =– 50,185 107,019 100,000 150,185 P = 14,979,981 440,000 547,019 P = 547,019 More than 5 years Total P =– P = 14,829,796 – 157,204 80,000 620,000 80,000 777,204 P = 80,000 P = 15,607,000 December 31, 2010 Within 1 year Cash equivalents and Short-term cash investments Interest Rates (Range) 0.00% to 11.50% AFS Financial Assets Bonds Government Securities RTBN Interest Rates (Range) 6.25% to 8.50% Corporate Bonds Interest Rates (Range) 4.90% to 8.80% Within 5 Years (In Thousands) P = 2,648,122 P =– 51,282 108,779 99,660 150,942 P = 2,799,064 595,565 704,344 P = 704,344 More than 5 years Total P =– P = 2,648,122 – 160,061 141,370 836,595 141,370 996,656 P = 141,370 P = 3,644,778 June 30, 2011 Within 5 Years More than 5 years (In Thousands) Within 1 year Total Fixed Rate Long Term Debt (exposed to fair value risk) P = 1,110,006 P = 6,489,914 P = 110,259 P = 7,710,179 Bonds Payable (exposed to fair value risk) 430,254 2,142,116 1,483,113 4,055,483 Corporate Notes (exposed to fair value risk) – 5,000,000 5,000,000 10,000,000 676,957 P = 2,217,217 5,319,525 P = 18,951,555 2,275,528 P = 8,868,900 8,272,010 P = 30,037,672 Floating Rate Long Term Debt (exposed to cash flow risk) December 31, 2010 Within 1 year Within 5 Years More than 5 years (In Thousands) Total Fixed Rate Long Term Debt (exposed to fair value risk) P = 672,711 4,889,255 P = 726,020 P = 6,287,986 Bonds Payable (exposed to fair value risk) – 4,000,000 – 4,000,000 502,271 P = 1,174,982 2,009,086 P = 10,898,341 1,526,104 P = 2,252,124 4,037,461 P = 14,325,447 Floating Rate Long Term Debt (exposed to cash flow risk) Interest on financial instruments classified as floating rate is repriced on a semi-annual basis. Interest on financial instruments classified as fixed rate is fixed until the maturity of the instrument. Foreign Exchange Risk The Group’s foreign exchange risk results primarily from movements of the Philippine Peso (PHP) against the United States Dollar (USD) and Japanese Yen (JPY). Majority of revenues is generated in PHP, and substantially all capital expenditures are also in PHP. Approximately 42% and 52% of debt as of June 30, 2011 and December 31, 2010, respectively, was denominated in foreign currency. Under Amendment 1 of its Concession Agreement, however, the Group’s foreign exchange risks on its loans and concession fee payments for the East Zone are effectively mitigated through a recovery mechanism in the tariff called Foreign Currency Differential Adjustment (FCDA). Information on the Group’s foreign currency-denominated monetary assets and liabilities and their Philippine Peso equivalents are as follows: June 30, 2011 Original Peso Currency Equivalent (Amounts in Thousands) Assets Cash and cash equivalents USD YEN Vietnamese Dong (VND) December 31, 2010 Original Peso Currency Equivalent (Amounts in Thousands) $2,582 Y364 VND 152,720 P = 111,889 196 322 P = 112,407 $7,476 Y364 VND1,083,849 P = 327,755 195 2,439 P = 330,389 Y11,048,369 $156,566 P = 5,951,756 6,784,005 Y9,981,073 $50,448 P = 5,389,779 2,211,640 Y701,745 $107,966 FRF3,717 376,586 4,678,176 35,444 17,825,967 Y740,731 $57,142 FRF3,783 399,995 2,505,105 33,442 10,539,961 Liabilities Long-term debt YEN loan USD loan Service concession obligations YEN loan USD loan French Franc (FRF) loan Net foreign currency-denominated liabilities P = 17,713,560 P = 10,209,572 The spot exchange rates used were P = 43.33 to US$1, P = 0.54 to JPY1, P = 9.54 to FRF1 and P = 0.00211 to VND1 in 2011 and P=43.84 to US$1, P=0.54 to JPY1, P=8.84 to FRF1 and P=0.0022 to VND1 in 2010. The following table demonstrates the sensitivity to a reasonably possible change in foreign exchange rates, with all variables held constant, of the Group’s profit before tax (due to changes in the fair value of monetary assets and liabilities taking into account the effect of the natural hedge due to the FCDA recovery mechanism) as of June 30, 2011 and December 31, 2010: June 30, 2011 Dollar Yen Increase/Decrease in Effect on Profit Foreign Exchange Rates before Tax (Amounts in Thousands) P = 1.00 (P = 2,582) (1.00) 2,582 0.02 (7) (0.02) 7 December 31, 2010 Dollar Yen Increase/Decrease in Effect on Profit Foreign Exchange Rates before Tax (Amounts in Thousands) P = 1.00 (P = 7,476) (1.00) 7,476 0.02 (7) (0.02) 7 The Group does not expect any movement of the VND against the Philippine Peso to have a significant effect on the Group’s profit before tax. - 39 - Credit Risk The Group trades only with recognized, creditworthy third parties. It is the Group’s policy that except for connection fees and other highly meritorious cases, the Group does not offer credit terms to its customers. With respect to credit risk arising from the other financial assets of the Group, which comprise cash and cash equivalents, short-term cash investments and AFS financial assets, the Group’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. The Group transacts only with institutions or banks which have demonstrated financial soundness for the past 5 years. In respect of receivables from customers, credit risk is managed primarily through credit reviews and an analysis of receivables on a continuous basis. Customer payments are facilitated through various collection modes like auto-debit arrangements. The Group has no significant concentrations of credit risk. The maximum exposure to credit risk for the components of the consolidated statements of financial position is equal to its carrying value. As of June 30, 2011 and December 31, 2010, the credit qualities per class of the Group’s financial assets are as follows: June 30, 2011 Cash and cash equivalents* Short-term cash investments Receivables Customers Residential Commercial Semi-business Industrial Employees Interest from banks Receivable from SAWACO Others AFS financial assets Quoted Unquoted Total *Excludes cash on hand. Neither Past Due nor Impaired High Grade Standard P = 12,117,601,776 P =– 3,517,792,210 – 510,083,340 102,521,650 30,806,389 4,411,088 – 63,629,508 70,986,811 41,948,576 98,015,761 26,672,692 6,084,071 512,963 50,824,525 – – – 1,009,849,353 703,415,800 P = 18,173,046,501 – – P = 182,110,012 Past Due and Impaired Total P =– P = 12,117,601,776 – 3,517,792,210 210,610,040 46,834,179 15,128,006 1,569,203 – – – 31,968,376 818,709,141 176,028,521 52,018,466 6,493,254 50,824,525 63,629,508 70,986,811 73,916,952 – 1,009,849,353 – 703,415,800 P = 306,109,804 P = 18,661,266,317 December 31, 2010 Cash and cash equivalents* Short-term cash investments Receivables Customers Residential Commercial Semi-business Industrial Employees Interest from banks Receivable from SAWACO Others AFS financial assets Quoted Unquoted Total Neither Past Due nor Impaired High Grade Standard P = 2,406,787,031 P =– 1,546,339,222 – Past Due and Impaired P =– – Total P = 2,406,787,031 1,546,339,222 139,318,327 11,907,332 1,680,083 943 – 21,767,660 47,699,550 59,893,560 86,821,142 47,943,600 12,016,717 2,729,708 50,389,222 – – 363,465,865 85,863,153 26,250,840 3,943,819 – – – 34,031,259 589,605,334 145,714,085 39,947,640 6,674,470 50,389,222 21,767,660 47,699,550 93,924,819 1,005,246,935 843,659,174 P = 6,084,299,817 – – P = 199,900,389 – – P = 513,554,936 1,005,246,935 843,659,174 P = 6,797,755,142 *Excludes cash on hand. - 40 - As of June 30, 2011 and December 31, 2010, the Group does not have financial assets that are past due but not impaired. The credit quality of the financial assets was determined as follows: Cash and cash equivalents and short-term cash investments are placed in various banks. Material amounts are held by banks which belong to the top 5 banks in the country. The rest are held by local banks that have good reputation and low probability of insolvency. Management assesses the quality of these assets as high grade. Receivables - high grade pertains to receivables that are collectible within 7 to 30 days from bill invoice date; standard pertains to receivables that are collectible from 61 to 90 days from bill invoice date. AFS financial assets, which are assessed by management as high grade, are investments in debt and equity instruments in companies with good financial capacity and investments in debt securities issued by the government. Ageing of Accounts Receivables As of June 30, 2011 Up to 6 Months Trade Receivable P = 845,904 Over 6 months to 1 year Past due (in thousands) P = 72,476 P = 134,869 Total P = 1,053,249 Liquidity Risk The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans, debentures, preference shares, leases and hire purchase contracts. The Group’s policy is to maintain a level of cash that is sufficient to fund its monthly cash requirements, at least for the next two to three months. The Company also currently benefits from the availability of short-term credit facilities to support the Group’s working capital requirements. Capital expenditures are funded through long-term debt, while operating expenses and working capital requirements are sufficiently funded through cash collections. The Group’s financial assets used for liquidity management based on their maturities are as follows: Within 1 Year Assets: Cash and cash equivalents Short-term cash investments Receivables: Customers Employees Receivable from SAWACO Interest from banks Others AFS financial assets June 30, 2011 More than 1-5 years 5 years (In Thousands) Total - Gross (In PhP) P = 12,117,602 3,517,792 P =– – P =– – P = 12,117,602 3,517,792 1,053,249 50,825 70,987 63,630 73,917 150,185 P = 17,098,187 – – – – – 547,019 P = 547,019 – – – – 1,053,249 50,825 70,987 63,630 73,917 1,713,266 P = 18,661,268 - 41 - 1,016,062 P = 1,016,062 Within 1 Year Assets: Cash and cash equivalents Short-term cash investments Receivables: Customers Employees Receivable from SAWACO Interest from banks Others AFS financial assets December 31, 2010 More than 1-5 years 5 years (In Thousands) Total - Gross (In PhP) P = 2,412,912 1,546,339 P =– – P =– – P = 2,412,912 1,546,339 781,942 50,389 47,700 21,768 93,925 152,503 P = 5,107,478 – – – – – 767,433 P = 767,433 – – – – – 933,662 P = 933,662 781,942 50,389 47,700 21,768 93,925 1,853,598 P = 6,808,573 The Group’s financial liabilities based on contractual undiscounted payments: Within 1 Year June 30, 2011 More than 1-5 years 5 years (In Thousands) Total - Gross (In PhP) Liabilities: Accounts and other payables Payables to related parties Long-term debt* Service concession obligations Customers’ guaranty and other deposits P = 3,283,497 104,976 2,217,216 624,481 P =– – 18,951,554 3,866,829 – – 8,868,899 11,283,198 P = 3,283,497 104,976 30,037,669 15,774,508 – P = 6,230,170 – P = 22,818,383 1,460,664 P = 21,612,761 1,460,664 P = 50,661,314 December 31, 2010 More than 1-5 years 5 years (In Thousands) Total - Gross (In PhP) *Includes contractual interest cash flows Within 1 Year Liabilities: Accounts and other payables Payables to related parties Long-term debt* Service concession obligations Customers’ guaranty and other deposits P = 3,147,896 91,167 1,988,503 1,235,724 P =– – 12,529,493 3,551,987 P =– – 2,643,161 12,401,503 P = 3,147,896 91,167 17,161,157 17,189,214 – P = 6,463,290 – P = 16,081,480 2,245,798 P = 17,290,462 2,245,798 P = 39,835,232 *Includes contractual interest cash flows Capital Management The primary objective of the Group’s capital management strategy is to ensure that it maintains a healthy capital structure, in order to maintain a strong credit standing while it maximizes shareholder value. The Group closely manages its capital structure vis-à-vis a certain target gearing ratio, which is total debt (less concession obligations) divided by the sum of the total capital and total debt (less concession obligations). The Group’s target gearing ratio is 60%. This target is to be achieved over the next 5 years, by managing the Group’s level of borrowings and dividend payments to shareholders. For purposes of computing its net debt, the Group includes the outstanding balance of its long-term debt (including current portion), accounts and other payables, less cash and cash equivalents, short-term cash investments and AFS financial assets. To compute its total Capital, the Group uses the total equity (excluding the unrealized gain on AFS financial assets and the cumulative translation adjustment). - 42 - Total liabilities Less: Total service concession obligation Net debt Equity Less net: Unrealized gain on AFS financial assets Cumulative translation adjustment Total capital Capital and net debt Gearing ratio - 43 - June 30, 2011 December 31, 2010 P = 41,223,301,492 P = 28,642,711,433 7,682,986,091 7,953,589,016 33,540,315,401 20,689,122,417 21,151,983,264 19,815,228,457 110,218,515 144,929,822 1,655,432 2,650,312 21,040,109,317 19,667,648,323 54,580,424,718 P = 40,356,770,740 61% 51% APPENDIX C MANILA WATER STOCK AND DIVIDENDS INFORMATION Stock chart (June 2010 – June 2011) Daily QMWC.PS 3/18/2005 - 6/30/2011 (MNL) Price PHP Line, QMWC.PS, Last Trade(Last) 18 17 16 15 14 13 12 11 10 9 8 7 6 .123 Q2 Q3 Q4 Q1 Q2 2005 Q3 Q4 Q1 Q2 2006 Q3 2007 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2008 Q3 Q4 Q1 2009 Q2 Q3 2010 Q4 Q1 Q2 2011 [Delayed] *Source: Reuters The Company was listed in the Philippine Stock Exchange on March 18, 2005 and its listed shares have since been actively traded therein. The high and low sale prices for each quarter that the Company’s shares have been listed are as follows: st 1 Quarter nd 2 Quarter rd 3 Quarter th 4 Quarter High 15.75 16.75 19.04 19.50 High / Low Sales 2010 Low 14.75 15.00 16.50 18.24 2011 High 19.16 19.34 - Low 16.08 17.96 - For the second quarter of 2011, the highest sale price was P 19.34 and lowest sale price was P 16.72. The price information as of the close of June 30, 2011, was P18.64. - 44 - Dividends Information 0.56 0.46 0.4 0.35 0.3 0.21 0.06 2003 0.1 2004 0.14 2005 2006 2007 2008 2009 2010 2011 In April 2011, the Board declared the first semester 2011 cash dividends: (i) P0.28 per share on the outstanding common shares, and (ii) P 0.028 per share on the outstanding participating preferred shares. The dividends are payable to stockholders of record as of April 27, 2011, to be paid on May 19, 2011. - 45 - APPENDIX D SUMMARY OF CORPORATE DISCLOSURES DURING THE 2ND QUARTER OF 2011 As part of its commitment to promote the corporate values of transparency and accessibility to its investors, the Company fully complies with the reporting and disclosure requirements of the law as well as the relevant rules and regulations issued by the Securities and Exchange Commission (SEC), the Philippine Stock Exchange (PSE) and the Philippine Dealing and Exchange Corporation (PDEx). The Company adopts a policy of prompt and accurate disclosure of all information that may be material to the investing public. The investor relations group conducts quarterly investors and analysts’ briefings and regular meetings with shareholders and fund managers to keep them up to date on the business. nd Below is a summary of the corporate disclosures during the 2 DATE April 6, 2011 April 11, 2011 April 11, 2011 April 27, 2011 May 12, 2011 May 18, 2011 May 20, 2011 May 20, 2011 June 22, 2011 quarter of 2011. TOPIC Issuance of PhP10 Billion Fixed Rate Corporate Notes Results of Special Meeting of the Board of Directors Results of Meetings of the Stockholders and Board of Directors Independent Directors’ Certifications Analysts’ Briefing/Release of First Quarter Financial and Operational Highlights Appointment of Mr. Ferdinand dela Cruz as Group Director for East Zone Business Operations Revision of Corporate Governance Manual PRS Aaa rating by Philippine Rating Services Corporation Amendment of By-Laws For more details on these disclosures, please visit our website at www.manilawater.com. - 46 - APPENDIX E PERFORMANCE INDICATORS AND BUSINESS EFFICIENCY MEASURES As of June 30, 2011 Key Performance Indicators Domestic Water Service Connections (cum) Continuity of Water Supply (24-hour supply) Target 679,000 98% Pressure of Water Supply (minimum of 7 psi) 82% Water Quality at Plant Outlet (% compliance with PNSDW) (cum. for the year 2011) Water Quality in Distribution (% compliance with PNSDW) (cum. for the year 2011) Sampling (% compliance with PNSDW) (cum. for the year 2011) Sewerage Connections (cum) Sanitation (Septic Tanks Emptied) (cum. for the year 2011) Wastewater Effluent Quality (%Compliance with DENR Standards) (cum. for the year 2011) Response to Customer Service Compaints (% of complaints responded within 10 days) (cum. for the year 2011) Response to Billing Complaints (% of complaints responded within 10 days) (cum. for the year 2011) Response to Request for New Connections (% of requests responded within 5 days) (cum. for the year 2011) Installation of New Water Service Connections (no. of regular connections installed within 7 days) (cum. for the year 2011) – regular connections exclude those that are associated with new pipeline projects - individualization of subdivisions and people’s organizations Response to disruptive mains failure (% of disruptive main failures repaired within 24 hours) (cum. for the year 2011) 95% Actual 786,624 99.87% of the Central Distribution System (CDS) 99.43% of CDS @ 19 psi (average) 99.95% 95% 100% 100% 98,700 1/ 53,927 95% 115.40% 86,386 24,398 100% 95% 99.96% 90% 99.81% 100% 100% 2/ 18,603 96% 100% Target 420 1/ 95% 1/ max. of 1,220 1/ max. of 93.50 1/ 1,463 2/ 45,101 max. of 25% Actual 204.05 99.21% 524.52 44.02 431.34 22,879.68 11.50% Business Efficiency Measures Billed Volume (mcm) (cum. for the year 2011) Revenue Collection Rate (cum. for the year 2011) Labor Cost ( cum. for the year 2011 - in million pesos) Power Consumption ( cum. for the year 2011 - in million KwH) Total Controllable OPEX ( cum. for the year 2011 - in million pesos) CAPEX (cumulative from 2008 to 2012 - in million pesos) Non-Revenue Water % 1/ 2/ 2011 year-end target 2012 year-end target - 47 - 29,338 APPENDIX F AVERAGE TARIFF Prev. Basic CPI Rate Rebasing Total Basic Water FCDA EC (2010: 16% 2011:18%) TOTAL VAT TOTAL w/ VAT June 30, 2010 21.91 0.16 1.00 23.08 0.35 3.75 27.18 3.26 30.44 - 48 - Dec. 31, 2010 23.08 23.08 0.10 3.71 26.89 3.23 30.12 June 30, 2011 23.08 1.03 1.00 25.11 0.29 4.57 29.97 3.60 33.57
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