OUR BACKSTORY
2013 Maynilad Annual Report
ore than the pipelines, reservoirs, and other water infrastructure, MMaynilad is composed of people—exemplary, hard-working and dedicated individuals who work 24 hours a day, seven days a week to ensure that potable water reaches your homes. Together, we provide quality services to the over eight million people in the West Zone. This is a job we take seriously, and the challenges we face as we strive to bring our vital services to more areas is an interesting backstory we are proud to share.
OUR BACKSTORY
2013 Maynilad Annual Report Contents
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25 45 I. Maynilad at a Glance 1 V. Operational Highlights 17
II. Business Model and Strategy 3 A. Business Environment B. Capital Investments
III. Message to Stakeholders 5 C. Water Treatment and Distribution D. Wastewater Management A. Chairman’s Message E. Non-Revenue Water Management B. President’s Review F. Sustainability G. Corporate Social Responsibility
IV. Key Performance Indicators 13
VI. Financial Review and Analysis 51 A. Customer Service
B. Operations VII. Corporate Information 55 C. Financial
VIII. Financial Statements 59 Maynilad at a Glance
Our Company
Maynilad Water Services, Inc. (Maynilad), an agent and contractor of the Metropolitan Waterworks and Sewerage System (MWSS), is the Philippines’ largest private water concessionaire in terms of customer base.
In 1997, it was granted exclusive, concession rights over the West Zone by the MWSS for 25 years. This term was extended by 15 years to enable Maynilad to increase and accelerate investments.
In 2007, the Company was re-privatized in a competitive bidding won by the Maynilad Water Holding Company, Inc.—a joint venture between Metro Pacific Investments Corporation (MPIC) and DMCI Holdings, Inc. (DMCI).
Marubeni Corporation of Japan acquired a 20-percent stake in Maynilad Water Holding Company, Inc. in 2013, and became a strategic partner of the Metro Pacific-DMCI consortium.
Since its re-privatization in 2007 until end of 2013, Maynilad has spent over P43 billion to improve and expand its water and wastewater services.
1 Our Backstory Our service area and 99.9% receive this supply at a minimum Maynilad provides water and wastewater pressure of 7 psi (pounds per square inch). services to the 17 cities and municipalities that comprise the West Zone of the Greater Our assets Manila area. These include Manila (except Maynilad maintains and operates three portions of San Andres and Sta. Ana), Quezon world-class water treatment plants: La Mesa City (including areas west of San Juan Treatment Plant 1, a conventional-type River, West Avenue, EDSA, Congressional, plant with a maximum design capacity of Mindanao Avenue, the northern part 1,500 million liters per day (MLD); La Mesa starting from the Districts of Holy Spirit and Treatment Plant 2, a pulsator-type plant Batasan Hills), Makati (west of South Super with a design capacity of 900 MLD; and the Highway), Caloocan, Pasay, Parañaque, Las Putatan Water Treatment Plant (PWTP), Piñas, Muntinlupa, Valenzuela, Navotas and the country’s largest membrane-based water Malabon, all in Metro Manila; and the cities treatment plant, and the first to use large- of Cavite, Bacoor and Imus, and the towns scale microfiltration and reverse osmosis. of Kawit, Noveleta and Rosario, all in the PWTP has a design capacity of 100 MLD Province of Cavite. and sources its raw water from Laguna Lake.
The West Zone is served by 12 Business The Company distributes water through Area (BA) offices of Maynilad. In 2010, 7,306 kilometers of primary, secondary and the Company clustered its 12 BAs into tertiary pipelines which, if laid end to end, four business districts so that water supply will stretch from Manila all the way to Qatar. allocation per BA could be managed more The distribution system also includes 24 efficiently, and financial figures could be pumping stations and 24 water reservoirs defined more clearly. These business districts spread across the West Zone, with a total are North, Central A, Central B and South. holding capacity of 559 million liters. The longest ISO-certified facility of its kind in the A business district comprises three BAs. Philippines, Maynilad’s water distribution Each BA is organized to have a Commercial system delivers 2,500 MLD of potable water Management, Technical Management, to an area as far north as North Caloocan and Zone Management, Anti-Illegal Unit, and as far south as the province of Cavite. Administrative Services section. To provide strategic and service support to the BAs, the Maynilad has also invested in 14 sewage Customer Care Department was formed in and septage treatment plants that process 2011 following the merger of the Business wastewater and sludge collected from Operations Support Services and the customers. The Dagat-Dagatan Sewage and Customer Service. Septage Treatment Plant in Caloocan City is the first in the Asia-Pacific Region to receive Our customers triple international standard accreditations To manage the delivery of water and on Quality Management, Environmental wastewater services in the West Zone, Management and Occupational Safety and Maynilad has divided its service area into Health Management. 12 BAs that are further broken down into zones, sub-zones and District Metered Areas Maynilad’s 35 lift stations and pumping (DMAs). These DMAs service over one stations, and 513 kilometers of sewer lines million accounts, providing piped-in water efficiently collect and convey wastewater supply to the West Zone. Of these accounts, from customers to treatment facilities before 97.8% now enjoy uninterrupted water supply release to receiving bodies of water.
2013 Annual Report 2 Business Model and Strategy
Overview of new strategic direction
Throughout our transformation from “basic water service provider” to “total water solutions company”, Maynilad has pursued sustainable growth by aggressively investing in infrastructure and by enhancing operational systems to enable employees to deliver quality service. Taking our lessons from 2013, we are prioritizing measures that will ensure our stability and minimize risks in the face of an uncertain business environment.
For 2014 and beyond, we will continue to improve operational efficiencies and pursue growth areas while managing expenditures and risks.
Operational Excellence We will strengthen policies, programs and processes through automation technology to deliver better quality services.
Sustainable Growth We will go where the growth is by pursuing untapped areas outside the West Zone.
Financial Risk Management We will make prudent investment decisions, ensuring documentation and rationalization.
People-Centric Management We will continue to empower our people to perform their functions with motivation and passion.
Our Our Vision Mission
We are the leading water solutions We provide safe, affordable, and sustainable company in the Philippines with a strong water solutions that enable those we serve presence across Asia. to lead healthier, more comfortable lives.
3 Our Backstory Our How Corporate Values We Do Business
Honesty and Integrity We at Maynilad strive to create value for all We deal with our stakeholders with our stakeholders. We exist to provide safe and honesty and integrity. We will always sustainable water solutions that mean profit for do what is right and fair for the sake our shareholders and access to life-giving water of our customers, shareholders and the for previously unserved communities. As public environment. servants, we also acknowledge our role in building communities and protecting the environment. Customer Service We consider our customers as our growth partners. Only by providing them with For our customers… affordable, high-quality water solutions We work to make a difference in our customers’ lives by providing can we continue generating value for our 24-hour access to potable water at price points that meet their means. company and shareholders. We also continuously explore ways to improve the way we serve our customers, and the means by which we communicate with them, and they Entrepreneurship with us. We encourage creative thinking and deliberate execution. We expect our For our shareholders… people to manage our company’s We make financial decisions with the best interest of the company and resources with a strong sense of initiative, our shareholders in mind. While we work to meet the 100% West Zone ownership, and accountability in order to coverage goal, we are aggressively expanding beyond our concession area balance the needs of our customers with to open up more opportunities for growth. those of our other stakeholders. For our employees... Commitment to Excellence We invest in empowering employees with tools to help them perform We view excellence as a means and not their functions efficiently. We build an environment that encourages an end. To maintain our operational our employees to serve a purpose to the company, the community, the efficiency and industry leadership, we push environment, and the country. our people to excel by being diligent and innovative in their work. For communities and the country… We recognize the crucial role that we play in the future of our country. Teamwork We contribute to national development by building communities We value our people and consider their through sustainable corporate social responsibility initiatives. We success as our own. This is why we provide respond to the call of our fellow Filipinos in times of crisis with them with the support, responsibilities, sustainable solutions. and opportunities that will allow them to develop individually and with the company. For the environment... Every business decision takes environmental sustainability into Love for Country consideration. Efforts are made to rally all stakeholders behind the We actively partner with the public sector common cause of protecting the environment, and ensuring that so that we can provide even more Filipinos watersheds are properly managed and used. with water solutions that will spur national development and secure the environment.
2013 Annual Report 4 5 Our Backstory Chairman’s Message
To our stakeholders,
We have survived a very challenging year.
The difficulties we faced came in different Despite the impediments we experienced forms—our rate rebasing exercise, program in 2013, our own story gives me the delays, natural calamities, and other external confidence that the Company, with factors—and from different directions, everybody’s help, will overcome the which kept us from achieving the goals that toughest hurdles. we set at the close of 2012. Expansion Far from breaking us, these challenges We opened 2013 with the goal of reminded us what makes Maynilad strong: providing 24-hour water supply to 100% the men and women within the organization of our concession area. As far as this goal committed to doing an exceptional job is concerned, our efforts to provide water in the name of public service. Maynilad’s access to southern Metro Manila were met story resonates throughout our country and with delays, mainly due to local government within the region as a transformation best regulations that we had to deal with, as practice. The water industry looks up to well as local elections that brought about us as a showcase of how a company—with changes in leadership and processes. While a shared vision, the will to succeed, and we did not meet our target, we were able dedicated people—can turn a losing venture to connect tens of thousands of households into a viable enterprise. from Las Piñas and Muntinlupa, and Imus and Bacoor in Cavite because of our people’s collective efforts.
2013 Annual Report 6 CHAIRMAN’S MESSAGE
Outside the West Zone, we built on our Tatsukawa and Takashi Sunami. This Board 2012 successes by continuing to pursue our representation allows Marubeni to contribute expansion plans through our acquisition to the plans and activities of Maynilad. strategy. In 2013, we invested in Olongapo City’s 10-percent share in Subic Water. Crisis Response We also explored opportunities to service While responding to our many issues in the provinces of Laguna, Cebu, Leyte, the West Zone, we mobilized our resources and Cagayan de Oro, whether through to help fellow Filipinos affected by the acquisitions or strategic partnerships. earthquake, typhoons, flooding and storm surges that ravaged the Visayas Region. In 2013, we strengthened our position Calamities like these remind us that our as a model water company in the region work ultimately means life and livelihood to through our Maynilad Water Academy families in need. when our counterparts across Asia and Africa—Bangladesh, Malaysia, Sri In August, potable water in bottles and Lanka, Thailand, India, Nairobi and tankers made their way to areas hit by Nepal—sought our expertise in water, Typhoon Maring and Habagat floods. In wastewater and non-revenue water (NRW) October, we responded to the call for help management. This reputation has eased from families affected by the earthquake in our entry into Vietnam, where we are hard Bohol and Cebu. In November, we were in at work exploring expansion opportunities Leyte, Samar, Cebu, Iloilo and Palawan— in Ho Chi Minh City and Hanoi City. areas hardest hit by Typhoon Yolanda.
Last year, we held talks with Marubeni In addition to the portable water treatment Corporation of Japan for its entry into our machines that were stationed in Capiz, Company as a shareholder. This culminated Leyte and Samar, we also mobilized a with Marubeni acquiring a 20 percent treatment plant in Tacloban and deployed economic interest in Maynilad on February four 10-cubic-meter tankers to transport 13, 2013. With this development, we see drinking water from the plant to the more growth opportunities opening up for affected barangays. We sent a generator to our Company as we increase investments in power up the Metro Leyte Water treatment wastewater management. plant. More importantly, we sent our people to respond to these crises in places where Changes in the Board public service was most needed. Those who The entry of a new partner resulted in were left in the offices volunteered in many changes in the composition of the Maynilad different ways. Board. Herbert Consunji stepped down after having served as Board Director since 2007. We take pride in reliving our backstory in He continues to serve as the Company’s these trying times. Chief Operating Officer. Our Background Story Marubeni, which now occupies two seats We would not have endured last year’s trials in the Board, is represented by Kensuke were it not for the committed men and
7 Our Backstory We would not have endured last year’s trials were it not for the committed men and women of Maynilad. They lay the pipes through which the water flows to the houses of our customers.
women of Maynilad. They lay the pipes through which the water flows to the houses of our customers. They keep the water systems running 24 hours every day of the year in any weather condition or indeed, in any regulatory situation. They collaborate with local governments to bring our service to unconnected areas. They negotiate with financial institutions and regulatory bodies to enable an environment conducive to our growth. And they are there, on behalf of the company, when and where help is needed.
With pride, we look back at 2013 and the challenges that tried our spirit and tested our character. With optimism and courage, we look forward to 2014, knowing that we have our story of resiliency to draw from.
Manuel V. Pangilinan Chairman
2013 Annual Report 8 9 Our Backstory President’s Review
To our stakeholders,
Year 2013 is probably the most difficult year Maynilad has faced so far.
The year was marked by delays in CAPEX 1,073,508 to 1,129,497 by end of December implementation due to right-of-way 2013. In Cavite alone, we connected 2,099 issues, plus our regulators’ unfavorable new accounts in Imus and 12,224 in Bacoor. rate rebasing decision and our subsequent filing of a notice of dispute to initiate the Despite a slight decrease in water supply arbitration process. last year, we attained an increase in billed volume from 428.42 million cubic meters These operating conditions and obstacles (MCM) to 443.85 MCM. This is a direct seriously challenged our ability to meet result of our expansion to the southern part our service obligations. But through the of our concession area. hard work of our people and our improved operational process efficiency, we still Our NRW reduction program also managed managed to keep the Company in a stable to further decrease average NRW from position and even grow our business. 43.47% in 2012 to 38.71% in 2013.
Growth Areas Collection efficiency rose to an all-time While striving to service the entire West high of 99% from 96% last year, as our Zone, our aggressive expansion in the field personnel made use of more creative south—particularly untapped areas in Las ways to engage customers and encourage Piñas, Muntinlupa and Cavite—brought prompt payment, especially in historically a 5.2% increase in billed services from problematic areas.
2013 Annual Report 10 PRESIDENT’S REVIEW
I would like to express my gratitude to our people for rising above the challenges and rallying behind us throughout the ebb and flow of the year that was.
All these contributed to the 6% increase Full Automation in revenue to P16.78 billion from P15.83 We started automating our internal and field billion last year, as well as the 10.6% growth processes in 2012. This year, we continued to in core net income to P7.53 billion. invest on the software and IT infrastructure necessary to achieve our vision of having Infrastructure Investment all facilities—from reservoirs to pumping We set ambitious infrastructure investment stations to pipelines—connected to one IT goals at the start of 2013. But external system, enabling us to measure, monitor and challenges, such as the local government manipulate water flow in real time. elections and delays in securing permits from local government units and Today, our head office can already view government agencies, considerably slowed the status of all facilities through the down our pace. FieldMOUS dashboard, a program that allows up-to-date monitoring of water Nonetheless, in 2013, we laid a total of supply data from raw water sources to the 221 kilometers of pipelines and built distribution network within the West Zone. three pump stations to improve water pressure and supply in far-flung areas We have commissioned a five-year roadmap such as Cavite and Muntinlupa. Eight new toward building a centralized system that sewage treatment plants (STP) became will allow our people to automate processes operational in 2013, bringing our total or even control these remotely in the near number of operational STPs to 14. These future. We have already begun laying are the critical first steps toward achieving the infrastructure—such as fiber optic our sewerage coverage targets. networks, servers and access controls—to make this happen.
11 Our Backstory Financial Stewardship September 2013. MWSS denied our petition We pursued our desire to improve the for an upward rate adjustment; instead, it Company’s financial position by lowering approved a negative adjustment of 4.82% interest rates on our existing obligations, as to our 2012 average basic charge. We are well as shifting our collateral position from challenging the MWSS ruling before the secured to clean. We made this possible International Court of Arbitration (ICA), as through a creative refinancing scheme provided for in the Concession Agreement. involving over P21 billion worth of long- term loans. It was hailed as one of the Although we are pushing for the prompt biggest financial transactions in the country disposition of our challenge by the ICA, last year. we are prepared to cushion the impact on the company’s performance in the event Aside from improving our financial of delays. Whatever the outcome of the viability, the refinancing also resulted in arbitration proceedings, we will be spending a considerable foreign exchange gain. We an average of P10 billion on CAPEX every earned almost P1 billion after repaying year for the next five years through long- around US$121 million worth of loans term funding sources, enabling us to meet obtained at an exchange rate of P48.80 is to our service obligations. $1 when the exchange rate was P40.83 is to $1. Pursuant to the Concession Agreement, In Closing and as part of our commitment to our Along with the Board and the Top consumers, this gain was returned to them Management Team, I would like to express from July 2013 to January 2014. To date, my gratitude to our people for rising above this has been the largest negative foreign the challenges and rallying behind us currency differential adjustment in the throughout the ebb and flow of the year history of our Company. that was. We look forward to 2014 with a stronger resolve to meet our customers’ and Due to our good credit standing, we stakeholders’ expectations. were able to secure a ten-year term loan amounting to P5 billion on clean basis, which we availed in 2013 to fund our substantial capital expenditure commitments.
Rate Rebasing One of our major activities for 2013 was the rate rebasing exercise. This began in March 2012 with the submission to MWSS of our proposed business plan for the 2013-2037 concession period.
A new rate should have been implemented by January 2013 but the MWSS only Victorico P. Vargas completed the tariff determination in President and CEO
2013 Annual Report 12 Key Performance Indicators
In 2013, Maynilad exhibited excellence in customer service and improved operational efficiencies. We also neutralized the economic impact of the result of our rate rebasing exercise and other setbacks through a strategy that strengthens our long-term financial position.
13 Our Backstory Customer Service serviced. Aside from allowing us to evaluate In 2012, we redefined customer service zone accomplishments, these reports also by enabling touch points such as text informed us on areas that could be improved message and email for communicating to in terms of account servicing. our customers. This year, we empowered our frontliners, our employees on the The personalized approach proved successful ground, to help explore better ways to especially for accounts with arrearages. To reach our customers through a program of address lost revenue from closed accounts, accountability. Since our zone specialists our Business Area Operations granted know our customers best, they were modified payment terms for accounts with given the task of regularly developing considerable arrears. In addition to regular customer-centric plans and programs to be house visits to accounts with two months implemented in their respective areas. From or more in arrearages, our teams also the ideas presented, management selected conducted intensified counseling to closed the best practices for rollout across the accounts to encourage them to reopen. service area. As a direct result of our strong relationship Customer service also became more with customers, we were able to achieve personal this year. House-to-house visits an unprecedented collection efficiency of to distribute flyers and counseling by 99% from last year’s 96%. In our Malabon- management teams complemented the Navotas Business Area, for example, traditional modes of advisory. We also collection efficiency was sustained at over expanded the role of our zone specialists 100% each month, despite seasonal factors by making them accountable for customer that traditionally made collection challenging. service, administrative, surveillance and marketing functions, in addition to minor Our frontliners are committed to further technical and repair work. improving customer service by increasing zone visibility. Plans to provide more Aside from giving our zone specialists the convenient payment options by partnering opportunity to improve their skills, the with additional third-party payment zone visitation program also ensured that facilities are expected to contribute to they were able to address customers’ needs sustaining high collection efficiency ratings. onsite—from complaints and inquiries, to requests and applications for water service connection. Zone Heads were able to monitor customer service levels through a system of filing transmittal forms signed by the customers who were
Service to customers become more personal, as Maynilad zone specialists do house-to-house visits to provide direct assistance to customers.
2013 Annual Report 14 KEY PERFORMANCE INDICATORS
Operations This year, we took a step closer toward our By end of 2013, we managed to post a billed goal of connecting 100% of the service area volume of 443.85 MCM from our 1,129,497 to our system. We aggressively expanded billed services. Non-revenue water further our customer base in the south, adding a decreased to an average of 38.7% from total of 12,224 new accounts in Bacoor, 43.5% in 2012. The improvement was Cavite, and 2,099 in Imus. We managed to due in part to our continuing leak repair achieve these milestones despite the delays program, which saw 41,171 leaks repaired caused by the previous elections and local in 2013. The program, coupled with regulatory hurdles in securing permits. pipe rehabilitation and more efficient management of water pressure and supply, In 2012, we set the goal of providing 100% has resulted in the recovery of over 138 of our customer base with 24-hour access to million liters per day of water. water at a minimum water pressure of 7 psi. Maynilad closed the year by delivering 24- For 2014, we will continue to address the hour water supply to 97.8% of our customers, downward trend of water use via a two-point 99.9% of whom are supplied with a water strategy. First, we will invest in increasing pressure of at least 7 psi. Although we did not water pressure through pipe replacements, reach our goal, we increased the percentage laying of reinforcing pipelines, and of customers that have 24-hour water access installation of additional boosters in our at 16 psi to 58% from only 44% in 2012. pumping stations. Second, we will continue This was made possible by commissioning to communicate with our customers the additional four pumping stations and two benefits of using tap water instead of water reservoirs. Our Water Supply Operations is from other sources such as deep wells. working to make 100% at 24-hour/minimum 7 psi happen by 2014. Our overall goal of further improving service levels and operational efficiencies In terms of wastewater management, we set are riding on our investment in technology. a 2013 goal of installing 4,000 new sewer We are building an intelligent automated service connections (NSSC), cleaning 4,000 system that will not only allow us to sewer manholes and 250 kilometers of sewer monitor our network real-time, but will lines, and laying 24 kilometers of conveyance also make automatic adjustments on our systems. We were able to exceed most of these facilities based on demand and other goals with 4,423 NSSCs connected, and 5,389 predetermined factors. sewer manholes and 307 kilometers of sewer lines cleaned. We also hit the 24-kilometer conveyance system mark.
15 Our Backstory In 2013, our Finance division led the Company into one of the biggest financial transactions in its history: the refinancing of over P21 billion in long-term loans.
Financial By yearend, Maynilad posted a total revenue The transaction involved around US$121 of P16.9 billion, up by 6% from last year’s million in long-term loans secured at an P15.8 billion as a result of the increase exchange rate of P48.80 to US$1. These in billed volume and an average effective loans were repaid at an exchange rate of year-on-year tariff increase of 3%. More P41 to US$1, resulting in a major foreign importantly, we were able to increase our exchange gain, aside from improving core net income by 10.6%. Maynilad’s collateral position from secured to clean. About P710 million in foreign Increased operational efficiencies helped us exchange earnings were returned to achieve our bottom line. As an example, our customers beginning July 2013, pursuant to Water Supply Operations division was able the Concession Agreement. to decrease their monthly power costs by almost P153,000 after terminating deepwell In 2013, we started reaping the fruits of power supply. By making their operations our expansion beyond the West Zone. more efficient, they were likewise able Our subsidiary, Philippine Hydro, Inc. or to save over P100 million in power and PhilHydro, made its first profit contribution chemical costs. This financial stewardship last year. We look forward to seeing more was seen across all departments and profit flow in from our subsidiaries in the functions, with everyone contributing to the coming years. increased net income. Finally, Japanese investor Marubeni is The foresight of our finance managers also expected to further improve our financial helped secure our financial position despite viability, as we gear up for expansion in 2014. the negative result of our rate rebasing exercise. In 2013, our Finance division led the Company into one of the biggest financial transactions in its history: the refinancing of over P21 billion in long- term loans.
2013 Annual Report 16 Operational Highlights
Setbacks in the business environment tempered our operational performance in 2013. While these external factors may have prevented Maynilad from reaching most of its performance goals, we have managed to sustain earlier efforts toward long-term viability.
17 Our Backstory Business Environment In March 2012, after months of intensive preparation, Simultaneous with the filing of the dispute notice, Maynilad Maynilad submitted its business plan with a request for submitted an alternative proposal, requesting instead a adjustment in Standard Rates for the period of 2013 to 2017, positive adjustment of 13.41% (or P4.06 per cubic meter), pursuant to the Concession Agreement. with corporate income taxes included in the Expenditures that may be recovered through the Standard Rates based on After months of delay in review and discussions, the MWSS the parties’ consistent understanding, agreement and history issued a resolution in September 2013 denying Maynilad’s of prior dealing. request for an upward adjustment of 28.35% of the average basic charge (or P8.58 per cubic meter). MWSS instead Before the year ended, on December 17, 2013, MWSS issued imposed a negative adjustment of 4.82% (or P1.46 per a resolution maintaining status quo for Maynilad’s Standard cubic meter). Rates and Foreign Currency Differential Adjustment (FCDA) for all scheduled adjustments pending the final The Concession Agreement provides that any disagreement award by the arbitration panel. or dispute which cannot be resolved through consultation or negotiation between the partners must be resolved through Aside from regulatory delays, operations were also adversely an arbitration process. The MWSS resolution has since affected by challenges on the ground. In some areas, shifts been contested by our filing of a notice of dispute with the in local government leadership after the elections caused Secretariat of the International Chamber of Commerce changes in processes such as securing permits for pipe-laying (ICC) International Court of Arbitration. and executing memoranda of agreement and documents for land acquisition.
Field personnel gathering flow and pressure data for analysis. OPERATIONAL HIGHLIGHTS
Maynilad also focused on increasing its storage capacity through several reservoir projects strategically located in high-density areas.
Capital Investments At the start of the year, we earmarked Maynilad also focused on increasing its P17.2 billion—more than double our storage capacity through several reservoir capital expenditure (CAPEX) in 2012—for projects strategically located in high-density water and wastewater projects. This was areas. Consequently, two new reservoirs supposed to be our biggest annual capital in Quezon City and one in Caloocan City investment since Maynilad’s privatization were commissioned. These facilities have a in 1997. The funds for these projects were combined capacity of 9.5 million liters, and to come from revenues and loans secured are able to provide over 53,700 residents from the World Bank. with 24-hour water supply at a minimum pressure of 16 psi. Out of its internal target of infrastructure projects, Maynilad was only able to contract Another major reservoir in Novaliches, out P10.8 billion. This was due to external Quezon City, is in progress and will be factors such as issues with right-of-way, completed by the third quarter of 2014. It land acquisition, and agreements between will have a storage capacity of 10 million liters Maynilad and local government units. and is expected to service 555,000 customers. Despite this, Maynilad was still able to add 19,444 to its billed services, and increase billed volume from its CAPEX projects.
A total of 221 kilometers of pipelines were laid in 2013, exceeding its revised target of 200 kilometers. Eight new sewage treatment plants (STP) also became operational, including those located at Congressional Avenue and Tandang Sora in Quezon City, and Paco in Manila. Over 220 kilometers of tertiary, secondary and primary pipelines were laid in 2013 alone.
19 Our Backstory 2013 Annual Report 20 21 Our Backstory Gil Aquino Jr. Operator, Noveleta Pumping Station
For many of Maynilad’s employees, facing But the bigger hurdle lay ahead: If the floodwaters operational challenges is all in a day’s work. continue to rise, he would have to manually open the bypass valve—which would by then be Gil Aquino Jr. is an operator at the Noveleta submerged in rampaging floodwaters—so water Pumping Station, which has been his second supply could continue to flow to as many as home for the past 25 years. A pioneer who has 3,000 homes in Kawit and Noveleta. weathered Maynilad’s organizational transitions, Gil knows that his work can be exacting. Being in Shortly after, it became clear that it had to be charge of the plant’s smooth operations sometimes done. Together with a janitor who managed requires personal and family sacrifices, along with to report for work that morning, the 5’6”-tall the commitment to keep the plant running despite operator bravely and selflessly negotiated the danger to life and limb. murky floodwaters to switch the bypass valve. By then, the valve was already submerged in This commitment was put to the test in August floodwaters five-feet-and-five-inches deep. 2013, when the country was rocked by Typhoon Maring and the Habagat winds that it brought By 10:30 a.m., he had successfully managed with it. Gil reported for work at 9 p.m. on August to open the valve, so the households had 19, prepared for a long night watch due to the uninterrupted water supply throughout the heavy rains. storm. Gil, however, had to continue his watch at the plant until the morning of August 21, when he At 5:00 a.m. on August 20, Gil noticed that the was able to go home to tend to the safety of his floodwaters have started to stream into the own family. pumping station. Two hours later, the water had risen to waist-deep outside the station, and had The 3,000 families serviced by the Noveleta covered the flooring of the entire facility. With only Pumping Station will never know the sacrifice a security guard as company—nobody else was that made it possible for them to have continuous able to report for work—Gil knew that the safety access to water that day. But to Gil, it was part of of the plant was on his shoulders. He decided to the job. And it will always be public service first shut down the 460-volt power supply to avoid any before self. electrical accidents.
2013 Annual Report 22 OPERATIONAL HIGHLIGHTS
23 Our Backstory We exceeded our goal of cleaning 4,000 manholes when we reached 5,389 by the end of 2013, and also cleaned 307 kilometers of sewer lines.
Water Treatment and Distribution Wastewater Management By end of 2013, Maynilad was able to A total of 4,423 new accounts were increase the number of accounts with 24- connected to our separate sewer system, and hour water access at a minimum pressure of 27,794 accounts were served by our newly 16 psi from 44.3% in 2012 to 57.7%. This completed combined system. This increased was made possible by the commissioning of our sewerage coverage from 8% in 2012 an additional four pumping stations located to 11% in 2013, bringing total population at Marcos Alvarez in Las Piñas City, Bacoor served to over 895,000. and Daang Hari in Cavite, and Baesa in Quezon City, as well as two water reservoirs We exceeded our goal of cleaning 4,000 at Bagbag and JP Ramoy in Novaliches, manholes when we reached 5,389 by the end Quezon City. of 2013, and also cleaned 307 kilometers of sewer lines. As a testament to their operational efficiency, 14 Water Service Operation We aggressively offered our septic tank sites reached Integrated Management cleaning services in 2013, reaching out to System (IMS) status in 2013 after it a total of 115,368 accounts, thus bringing received three ISO certifications for quality, coverage from 9% in 2012 to 19%. Our environmental, and occupational safety and target was to desludge 52,800 septic tanks health management systems. during the year, but low acceptance of our desludging service among account holders still prevails as only 32,535 septic tanks were desludged.
Technology was tapped to increase efficiency in the delivery of sanitation services. We equipped our vacuum truck units with GPS (Global Positioning System) for quicker deployment when accommodating emergency requests. It will also allow for New reservoirs were constructed better planning and maximized utilization to further increase water storage capacity. of the units.
2013 Annual Report 24 OPERATIONAL HIGHLIGHTS
25 Our Backstory 2013 Annual Report 26 27 Our Backstory Engr. Ryan Orillo Head, Planning Information and Resource Management
As with most organizations, there are people in waste problem has an impact on Maynilad’s vision Maynilad who are tasked to do the dirty job, such of providing safe, affordable and sustainable as Ryan Orillo and the rest of the Wastewater water solutions that enable their customers Management Division (WMD). The division is in to lead healthier, more comfortable lives. “A charge of wastewater and septage treatment— clean environment means a safer and healthier tasks that are definitely not for the faint of heart. community,” says Ryan.
Aside from the difficult nature of the job, Ryan At the close of 2013, Ryan and his team are and his team also faces many other challenges proud to be at the helm of 14 STPs and two every day, all of which make the division’s goals Septage Treatment Plants (SpTP). “The number harder to reach. From transacting with regulators of facilities that we operate and monitor has and local government units on the construction of more than doubled in 2013, pushing the team to sewage treatment plants, to convincing customers maximize people, resources and skills to cope to avail of Maynilad’s desludging services, Ryan with this challenge.” and his teammates have had to deal with all sorts of pressure. As the WMD team gears up for 2014 and beyond, Ryan remains excited and up for the challenge. The most important part of the job, according “For me, every day is an opportunity to learn new to Ryan, is promoting environmental awareness, things. I always try to motivate my team to push including proper waste disposal. Aside from beyond their limits and keep learning,” says Ryan. directly affecting their ability to accomplish their Passion, he adds, is always key. “If you follow your tasks, Ryan and his team also realize that the passion, you can easily perform your duties.”
2013 Annual Report 28 OPERATIONAL HIGHLIGHTS
Non-Revenue Water Management In 2013, P1.98 billion of the CAPEX budget was allotted for Non-Revenue Water projects, which include meter and pressure management, active leakage control, primary line assessment, selective pipe replacement, and District Metered Area management.
Maynilad’s Central NRW team was able to repair a total of 41,171 pipe leaks, of which 180 were located on primary lines. A total of 168 kilometers of pipes were also replaced or rehabilitated, while 190 Pressure Management Points (PMP) and 111 Pressure Regulating Valves (PRV) were installed. We also started automating our District Metered Areas to better measure water supply and water lost.
29 Our Backstory The replacement of old, leaky pipes is part of the effort to bring down water loss.
As a result of this and other investments, average NRW further decreased from 43.5% in 2012 to an all-time low of 38.7%, representing a recovered volume of 138 MLD.
Maynilad has been widely successful in dramatically decreasing NRW since the launch of our NRW reduction program in 2008. It is such that other water districts in the country and in the region have sought our expertise to help them address their own NRW concerns. For 2014, we will continue setting the best practice for NRW management and sharing our expertise so that other people may benefit from more efficient water distribution.
2013 Annual Report 30 31 Our Backstory Manuel Caldit Head, Leak Detection Management
No job is too small. This is the lesson that Manuel were able to develop our skills and expertise, and “Manny” Caldit is learning every day at work. Manny make NRW management work in Maynilad—one heads Leak Detection Management under CNRW of the most complicated networks in the world,” Division, the team in charge of tracking down where shares Manny. water is lost in Maynilad’s network of pipes. This dedication to perfect their craft has propelled For Manny and his team, every leak is a major them from a support division to a revenue- problem. “Every underground leak is lost water generating group. In 2013, Manny and his team that could have been put to good use. It is also completed two international leak detection and a potential intrusion point for contaminated pipe inspection projects in India and Dubai. water that could harm our customers,” says For 2014, they have so far closed 18 local leak Manny. Putting a plug on leaks is thus a major detection contracts. Sending out teams to do NRW opportunity to serve customers and increase the assessment for other water utilities—and getting company’s revenues. paid for it—is a “great accomplishment” for Manny.
Manny transferred to the CNRW Division in 2009 As long as there are leaky pipes, Manny’s team when the company, having been taken over by will always find good reason to get up every day MPIC and DMCI, made NRW management a major and report for work. “I tell my team that we have a strategy to increase revenues. He remembers unique job—and one of the best in the world,” says knowing nothing about NRW back then. “With Manny. “In a way, we are safeguarding both the the full support of management and through the health of our customers and securing water supply technical knowledge shared by consultants, we for future use. That’s a great job.”
2013 Annual Report 32 OPERATIONAL HIGHLIGHTS
Sustainability
Integrated Management System Meanwhile, the Geographic Information Maynilad establishes Integrated System department also attained an ISO Management Systems (IMS) in its offices certificate in Quality Management Systems. and facilities to ensure that its procedures The company’s Central Laboratory likewise and processes follow world-class standards. passed the accreditation of the Philippine We have maintained the ISO certifications Accreditation Office. The recognition was of our vital facilities through the years obtained following the implementation of a and also continue to add to our roster of Laboratory Quality Management Systems internationally accredited offices. that satisfies the requirements of the PNS ISO/IEC 17025:2005 standard. In 2013, we successfully set up IMS for the following: Logistics Warehouse (its To date, Maynilad has a total of 86 ISO central depot and three satellite areas), certifications, including those of its five pumping stations (Baesa, Ermita, Human Resources Division; Corporate Patindig Araw, Marcos Alvarez and Pagcor), Quality, Environment, Safety and Health Fairview-Commonwealth Business Area, Division; La Mesa Treatment Plants 1 and and Novaliches-Valenzuela Business Area. 2; Dagat-Dagatan Sewage and Septage Treatment Plant; Tondo Sewage Pumping All of these facilities achieved international Plant; Water Network (including its certifications in Quality Management accompanying pipelines, 12 pumping Systems (ISO 9001:2008), Environmental stations, Head Office and maintenance Management Systems (ISO 14001:2004 + shop); and North Caloocan Business Area. Cor.1:2009), and Occupational Safety and Health Management Systems (BS OHSAS Maynilad is also the first and only water 18001:2007). company in the Philippines to receive the ISO 14064:2006 certification for the verification of its greenhouse gases or carbon footprint quantification and reporting initiative.
33 Our Backstory For 2013 alone, Maynilad was able to plant 54,100 trees in the area, covering a total of 42.75 hectares. Over 700 volunteers were tapped for the tree planting.
Watershed Management Maynilad maximizes existing water sources Maynilad was able to raise P407,100 by through various watershed management auctioning off their driftwood art pieces, initiatives. Central to this is the Ipo and the funds went to the education of the Watershed, which is the venue of our Dumagat children, as well as for further annual “Plant for Life: Save Ipo Watershed” training and the purchase of tools for the activity. For 2013 alone, Maynilad was able sculptors. to plant 54,100 trees in the area, covering a total of 42.75 hectares. Over 700 volunteers The Company involves its different were tapped for the tree planting. stakeholders in the environmental protection effort. For example, our Daloy An offshoot of this activity is a new Dunong education program brought youth project called “Sining Ipo,” which engaged groups to watersheds to teach them the Dumagats—the indigenous people living importance of nature conservation. in the watershed—to promote conservation through art. Chieftains were trained by Besides the Ipo watershed, Maynilad’s renowned sculptor Rey Contreras to “Plant for Life” also pursues mangrove transform driftwood into sculpture that rehabilitation activities along the shores of they can sell. Providing them this alternate Manila Bay, which cover coastal barangays source of income helps to discourage their within the province of Cavite. A total of charcoal-making livelihood, which entails 20,000 mangrove propagules were planted the cutting down of trees. in the area in 2013. As in the Ipo watershed activity, this also taps volunteers from private and government institutions, as well as the local communities.
2013 Annual Report 34 OPERATIONOPERATIONAL HIGHLIGHTS HIGHLIGHTS
In 2013, we conducted a total of 247 training sessions and seminars on leadership and management development, professional and technical growth development, and integrated management system.
35 Our Backstory The company provides trainings that develop the technical and commercial skills of employees.
Human Resource Management The most important factor in sustaining We also brought the management system business gains is our investment in our own closer and more accessible to all employees. people. In 2011, we launched “HR Plus”, We reviewed HR processes and facilitated a medium-term plan intended to provide the automation of a number of HR a roadmap for Maynilad’s human resource transactions. The enhanced HR Plus Online transformation. The goal of the plan was to was rolled out in January 2014, equipped expand the scope, impact and relevance of with new functionalities that will allow HR programs beyond the traditional HR employees to access vital HR services and practice, and to achieve measurable impacts information via Maynilad’s intranet. on profit, people, and business growth.
In 2013, we conducted a total of 247 training sessions and seminars on leadership and management development, professional and technical growth development, and integrated management system. We also successfully launched and conducted the first phase of the Maynilad Values Program (MVP), which had 96% of all Maynilad employees in attendance.
2013 Annual Report 36 37 Our Backstory Dr. Ricardo Jose Miranda Head, Health Management
Doc Ric, as he is fondly called by his colleagues, their dependents. The same is true of the annual heads the Health Management department of the physical examination, which has maintained a high Human Resources Division. His team serves 2,200 compliance rate of 99% for several years. They employees geographically dispersed in 17 cities and have also opened medical and dental forums to municipalities. employees to discuss seasonal diseases and other health issues. These forums are brought to different He joined Maynilad in 2007, and has since redefined Business Areas so everyone can participate. Doc Ric the way the company takes care of its people believes that health promotion is a proactive job. through responsive and engaging health programs. Under Doc Ric, the programs that his department To make sure that employees are constantly spearheaded reflect Maynilad’s HR policy of reminded of the importance of preventive medical promoting the welfare of its people in ways that go procedures, he has developed a checklist of above and beyond industry standards. procedures that employees are advised to undergo as they age. His department also holds an annual “We have a three-point agenda in our department: Health and Wellness Awareness Day where First, we want to roll out and intensify health employees can avail of free screening tests, among risk-reducing and preventive programs; second, other services. we want to focus on and maximize treatment and rehabilitation services; third, we want to strengthen For Doc Ric, the most challenging part of the employee health education and awareness,” says job is not making health services accessible to Doc Ric. “These are in addition to other health employees, but changing their mindset so they put initiatives that we pursue in compliance with DOH more importance on health and avail of the services. and DOLE requirements for occupational health Despite this, the job is a source of happiness and practice in the workplace.” fulfillment for Doc Ric and his team.
For risk reduction and disease prevention, Doc Ric “In our small way, we are able to address our happily reports that their vaccination programs, colleagues’ medical needs. It is really a team offered at discounted prices in partnership with effort. Personally, it makes me happy when I get pharmaceutical companies, are being availed recognized by my fellow employees, that they trust of by an increasing number of colleagues and me,” says Doc Ric.
2013 Annual Report 38 OPERATIONAL HIGHLIGHTS
Maynilad is banking on technology to make water supply management more efficient.
Data Accuracy and Automation Technology plays a crucial role in promoting Another technology-enabled development operational efficiencies. Maynilad has is our increased reliance on FieldMOUS therefore been investing in state-of-the-art (Field Monitoring User System)—an IT technology, specifically in the areas of data system that provides up-to-date monitoring processing, automation and geolocation. of water supply data from raw water sources to the distribution network within the West In 2013, we laid down a five-year roadmap Concession area. Aside from serving as the for the installation of a centralized single and centralized repository of field automation and remote control system data, the system also provides management a connecting Maynilad’s water and wastewater quick view of service level indicators such as networks, and allowing facilities to be pressure and supply across the network. controlled from a single command center. Based on the roadmap, our water To ensure that we stay on track based service operation facilities should be fully on our roadmap, we have established a automated to adjust water supply based new Automation and Instrumentation on demand by 2016. The groundwork for Department that will be in charge this ambitious project has been laid by of the design and maintenance of all connecting pumping stations to a fiber optic instrumentation and field automation for network, aside from other investments in all facilities. hardware and software.
39 Our Backstory Based on the roadmap, our water service operation facilities should be fully automated to adjust water supply based on demand by 2016.
2013 Annual Report 40 OPERATIONAL HIGHLIGHTS
Corporate Social Responsibility
Maynilad’s corporate social responsibility initiatives in 2013 were channeled toward achieving sustainable development in areas such as environment protection, health, education, and disaster response. New initiatives were launched and flagship programs were expanded to reach a wider set of audiences—from schoolchildren to families, from communities to regulatory agencies.
Maynilad installs drink-wash stations in public schools through its Lingkod Eskwela Program.
41 Our Backstory School Outreach We engaged 11,565 students in 52 schools Maynilad mobilized its employees to reach through the Daloy Dunong water education out to six schools for our biggest ever drive, which teaches them about the role Brigada Eskwela effort. We refurbished of clean water in personal hygiene and science laboratories, set up computer community health, as well as the importance laboratories, conducted lectures on water, of caring for our water resources. wastewater and the environment, and established “Water Education Corners”. Our Lingkod Eskwela program brought a more direct impact on schoolchildren by Department of Education Secretary Bro. providing 54 public schools with drink- Armin Luistro lauded our concerted wash areas, bringing the total number efforts in building environmental of beneficiary schools to 180. We also consciousness in schools through revisited 129 past beneficiary schools to fix substantial and meaningful programs. their water and sanitation facilities.
2013 Annual Report 42 OPERATIONAL HIGHLIGHTS
Maynilad’s community Community Engagement an inter-barangay Water Warrior Frisbee engagement activities highlight the importance of water to health. We renewed our commitment to providing tournament to close the year. At the same livelihood programs for more communities time, around 230 households in ten villages in 2013. Armed with expert sculpting skills, in Parañaque, Muntinlupa and Las Piñas the Dumagats of Ipo Dam are now able participated in our Ginhawa Zumba classes. to augment their income by crafting and Aside from reminding participants of the selling art pieces made from driftwoods. benefits of staying fit, these sessions also Similarly, members of the Mamamayan taught them how reliable water contributes Para sa Lambat at Dagat Multi-Purpose to wellness and how a deteriorating Cooperative are sustaining their shellfish environment affects our water supply and, farm through our P600,000 donation and as a result, the health of our families. P1 million seed money, which they are now using as a loaning facility and for Maynilad also led the Philippine other projects. celebration of World Water Day 2013 in partnership with the Department of On a lighter yet equally important note, Environment and Natural Resources Maynilad was also able to bring families (DENR) and 25 other government and communities together around various agencies and private organizations. Key health and fitness initiatives. Frisbee events of the advocacy campaign include clinics held in 12 communities and the Maynilad thinkLiquid 2013 Film participated in by poor kids culminated in Competition, the Maynilad-PUP AdClash
43 Our Backstory We renewed our commitment to providing livelihood programs for more communities in 2013.
Wastewater Campaign Competition, the signing of a partnership agreement between Maynilad and the Foundation for the Promotion of Science and Mathematics Education and Research, Inc. (FPSMER) for the production of water education teaching-learning tools, and the “Giant Water Snake” formation by World Water Day 2013 partners at the SM Mall of Asia in Pasay City.
2013 Annual Report 44 OPERATIONAL HIGHLIGHTS
45 Our Backstory 2013 Annual Report 46 OPERATIONAL HIGHLIGHTS
Left to Right Crisis Response Typhoon Yolanda calamity victims lining up before the Maynilad Another illustration of what makes In addition to these efforts on the field, relief goods distribution booth Maynilad a responsible corporate citizen Maynilad set up a repacking center in the at Camp Aguinaldo; A boy drinks water from a jug equipped with a is how fast and how well we responded head office where employees deposited and microfilter Maynilad donated for to fellow Filipinos outside the West packed donations. We also manned relief typhoon-stricken communities in Cebu; Transforming driftwood Concession Area in times of crisis. distribution booths at Camp Aguinaldo, into sculpture is now an alternate source of livelihood for the Villamor Air Base, Villamor Elementary Dumagat inhabitants of the Ipo In November, more than 152,000 liters of School, and various Department of Social watershed. potable water from Maynilad reached 20 Welfare and Development (DSWD) municipalities and cities in the typhoon- repackaging sites. stricken provinces of Leyte, Samar, Cebu, Iloilo and Palawan. In addition to this Maynilad’s assistance to the provinces emergency response, and in partnership that were hard-hit by Typhoon Yolanda with UNICEF, we sent a 650-kva generator extended into the rehabilitation phases, to power up the Metro Leyte Water by helping them set up a more sustainable District water treatment facility. We then source of clean water via a project called deployed four 10-cubic-meter tankers to Mission Ginhawa. With money raised Tacloban, manned by our own people, from employee donations, Maynilad to make sure that drinking water from turned over 2,500 water filtration systems the treatment plant reached the affected to the affected communities. Employee barangays. Four portable treatment volunteers, including President Victorico machines, with a combined capacity of P. Vargas, went to these communities around 25,000 gallons per day, were also to educate them on the proper use and stationed in the area to augment the limited maintenance of these filtration systems. water supply.
47 Our Backstory We likewise provided help when other town of Tubigon, where it produced up to calamities struck the country. A total of 3,000 gallons of drinking water per day for 232,600 liters of drinking water were refugees in Barangays Clarin and Calape. donated to the victims of Typhoon Maring and the Habagat through various Spirit of Volunteerism government agencies, Tulong Kapatid From engaging schoolchildren to teaching Foundation and other private groups. communities, all the way to responding Over 4,000 families benefitted from to crisis calls, the spirit of volunteerism Maynilad’s relief operations in Cavite, is kept alive among Maynilad employees Marikina, Laguna, Manila, Mandaluyong, because they are constantly provided with Quezon City, Muntinlupa, Valenzuela, opportunities to share their time and talent Malabon, Parañaque, Pampanga and for a noble cause. Bataan. Our rescue team also assisted in ferrying stranded victims in Tullahan, Commonwealth, Bagong Silangan and Batasan Hills, Quezon City, and in Kawit, Cavite. Employees devoted time in the Tulong Kapatid relief repacking center.
More than 25,500 liters of drinking water were sent to the earthquake victims in Cebu and Bohol, through the DSWD and TV5 Alagang Kapatid. A water treatment machine was also deployed to the Bohol
2013 Annual Report 48 49 Our Backstory Ronel Nojalda Water Production Engineer
As foreman of the Electrical Section, a typical hindi na alam kung paano sila magsisimulang muli day for Water Production Engineer Ronel ng bagong buhay. Naiyak talaga ako sa sobrang Nojalda involves maintaining the electrical and pagkahabag sa lahat ng aking nasaksihan. [The instrumentation equipment, devices and controls cries of every person, the bare mountains and all of La Mesa Treatment Plants 1 and 2. the destroyed houses, people who have no idea how they could start a new life—they all left a But not every day is a typical day for Ronel. In mark in my mind. I could not help but cry out of his five years as a Maynilad employee, Ronel has pity at what I saw.]” also been among the frontliners whenever the company would deploy its crisis response team Unfazed by the desperation all around him, Ronel to disaster-stricken areas all over the Philippines. focused on doing what he was sent there to do: Although he is aware of the dangers that come Provide life-giving water to survivors who were with being deployed in crisis situations, Ronel is holding on to what little hope they had. The task grateful for the opportunity to bring Maynilad’s was physically draining, but what sustained Ronel public service to those in need. and the rest of Maynilad’s crisis response team was the knowledge that thousands of survivors Most recently, Ronel saw action in the aftermath were relying on them for sustenance. of Typhoon Yolanda, when he was deployed to Tacloban City to operate Maynilad’s portable Opportunities like this, which push him to go water treatment plant. Ronel recalls the harrowing above and beyond the call of duty, make Ronel situation that he and his team found themselves in. proud to be a Maynilad employee. He is grateful to his superiors for deploying him to places and “Tumatak sa aking isip ang nakapangingilabot situations that test his spirit and that allow him na panaghoy ng bawat tao, mga kalbong to witness how clean and safe water can not only kabundukan at mga wasak na tahanan, mga taong quench thirst but keep hope afloat as well.
2013 Annual Report 50 Financial Review and Analysis
Revenues Operating Expenses (OPEX) Consolidated revenues from water and sewer services for the year grew 6.8% Cash OPEX to P16.50 billion from P15.44 billion Consolidated cash OPEX increased by 11.4% last year. The increase in revenues was to P5.21 billion versus P4.67 billion last year primarily driven by the 3.6% increase primarily driven by increases in personnel in billed volume and a 2.7% increase in cost and professional fees. The four largest average effective tariff in the West Zone cost elements accounting for 73% of total Concession Area (West Zone). cash expenditures continue to be personnel cost, light and power, contracted services, Although the approved basic tariff increase and repairs and maintenance, which grew a for the year was 3.2% in line with the combined 11.83% during the year. 12-month Consumer Price Index (CPI) increase, the average effective increase The largest cost element, personnel costs, was dampened by the higher proportion increased 11.3% to P2.04 billion due of billed volume growth coming from primarily to the accrual of a newly approved domestic consumption whose rates are long-term incentive plan (LTIP) payable subsidized by non-domestic or commercial to employees on the attainment of set and industrial accounts. As a percentage of three-year targets. Excluding the accrual volume, domestic customers accounted for of LTIP benefits, personnel costs would 79.74% of total compared to 79.07% in the have grown by 4.8% compared to last year, same period last year. driven primarily by salary adjustments as West Zone headcount declined to 2,226 Furthermore, due to Maynilad’s volumetric employees at the end of December versus tariff table, even within the same customer 2,251 last year. This translates to 1.97 categories, the lower the average consumption employees per thousand connections of each customer, the lower the average tariff compared to 2.10 employees per thousand per cubic meter consumed. connections at the end of last year.
Consolidated revenues from operations, Light and power increased 10.7% to P780.5 including other fees and services such as million due to higher electrical usage as installation fees, amounted to P16.9 billion, a result of increased network pumping a 6.4% increase from P15.88 billion last year. activities in order to deliver water to new customers in the south and operation of
51 Our Backstory new sewage treatment plants or STPs built fees. Concession assets (composed of to meet the sewerage coverage targets in the concession fees and network PP&E) San Juan river system in Quezon City but are considered intangible assets and are tempered by lower average power rates. amortized over the life of the concession. Beginning 2013, the company decided that Contracted services increased 8.28% to given the large initial expenditures and P523 million in line with the growth of the the economic benefit of the concession company’s facilities, particularly the new asset being more closely aligned with the STPs and pumping stations. Repairs and growth in billed volume, it would apply maintenance grew 11.04% to P467 million the unit-of-production (UOP) method, as a result of increased leak repairs for instead of the straight-line method, of water service connections as the company’s amortizing its concession asset. improved service levels increased water availability and water pressure throughout Despite the company’s continuing capital the network. expenditure program, amortization of intangible assets decreased 14.5% to Excluding these four main items, all other P1.57 billion from P1.83 billion in the cost elements accounting for 27% of prior year, as a result of the shift to the total cash operating expenses increased UOP method of amortization. Partially by 11.06% compared to the same period offsetting the lower amortization is the last year primarily due to an increase in lower provision for doubtful accounts due professional fees in relation to the rate to improved collection performance. Total rebasing exercise offset by lower business non-cash operating expenses decreased by development costs. Without this item, P200 million or 9.32% to P1.94 billion all other expenses would have grown by from P2.14 billion last year. around 8.5%. Non Recurring Income and Charges Non-Cash OPEX On March 22, 2013, Maynilad refinanced Under IFRIC 12, all property plant and approximately P21.0 billion of its secured equipment (PP&E) defined as parts of term loans, in order to take advantage of the network are considered intangible lower interest rates. The new loans were assets. These are no longer depreciated obtained on a clean basis, reflecting the but are instead amortized over the life improved financial position of the company. of the concession similar to concession Since the refinancing involved essentially
2013 Annual Report 52 FINANCIAL REVIEW AND ANALYSIS
the same set of creditors, the company could due to the double-digit decline in non-cash not capitalize the resulting debt-issue costs operating expenses. of approximately P548 million in front- end fees. Additionally, the pre-termination EBITDA of term loans of the same amount resulted Core Earnings before Interest, Taxes, in P200 million in additional gross receipts and Depreciation (EBITDA) grew at a taxes. These one-time charges amounting to slightly slower pace than revenue at 5.9% approximately P748 million are considered to P11.08 billion versus P10.46 billion last non-core and are added back to reported net year, resulting in a marginally lower margin income to get core net income as shown in of 65.6% compared to the 65.9% margin the next section. obtained in same period last year.
In 2012, Maynilad booked one-time charges Balance Sheet amounting to P469.5 million resulting from In 2013, Maynilad’s total assets grew 11.8% the net effect of the write-off of deferred tax to P68.73 billion compared to P61.47 assets brought about by the impending shift billion at the end of 2012. Concession in amortization from straight-line to unit of assets continued to form bulk of total assets production method, the write-down of debt growing 7.5% to P54.56 billion or 79% of issue costs from then existing term loans as total assets. Growth in concession assets the refinancing of these loans was already slowed down during the year due to right- being planned for the first quarter of 2013, of-way and permitting issues before and and the reversal of provisions related to the immediately after the May elections, as well disputed claims of MWSS. Similarly, these as the difficulty experienced in obtaining one-time charges were considered non- land for the construction of sewage core and added back to reported income to treatment plants. Other non-current assets derive core net income. increased significantly by 72% or P274 million due to the Company’s acquisition Net Income of 10% of Subic Water from the City of Income from operations for the year Olongapo in January. (See discussion on improved by 7.5% to P9.75 billion from investments.) P9.07 billion last year. Reported net income grew at the same pace to P6.94 billion On February 13, 2013, the entry of from P6.38 billion in the prior year. The Marubeni as a shareholder with an impact of the additional expenses incurred indirect 20% ownership in Maynilad in the refinancing of the company’s long- was completed. The transaction involved term loans was partially tempered by the Marubeni’s direct investment in Maynilad net effect of the prior year’s one-time Water Holding Company, Inc. (MWHCI), charges as discussed in the preceding Maynilad’s controlling shareholder, which section. Core net income for the period, subsequently subscribed to additional which excluded these one-time charges and shares in the company at a price of P10.4 foreign exchange gains or losses, amounted billion. On the same day, Maynilad to P7.53 billion, a growth of 10.6% from approved a cash dividend amounting to last year’s core net income of P6.81 billion, P11.4 billion to all shareholders of record as
53 Our Backstory of February 4, 2013 and payable within the of the year amounted to 37,515 and NRW month. MWHCI’s additional investment was at 33%. Maynilad’s 10% investment in resulted in additional paid-in capital of Subic Water is carried at cost. P9.86 billion, effectively replacing part of the retained earnings that had been Acquired in August 2012 and owned 100% declared as dividends. An additional P1.1 by Maynilad, PhilHydro owns and operates billion in dividends was also paid in July, three plants that supply treated bulk water and another P1.0 billion in December. to the Legazpi City Water District in Albay, Norzagaray Water District and Santa Maria In addition to the P21.0 billion refinancing Water District in Bulacan, and municipal in March, Maynilad also signed a new clean waterworks of Bambang, Nueva Vizcaya. term-loan facility amounting to P5.0 billion The company also owns and operates of which 50% or P2.5 billion was drawn in the treated water supply and distribution April, and the balance in October boosting system of Rizal, Nueva Ecija. The company cash levels. The delay experienced in has a total plant capacity of 53 MLD and is capital expenditures resulted in lower than currently operating at around 28 MLD. expected disbursements causing a 65.6% growth in the company’s ending cash and In 2013, PhilHydro improved its billed short-term investments amounting to P6.49 volume by 8.1% to 27.9 MLD compared billion. Although total liabilities increased to its average 25.8 MLD for 2012. The 7.3% to P48.0 billion from P44.7 billion at company delivered revenues amounting to the end of 2012, Maynilad’s total debt-to- P119 million and a stand-alone net income equity ratio still improved to 70:30, from of P5.4 million. 73:27 twelve months earlier.
Investments On January 28, 2013, Maynilad won the bid to acquire 10% of Subic Water and Sewerage Company Inc. (Subic Water) from the city of Olongapo for P211 Million. After the expiry of the right of first refusal of Subic Water’s existing shareholders to acquire the shares, Maynilad signed the deed of sale for the acquisition on March 15, 2013.
Subic Water operates the water supply and sewerage system in the Subic Bay Freeport and the water system in Olongapo City, under a franchise agreement expiring in 2027. In 2013, Subic Water generated 15.5 MCM of billed volume and delivered gross revenues of P543 million and net income of P205 million. Billed connections at the end
2013 Annual Report 54 Corporate Information
Shareholder Board of Structure Directors
2% 20%
Shareholder Structure
52.8% 25.2%
Metro Pacific Investments Corp.
DMCI Holdings, Inc.
Marubeni Corp.
Others
Row 1 From Left: Manuel V. Pangilinan, Isidro A. Consunji
Row 2 From Left: Jose Ma. K. Lim, Jorge A. Consunji, Victorico P. Vargas
Row 3 From Left: Randolph T. Estrellado, Atty. Marilyn A. Victorio-Aquino, Takashi Sunami
Row 4 Kensuke Tatsukawa
55 Our Backstory Manuel V. Pangilinan Jorge A. Consunji Chairman, 2007 to present Director, 2007 to present
Mr. Pangilinan, 67 years old, assumed chairmanship of Maynilad in January Mr. Consunji has been a Director of Maynilad since January 2007. He is also 2007 and remain as such up to the present. He was appointed as Chairman presently the President and Chief Operating Officer of D.M. Consunji, Inc. He of the Philippine Long Distance Telephone Company (PLDT) after serving as also serves as a member of the Board of Directors of DMCI Holdings Inc., DMCI its President and Chief Executive Officer from Nov. 1998 to Feb. 2004 and Power Corp., DMCI Mining Corp., DMCI-PDI, Dacon Corp., M&S Company Inc., became Chairman of PLDT Communications and Energy Ventures Inc. (PCEV, Semirara Mining Corp., Sem-Calaca Power Corp., Sirawai Plywood & Lumber formerly Piltel) on Nov. 3, 2004. He also holds chairmanship in Metro Pacific Co., Manila Herbal Corp., and Beta Electric Corp. He also serves as Chairman Investments Corp., Smart Communications, Inc., ePLDT, Inc., Landco Pacific of the Board of Wire Rope Corp. and DMCI Masbate Power Corp.; Director of Corp., Philex Mining Corp., Metro Pacific Tollways Corp., Manila North Tollways Private Infrastructure Development Corp.; past Chairman of Asean Constructors Corp., Medical Doctors, Inc. (Makati Medical Center), Colinas Verdes, Inc. Federation; and past President of Philippine Constructors Association. (Cardinal Santos Medical Center) and Davao Doctors, Inc. He is also Chairman of the Manila Electric Company (Meralco). Victorico P. Vargas Director, August 2010 to present Mr. Pangilinan founded First Pacific Company, Limited in 1981 and served as its Managing Director until 1999. He was appointed as Executive Chairman Mr. Vargas is concurrently the President and CEO of Maynilad. He formally until June 2003, when he was named CEO and Managing Director. He also took over the position last August 2010. He is also a Director for Metro Pacific holds the position of President Commissioner of P.T. Indofood Sukses Makmur Investments Corp., Metropac Water Investments Corp.; Director and Chairman Tbk, the largest food company in Indonesia. Outside the First Pacific Group, of Philippine Hydro, Inc.; member of the Executive Committee of the First Mr. Pangilinan was a member of the Board of Overseers of the Wharton Pacific Leadership Academy, and trustee of the MVP Sports Foundation, School of Finance & Commerce, University of Pennsylvania. He is Chairman Inc. and the IdeaSpace Foundation, Inc. In the field of sports, he currently of the Board of Trustees of San Beda College. He also serves as Chairman of holds the position of President for the Amateur Boxing Association of the PLDT-Smart Foundation, Inc. and the Philippine Business for Social Progress. Philippines (ABAP). He has been elected Vice Chairman for the Samahang He also serves as Vice Chairman of the Foundation for Crime Prevention, Basketbol ng Pilipinas, Inc., the national sports association for Philippine and a member of the Board of Trustees of Caritas Manila and Radio Veritas Basketball, and is a member of the Philippine Olympic Commission (POC) and Global Broadcasting Systems, Inc. In Feb. 2007, he was named President of International Basketball Federation (FIBA). He holds the position of Alternate the Samahang Basketball ng Pilipinas, and effective Jan. 2009, he assumed Governor of the Philippine Basketball Association (PBA), the nation’s chairmanship of the Amateur Boxing Association of the Philippines. In Dec. professional basketball league. The Philippine Sportswriters Association (PSA) 2013, Roxas Holdings, Inc. announced the election of Mr. Pangilinan as Vice conferred Mr. Vargas with the title “Executive of the Year” for 2011. Chairman of its Board of Directors. Randolph T. Estrellado Isidro A. Consunji Director, 2007 to present Vice Chairman, 2007 to present Mr. Estrellado has been a Director of Maynilad since January 2007 and is Mr. Consunji, 65 years old, has been Vice Chairman of Maynilad since January concurrently the Company’s Chief Finance Officer. He was Director and Chief 2007. He is a Member of the Board of Directors of D.M. Consunji, Inc. (DMCI), Finance Officer of Metro Pacific Investments Corp. Prior to joining Metro Semirara Mining Corp., Maynilad Water Holding Company, Inc., Crown Equities, Pacific, Mr. Estrellado was Vice President and Chief Finance Officer for ABS- Inc., Atlas Consolidated Mining and Dev. Corp., Carmen Copper Corp., Sem- CBN Broadcasting Corporation. While at ABS-CBN, he managed all aspects of Calaca Power Corp., Berong Nickel Corp., Toledo Mining Corp., and ENK PLC the network’s financial operations, including financial planning, controllership, (London). He holds chairmanship in DMCI Project Developers Inc., DMCI treasury, budget, and investor relations. Mr. Estrellado had served in various Mining Corp., DMCI Homes, and Beta Electric Corp. He is President of DMCI positions of senior responsibility with the Lopez Group of Companies since Holdings, Inc., Dacon Corp., and Asia Industries, Inc. 1996. He had formerly also served in financial positions at Phinma and P.T. Dwi Satrya Utama in Indonesia. Mr. Consunji graduated from the University of the Philippines where he earned a degree in Bachelor of Science in Engineering. He also took up Master of Atty. Marilyn A. Victorio-Aquino Director, December 21, 2012 to present Business Economics from the Center for Research & Communication, and Master of Business Management from the Asian Institute of Management. He Atty. Aquino joined the Maynilad Board on December 21, 2012. She is also took up Advanced Management Program at IESE School in Barcelona, Spain. Assistant Director at First Pacific Company Limited (FPC). She joined FPC on July 1, 2012 following her 31-year practice at SyCipLaw. She graduated He became President of the Philippine Constructors Association from 1999 cum laude (class salutatorian) from the University of the Philippines, College to 2000, and the Philippine Chamber of Coal Mines, Inc. from May 1999 of Law in 1980 and placed second in the Philippine Bar Examination in the to January 2002. At present, he is Chairman of the Philippine Overseas same year. Atty. Aquino is also a Director of Philex Mining Corporation, Philex Construction Board (POCB), and a Board Member of the Construction Petroleum Corporation, and Silangan Mindanao Mining Co., Inc. Industry Authority of the Philippines.
Takashi Sunami Mr. Consunji is an active member of the U.P. Beta Epsilon Fraternity, Asian Director, February 13, 2013 to present Institute of Management Alumni Association, U. P. Alumni Engineers, and U.P. Aces Alumni Association. Mr. Sunami joined the Maynilad Board of Directors in the first quarter of 2013. He pioneered the development of the water business in Marubeni Corporation Jose Ma. K. Lim for over 20 years through his position such as General Manager of the Director, 2007 to present department (1999-2001), managing the BOT (Build, Operate and Transfer) Water Supply Project in Chengdu City, China with Veolia in France as partner Mr. Lim has been a Director of Maynilad since January 2007. He is President & and the other BOT in Mexico. CEO of Metro Pacific Investments Corp., and is also currently a Director in the following MPIC subsidiary and/or affiliate companies: Beacon Electric Asset Mr. Sunami also held the following previous positions: President of the Holdings Inc., Manila Electric Company, Metro Pacific Tollways Corp., Manila Aquasistema Salina Cruz, S.A., in partnership with Degremont in France, for North Tollways Corp., Tollways Management Corp., Indra Philippines Inc., the BOT Desalination & Wastewater Treatment of Pemex, Mexico from 2011 Medical Doctors, Inc. (owner and operator of Makati Medical Center), Cardinal to 2012; President of Suisei Co., Ltd. for the promotion of Water Concession Santos Medical Center (Colinas Verdes Hospital Managers Corp.), and Our Lady in Japan from 2006 to 2007; and Managing Director of Jenets Co., Ltd., in of Lourdes Hospital. He serves as Chairman of Asian Hospital, Davao Doctors partnership with Veolia in France, for the operation and management of water Hospital (Clinica Hilario) Inc., and Riverside Medical Center in Bacolod. Mr. Lim is tariff billing & collection from 2002 to 2006. also President of the Metro Strategic Infrastructure Holdings, Inc. (MSIHI) which holds a minority ownership in Citra Metro Manila Tollways Corp. (Skyway). He Kensuke Tatsukawa is active in the Management Association of the Philippines and has served Director, April 22, 2013 to present as Vice-Chair of the Good Governance Committee from 2007 to 2009. He is a founding member and Treasurer of the Shareholders Association of the Mr. Tatsukawa joined the Maynilad Board of Directors last April 2013, and Philippines. is the Unit Director for the Environment Infrastructure Department of the Marubeni Corporation. He was also assigned by Marubeni to help facilitate international projects in Doha, Qatar as Project Director for the Doha Sewage Project Office (2008-2010), and in Jakarta, Indonesia as Project Coordinator (1994-2001).
2013 Annual Report 56 CORPORATE INFORMATION
Top Management Team
57 Our Backstory Victorico P. Herbert M. Randolph Vargas Consunji T. Estrellado President and Chief Chief Operating Officer Chief Finance Officer Executive Officer
Christopher J. Francisco C. John Patrick C. Levi F. Lichauco Castillo Gregorio Diestro Head, Business Head, Information Head, Commercial Head, Human Resources Area Operations Technology Services and Marketing
Atty. Lourdes Antonio F. Irineo L. Francisco A. Marivic P. Espiritu Garcia Dimaano Arellano Head, Legal and Head, Wastewater Head, Central Head. Corporate Quality, Regulatory Affairs Management Non-Revenue Water Environment, Safety and Health
Yolanda C. Ronaldo C. Marcos D. Arturo Celso D. Lucas Padua de Jesus Baranda Head, Program Head, Water Supply Head, Technical Services Head, Corporate Logistics Management Operations
2013 Annual Report 58 Financial Statements
INDEPENDENT AUDITOR’S REPORT
The Stockholders and the Board of Directors Maynilad Water Services, Inc. MWSS Compound, Katipunan Road Balara, Quezon City
We have audited the accompanying consolidated financial statements of Maynilad Water Services, Inc. and Subsidiaries (a subsidiary of Maynilad Water Holding Company, Inc.), which comprise the consolidated statements of financial position as at December 31, 2013 and 2012, and the consolidated statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2013, and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
59 Our Backstory We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Maynilad Water Services, Inc. and Subsidiaries as at December 31, 2013 and 2012, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2013 in accordance with Philippine Financial Reporting Standards.
SYCIP GORRES VELAYO & CO.
Johnny F. Ang Partner
CPA Certificate No. 0108257 SEC Accreditation No. 1284-A (Group A), February 14, 2013, valid until February 13, 2016 Tax Identification No. 221-717-423 BIR Accreditation No. 08-001998-101-2013, January 28, 2013, valid until January 27, 2016 PTR No. 4225148, January 2, 2014, Makati City
February 24, 2014
2013 Annual Report 60 MAYNILAD WATER SERVICES, INC. AND SUBSIDIARIES (A SUBSIDIARY OF MAYNILAD WATER HOLDING COMPANY, INC.)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Amount in thousands)
December 31, 2013 December 31, 2012 January 1, 2012 (As restated -Note 2) (As restated -Note 2)
ASSETS
Current Assets
Cash and cash equivalents (Notes 5, 25 and 26) P2,864,405 P3,906,336 P4,175,437
Short-term investments (Notes 5, 25 and 26) 3,627,000 14,085 –
Trade and other receivables (Notes 6, 25 and 26) 2,010,165 2,532,914 2,034,815
Other current assets (Notes 7, 11, 25 and 26) 2,392,881 1,795,134 2,266,171
Total Current Assets 10,894,451 8,248,469 8,476,423
Noncurrent Assets
Service concession assets (Notes 8, 11, 13, 15 and 23) 54,560,728 50,758,127 44,587,539
Deferred tax assets - net (Notes 16 and 21) 2,072,997 1,712,953 1,868,987
Property and equipment (Note 9) 548,272 367,332 335,202
Goodwill (Note 4) 288,082 288,082 –
Available-for-sale financial assets (Note 10) 210,584 – –
Other noncurrent assets (Notes 25 and 26) 155,364 92,247 98,089
Total Noncurrent Assets 57,836,027 53,218,741 46,889,817
P68,730,478 P61,467,210 P55,366,240
LIABILITIES AND EQUITY
Current Liabilities
Current portion of interest-bearing loans (Notes 8, 11, 25 and 26) P1,703,831 P1,031,600 P985,971
Trade and other payables (Notes 12, 15, 17, 24, 25 and 26) 12,226,318 11,329,689 9,622,691
Current portion of service concession obligation payable to MWSS (Notes 8, 13, 25 and 26) 954,706 1,012,526 1,656,413
Deposits for future stock subscription (Note 14) – 33,506 –
Total Current Liabilities 14,884,855 13,407,321 12,265,075
Noncurrent liabilities
Interest-bearing loans - net of current portion (Notes 8, 11, 25 and 26) 23,638,204 20,623,579 21,551,777
Service concession obligation payable to MWSS - net of current portion (Notes 8, 13, 25 and 26) 7,915,367 7,974,985 7,739,593
Deferred credits (Notes 1, 2, 25 and 26) 987,815 2,129,354 1,115,185
Customers’ deposits (Notes 2, 25 and 26) 240,543 206,278 139,040
Pension liability (Note 17) 192,899 240,304 165,455
Other noncurrent liabilities (Note 17) 177,878 166,926 79,521
Total Noncurrent Liabilities 33,152,706 31,341,426 30,790,571
Total Liabilities 48,037,561 44,748,747 43,055,646
Equity
Capital stock (Notes 1, 12 and 14) P4,546,982 P4,010,893 P4,010,893
Additional paid-in capital (Note 14) 9,979,786 101,815 101,815
Treasury shares (Note 14) (4,110) (9,730) (6,572)
Other comprehensive income (loss) (Note 17) 32,920 (82,401) (100,461)
Other equity adjustments (Note 14) (309,220) (308,695) (322,369)
Retained earnings (Note 14)
Unappropriated 2,446,559 806,581 6,627,288
Appropriated for capital expenditures 4,000,000 2,000,000 2,000,000
Appropriated for cash dividend – 10,200,000 –
Total Equity 20,692,917 16,718,463 12,310,594
P68,730,478 P61,467,210 P55,366,240
61 Our Backstory MAYNILAD WATER SERVICES, INC. AND SUBSIDIARIES (A SUBSIDIARY OF MAYNILAD WATER HOLDING COMPANY, INC.)
CONSOLIDATED STATEMENTS OF INCOME (Amounts in Thousands, Except Earnings Per Share Value)
Years Ended December 31
2013 2012 2011 (As restated -Note 2) (As restated -Note 2)
OPERATING REVENUE
Water services:
West zone P13,468,569 P12,489,702 P11,152,074
Outside west zone 118,520 48,507 –
Sewer services -
West zone 2,909,369 2,906,462 2,171,743
Others 398,742 438,093 445,663
16,895,200 15,882,764 13,769,480
COSTS AND EXPENSES
Salaries, wages and benefits (Notes 14, 15 and 17) 2,042,867 1,811,052 1,595,348
Amortization of service concession assets (Notes 4 and 8) 1,565,644 1,831,441 1,428,501
Utilities 824,950 745,363 621,830
Contracted services 767,902 694,670 539,072
Repairs and maintenance 467,546 421,060 281,537
Depreciation and amortization (Note 9) 231,241 158,351 217,518
Materials and supplies 192,747 196,589 245,331
Transportation and travel 175,204 152,019 139,200
Rental (Note 23) 158,907 175,171 208,203
Taxes and licenses 155,178 134,129 117,895
Provision for doubtful accounts (Note 6) 142,952 134,000 154,917
Business meetings and representations 121,744 86,245 77,034
Collection charges 108,706 101,831 91,474
Regulatory costs 63,106 48,915 28,543
Insurance 40,782 40,147 28,309
Advertising and promotion 29,175 22,074 42,401
Others 57,901 61,131 61,001
7,146,552 6,814,188 5,878,114
INCOME BEFORE OTHER INCOME (EXPENSES) 9,748,648 9,068,576 7,891,366
OTHER INCOME (EXPENSES)
Revenue from rehabilitation works (Note 8) 5,146,214 6,505,856 8,770,141
Cost of rehabilitation works (5,020,772) (6,383,121) (8,605,052)
Interest expense and other financing charges (Note 18) (2,570,951) (2,494,413) (2,051,722)
Interest income (Notes 5 and 18) 90,572 154,900 121,751
Foreign exchange gains - net (Note 1) (176,050) 960,075 1,295,188
Foreign currency differential adjustments (FCDA) (Note 1) 174,437 (960,656) (1,337,601)
Others - net (Notes 11 and 13) (862,826) (345,890) (453,193)
(3,219,376) (2,563,249) (2,260,488)
INCOME BEFORE INCOME TAX 6,529,272 6,505,327 5,630,878
PROVISION FOR (BENEFIT FROM) INCOME TAX (Notes 16 and 21)
Current 2,526 8,198 13,339
Deferred (409,468) 117,836 (215,542)
(406,942) 126,034 (202,203)
NET INCOME P6,936,214 P6,379,293 P5,833,081
Basic/Diluted Earnings Per Share (Note 19) P1,550.77 P1,593.22 P1,454.31 See accompanying Notes to Consolidated Financial Statements.
2013 Annual Report 62 MAYNILAD WATER SERVICES, INC. AND SUBSIDIARIES (A SUBSIDIARY OF MAYNILAD WATER HOLDING COMPANY, INC.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Thousands)
Years Ended December 31
2013 2012 2011 (As restated -Note 2) (As restated -Note 2)
NET INCOME P6,936,214 P6,379,293 P5,833,081
OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) not to be reclassified to profit or loss in subsequent period -
Remeasurement gain (loss) on retirement plans 164,745 25,800 (143,516)
Income tax effect (49,424) (7,740) 43,055
115,321 18,060 (100,461)
TOTAL COMPREHENSIVE INCOME P7,051,535 P6,397,353 P5,732,620
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011 (Amounts in Thousands)
Capital Additional Treasury Other Comprehensive Other Equity Retained Earnings (Note 14) Stock Paid-in Capital Shares Income (Loss) Adjustments (Notes 1 and 14) (Note 14) (Note 14) (Note 17) (Note 14) Unappropriated Appropriated Total
At December 31, 2012 as previously reported P4,010,893 P101,815 (P9,730) P– (P308,695) P731,088 P12,200,000 P16,725,371
Effect of adoption of Philippine Accounting Standards 19 (Revised), – – – (82,401) – 75,493 – (6,908) Employee Benefits
At December 31, 2012, as restated 4,010,893 101,815 (9,730) (82,401) (308,695) 806,581 12,200,000 16,718,463
Total comprehensive income for the year – – – 115,321 – 6,936,214 – 7,051,535
Cost of share-based payments (Note 14) – – – – (525) – – (525)
Issuance of shares (Note 14) 536,089 9,863,911 – – – – – 10,400,000
Treasury shares – 14,060 5,620 – – – – 19,680
Reversal of appropriation 12,200,000 (12,200,000) –
Appropriation for capital expenditures – – – – – (4,000,000) 4,000,000 - (Note 14)
Dividends declared (Note 14) – – – – – (13,496,236) – (13,496,236)
At December 31, 2013 P4,546,982 P9,979,786 (P4,110) P32,920 (P309,220) P2,446,559 P4,000,000 P20,692,917
63 Our Backstory Capital Additional Treasury Other Comprehensive Other Equity Retained Earnings (Note 14) Stock Paid-in Capital Shares Income (Loss) Adjustments (Notes 1 and 14) (Note 14) (Note 14) (Note 17) (Note 14) Unappropriated Appropriated Total
At December 31, 2011 as previously reported P4,010,893 P101,815 (P6,572) P– (P322,369) P6,544,826 P2,000,000 P12,328,593
Effect of adoption of Philippine Accounting Standards 19 (Revised), – – – (100,461) – 82,462 – (17,999) Employee Benefits
At December 31, 2011, as restated 4,010,893 101,815 (6,572) (100,461) (322,369) 6,627,288 2,000,000 12,310,594
Total comprehensive income for the year – – – 18,060 – 6,379,293 – 6,397,353
Appropriation for cash dividends (Note 14) - - - - - (10,200,000) 10,200,000 -
Cost of share-based payments (Note 14) – – – – 13,674 - – 13,674
Treasury shares – - (3,158) – – – – (3,158)
Dividends declared (Note 14) – – – – – (2,000,000) – (2,000,000)
At December 31, 2012, as restated P4,010,893 P101,815 (P9,730) P82,401 (P308,695) P806,581 P12,200,000 P16,718,463
Capital Additional Treasury Other Comprehensive Other Equity Retained Earnings (Note 14) Stock Paid-in Capital Shares Income (Loss) Adjustments (Notes 1 and 14) (Note 14) (Note 14) (Note 17) (Note 14) Unappropriated Appropriated Total
At December 31, 2010 as previously reported P4,010,893 P101,815 P- P– (P348,946) P4,179,976 P- P7,943,738
Effect of adoption of Philippine Accounting Standards 19 (Revised), – – – - – 114,231 – 114,231 Employee Benefits
At December 31, 2010, as restated 4,010,893 101,815 - (100,461) (348,946) 4,294,207 - 8,057,969
Total comprehensive income for the year – – – - – 5,833,081 – 5,732,620
Appropriation for cash dividends (Note 14) - - - - - (2,000,000) 2,000,000 -
Cost of share-based payments (Note 14) – – – – 26,577 - – 26,577
Treasury shares – - (6,572) – – – – (6,572)
Dividends declared (Note 14) – – – – – (1,500,000) – (1,500,000)
At December 31, 2011, as restated P4,010,893 P101,815 (P6,572) P100,461 (P322,369) P6,627,288 P2,000,000 P12,310,594
See accompanying Notes to Consolidated Financial Statements.
2013 Annual Report 64 MAYNILAD WATER SERVICES, INC. AND SUBSIDIARIES (A SUBSIDIARY OF MAYNILAD WATER HOLDING COMPANY, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands)
Years Ended December 31
2013 2012 2011 (As restated -Note 2) (As restated -Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax P6,529,272 P6,505,327 P5,630,878
Adjustments for:
Interest expense and other financing charges (Note 18) 2,570,951 2,494,413 2,051,722
Amortization of service concession assets (Note 8) 1,565,644 1,831,441 1,428,501
Depreciation and amortization (Note 9) 231,241 158,351 217,518
Pension cost (income) (Note 17) 117,340 100,649 (29,514)
Interest income (Note 18) (90,572) (154,900) (121,751)
Gain on sale of property and equipment (1,081) (475) (35,049)
Cost of share-based payments (Note 14) (525) 13,674 26,577
Unrealized foreign exchange gains - net (78) (86) (1,136)
Reversal of accrued interest payable to MWSS (Note 13) – (378,075) –
Operating income before working capital changes 10,922,192 10,570,319 9,167,746
Decrease (increase) in:
Short-term investments (3,612,837) (13,999) 7,274
Trade and other receivables 528,931 (503,692) (469,297)
Other current assets (597,747) 471,037 (731,138)
Additions to service concession assets (Note 8) (5,153,750) (6,819,700) (8,793,388)
Increase (decrease) in trade and other payables (388,242) 1,581,565 2,277,656
Cash generated from operations 1,698,547 5,285,530 1,458,853
Interest received 84,390 160,493 112,005
Income taxes paid (2,526) (4,891) (13,339)
Net cash provided by operating activities 1,780,411 5,441,132 1,557,519
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of property and equipment (Note 9) (399,841) (192,557) (264,729)
Acquisition of available-for-sale financial assets (Note 10) (210,584) – –
Cash paid on acquisition of a subsidiary (195,368) (210,000) –
Decrease (increase) in other noncurrent assets (63,119) 5,843 (50,761)
Proceeds from sale of property and equipment 1,548 2,551 37,923
Benefits paid from operating funds (Note 17) – – (3,771)
Net cash used in investing activities (867,364) (394,163) (281,338)
65 Our Backstory Years Ended December 31
2013 2012 2011 (As restated -Note 2) (As restated -Note 2)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from availment of interest-bearing loans (Note 11) 26,240,838 – 6,881,172
Payments of:
Interest-bearing loans (22,459,233) (980,946) (492,378)
Dividends (Note 14) (13,494,130) (2,000,000) (1,500,000)
Service concession obligation payable to MWSS (1,252,634) (1,116,019) (2,220,515)
Increase in:
Customers’ deposits 69,684 117,766 78,777
Other noncurrent liabilities 10,953 87,405 18,349
Proceeds from deposits for future stock subscription – 33,506 –
Proceeds from increase in capital stock 10,366,495 – –
Interest paid (1,442,571) (1,454,624) (1,166,512)
Acquisition of treasury shares (Note 14) 5,620 (3,158) (6,572)
Net cash provided by (used in) financing activities (1,954,978) (5,316,070) 1,592,321
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,041,931) (269,101) 2,868,502
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,906,336 4,175,437 1,306,935
CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 5) P2,864,405 P3,906,336 P4,175,437
See accompanying Notes to Consolidated Financial Statements.
2013 Annual Report 66 MAYNILAD WATER SERVICES, INC. AND SUBSIDIARIES (A SUBSIDIARY OF MAYNILAD WATER HOLDING COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousands, Except Number of Shares, Earnings Per Share Value and Unless Otherwise Specified)
1. Corporate Information and Status of Operations
General Maynilad Water Services, Inc. (Maynilad or Parent Company) was incorporated on January 22, 1997 in the Philippines primarily to bid for the operation of the privatized system of waterworks and sewerage services of the Metropolitan Waterworks and Sewerage System (MWSS) for Metropolitan Manila.
On July 26, 2011, the Board of Directors (BOD) approved the amendment of the Articles of Incorporation to amend its primary purpose to include the provision of allied and ancillary services and undertaking such other activities incidental to its secondary purpose. The amendment was approved by the stockholders and the Securities and Exchange Commission on August 12, 2011 and October 26, 2011, respectively.
Effective Interests in Maynilad As at December 31, 2012, the Parent Company was a 91.90% owned subsidiary of Maynilad Water Holding Company, Inc. (MWHCI), formerly DMCI-MPIC Water Company, Inc., a company incorporated in the Philippines and a 55.41% owned subsidiary of Metro Pacific Investments Corporation (MPIC). In addition, MPIC directly owned 5.88% of the Parent Company. Hence, MPIC effectively owned 56.80% of the Parent Company in 2012.
MWHCI and Maynilad Subscription Agreements. Pursuant to the Subscription Agreements executed between MWHCI and Maynilad, MWHCI subscribed to 134,022 common shares of Maynilad at par value on December 28, 2012. Such shares, however, were issued only on February 13, 2013 and together with the additional subscription to 402,067 common shares increased MWHCI ownership interest in Maynilad to 92.85% as at December 31, 2013 (see Note 14).
MCNK JV Corporation and MWHCI Subscription Agreements. On December 28, 2012, a Subscription Agreement between MCNK JV Corporation (MCNK, a subsidiary of a Japan-listed entity Marubeni Corp.) and MWHCI was executed, wherein MCNK subscribed to 169,617,682 common shares of MWHCI. On February 13, 2013, MCNK and MWHCI entered into another Subscription Agreement for the subscription by MCNK to an additional 508,853,045 common shares of MWHCI. On the same date, MPIC purchased 154,992,852 common shares of stock of MWHCI from DMCI Holdings, Inc. (DMCI, a listed Philippine entity).
The above transactions resulted to the following changes in the effective interests in Maynilad:
Entity Pre-deal Ownership Post-deal Ownership*
MPIC 56.80% 52.80%
DMCI 40.98% 25.24%
MCNK –% 20.00%
ESOP/others 2.22% 1.96%
100.00% 100.00%
*Effective February 13, 2013
67 Our Backstory As at December 31, 2013, MPIC is 55.8% owned by Metro Pacific Holdings, Inc. (MPHI). MPHI is a Philippine corporation whose stockholders are Enterprise Investment Holdings, Inc. (EIH) (60.0%), Intalink B.V. (26.7%) and First Pacific International Limited (13.3%). First Pacific Company Limited (FPC), a company incorporated in Bermuda and listed in Hong Kong, through its subsidiaries, holds 40.0% equity interest in EIH and an investment financing which under Hong Kong Generally Accepted Accounting Principles require FPC to account for the results and assets and liabilities of EIH and its subsidiaries as FPC group companies in Hong Kong.
The registered office address of the Parent Company is MWSS Compound, Katipunan Road, Balara, Quezon City.
The accompanying consolidated financial statements were approved and authorized for issue by the BOD on February 24, 2014.
Concession Agreement On February 21, 1997, the Parent Company entered into a Concession Agreement with the MWSS, a government-owned and controlled corporation organized and existing pursuant to Republic Act (RA) No. 6234 (the Charter), as clarified and amended, with respect to the MWSS West Service Area. The Concession Agreement sets forth the rights and obligations of the Parent Company throughout the concession period. The MWSS Regulatory Office acts as the regulatory body of the Concessionaires [the Parent Company and the East Concessionaire - Manila Water Company, Inc. (Manila Water)].
Under the Concession Agreement, MWSS grants the Parent Company (as contractor to perform certain functions and as agent for the exercise of certain rights and powers under the Charter), the sole right to manage, operate, repair, decommission and refurbish all fixed and movable assets required (except certain retained assets of MWSS) to provide water and sewerage services in the West Service Area for an extended period of 40 years commencing on August 1, 1997 (the Commencement Date) to May 6, 2037 or the early termination date as the case may be.
The Parent Company is also tasked to manage, operate, repair, decommission and refurbish certain specified MWSS facilities in the West Service Area. The legal title to these assets remains with MWSS. The legal title to all property, plant and equipment contributed to the existing MWSS system by the Parent Company during the concession period remains with the Parent Company until the Expiration Date (or on early termination date) at which time, all rights, titles and interest in such assets will automatically vest in MWSS.
Fourth Rate Rebasing MWSS released Board of Trustees Resolution No. 2013-100-RO dated September 12, 2013 and Regulatory Office (RO) Resolution No. 13-010-CA dated September 10, 2013 on the rate rebasing adjustment for the rate rebasing period 2013 to 2017 reducing the Parent Company’s 2012 average all-in basic water charge by 4.82% or P1.46 per cubic meter (cu.m) or P0.29 per cubic meter (cu.m) over the next five years. The Parent Company has formally notified its objection and initiated arbitration proceedings. On October 4, 2013, the Parent Company filed its Dispute Notice before the Appeals Panel.
On December 17, 2013, the Regulatory Office released Resolution No. 13-011-CA regarding the implementation of a status quo for the Parent Company’s Standard Rates and Foreign Currency Differential Adjustment (FCDA) for any and all its scheduled adjustments until such time that the Appeals Panel has issued the Final Award.
On February 12, 2014, the Appeals Panel is effectively constituted with the appointment by the International Chamber of Commerce (ICC) of the Appeals Panel Chairman.
2013 Annual Report 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting and Financial Reporting Policies
Basis of Preparation The consolidated financial statements of the Company have been prepared on a historical cost basis. The consolidated financial statements are presented in Philippine peso, which is the Parent Company’s functional and presentation currency, and all amounts are rounded to the nearest thousand (P000), except when otherwise indicated.
The consolidated financial statements provide comparative information in respect of the previous period. In addition, the Company presents an additional consolidated statement of financial position at the beginning of the earliest period presented when there is a retrospective application of an accounting policy, a retrospective restatement, or a reclassification of items in the financial statements. An additional consolidated statement of financial position as at January 1, 2012 is presented in these consolidated financial statements due to retrospective application of Philippine Accounting Standards (PAS) 19, Employee Benefits (Revised), which became effective beginning January 1, 2013.
Statement of Compliance The Company’s consolidated financial statements have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). PFRS include statements named PFRS and PAS, including Interpretations issued by the Financial Reporting Standards Council (FRSC).
Basis of Consolidation The consolidated financial statements comprise of the financial statements of Maynilad and the following subsidiaries (collectively referred to as the “Company”) that it controls:
Subsidiaries Nature of Business
Philippine Hydro, Inc. (Phil Hydro)* Bulk water supply and water distribution (outside the West Service Area)
Amayi Water Solutions, Inc. (Amayi)** Water distribution (outside the West Service Area)
* Acquired on August 3, 2012 ** Incorporated on July 18, 2012
All subsidiaries are wholly-owned and incorporated in the Philippines.
Phil Hydro. Phil Hydro is engaged in waterworks construction, engineering and engineering consulting services. Phil Hydro is currently undertaking water supply projects outside Metro Manila in line with the thrusts of the government under Presidential Decree No. 198, also known as the Provincial Water Utilities Act of 1973, which mandates the local government units to create and operate local water utilities and provide potable water to the public.
Phil Hydro has existing 25-year Bulk Water Supply Agreements with various provincial municipalities outside the West Service Area and a Memorandum of Agreement with certain provincial municipality for the construction and operation of water treatment facilities for water distribution services.
Amayi. Amayi is incorporated for the purpose of operating, managing, maintaining and rehabilitating waterworks, sewerage and sanitation system and services outside the Concession Area.
The subsidiaries are consolidated from the date of acquisition, being the date on which the Parent Company obtains control, and continue to be consolidated until the date that such control ceases.
69 Our Backstory The financial statements of the subsidiaries are prepared for the same reporting year as the Parent Company using consistent accounting policies. All significant intercompany balances, transactions, income and expense and profits and losses from intercompany transactions are eliminated in full in the consolidation.
Changes in Accounting Policies and Disclosures The accounting policies adopted in the preparation of the consolidated financial statements are consistent with those of the previous financial year, except for the adoption of the following amended PAS and PFRS which were adopted effective beginning January 1, 2013. Except as otherwise indicated, adoption of the new standards and amendments has no impact on the Company’s consolidated financial statements. The nature of each new standard and amendment is described below:
• PFRS 1, First-time Adoption of International Financial Reporting Standards – Government Loans (Amendments)
The amendments to PFRS 1 require first-time adopters to apply the requirements of PAS 20, Accounting for Government Grants and Disclosure of Government Assistance, prospectively to government loans existing at the date of transition to PFRS. However, entities may choose to apply the requirements of PAS 39, Financial Instruments: Recognition and Measurement, and PAS 20 to government loans retrospectively if the information needed to do so had been obtained at the time of initially accounting for those loans. These amendments are not relevant to the Company.
• PFRS 7, Financial instruments: Disclosures – Offsetting Financial Assetsand Financial Liabilities (Amendments)
These amendments require an entity to disclose information about rights of set-off and related arrangements (such as collateral agreements). The new disclosures are required for all recognized financial instruments that are set-off in accordance with PAS 32. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or “similar agreement”, irrespective of whether they are set-off in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another format is more appropriate, the following minimum quantitative information. This is presented separately for financial assets and financial liabilities recognized at the end of the reporting period:
a) The gross amounts of those recognized financial assets and recognized financial liabilities;
b) The amounts that are set off in accordance with the criteria in PAS 32 when determining the net amounts presented in the consolidated statement of financial position;
c) The net amounts presented in the consolidated statement of financial position;
d) The amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in (b) above, including:
i. Amounts related to recognized financial instruments that do not meet some or all of the offsetting criteria in PAS 32; and
2013 Annual Report 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ii. Amounts related to financial collateral (including cash collateral); and
e) The net amount after deducting the amounts in (d) from the amounts in (c) above.
The amendments affect disclosures only and have no impact on the Company’s financial position or performance. The additional disclosures required by the amendments are presented in Note 25 to the consolidated financial statements.
• PFRS 10, Consolidated Financial Statements
The Company adopted PFRS 10 in the current year. PFRS 10 replaced the portion of PAS 27, Consolidated and Separate Financial Statements, that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC-12, Consolidation – Special Purpose Entities. PFRS 10 established a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in PAS 27.
• PFRS 11, Joint Arrangements
PFRS 11 replaced PAS 31, Interests in Joint Ventures, and SIC-13, Jointly-controlled Entities – Non-monetary Contributions by Venturers. PFRS 11 removed the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method.
• PFRS 12, Disclosure of Interests in Other Entities
PFRS 12 sets out the requirements for disclosures relating to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. The requirements in PFRS 12 are more comprehensive than the previously existing disclosure requirements for subsidiaries (for example, where a subsidiary is controlled with less than a majority of voting rights).
• PFRS 13, Fair Value Measurement
PFRS 13 establishes a single source of guidance under PFRS for all fair value measurements. PFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. As a result of the guidance in PFRS 13, the Company re-assessed its policies for measuring fair values, in particular, its valuation inputs such as non-performance risk for fair value measurement of liabilities. The Company has assessed that the application of PFRS 13 has not materially impacted the fair value measurements of the Company. Additional disclosures, where required, are provided in the individual notes relating to the assets and liabilities whose fair values were determined. Fair value hierarchy is provided in Note 26.
71 Our Backstory • PAS 1, Presentation of Financial Statements – Presentation of Items of Other Comprehensive Income or OCI (Amendments)
The amendments to PAS 1 change the grouping of items presented in other comprehensive income. Items that could be reclassified (or “recycled”) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and has therefore no impact on the Company’s financial position or performance. • PAS 19, Employee Benefits (Revised)
On January 1, 2013, the Company adopted the PAS 19, Employee Benefits (Revised).
For defined benefit plans, the PAS 19 (Revised) requires all actuarial gains and losses to be recognized in other comprehensive income and unvested past service costs previously recognized over the average vesting period to be recognized immediately in profit or loss when incurred.
Prior to adoption of the PAS 19 (Revised), the Company recognized actuarial gains and losses as income or expense when the net cumulative unrecognized gains and losses for each individual plan at the end of the previous period exceeded 10% of the higher of the defined benefit obligation and the fair value of the plan assets and recognized unvested past service costs as an expense on a straight-line basis over the average vesting period until the benefits become vested. Upon adoption of the PAS 19 (Revised), the Company changed its accounting policy to recognize all actuarial gains and losses in other comprehensive income and all past service costs in profit or loss in the period they occur. The net cumulative actuarial gains and losses as at January 1, 2011 were charged to retained earnings.
The PAS 19 (Revised) replaced the interest cost and expected return on plan assets with the concept of net interest on defined benefit liability or asset which is calculated by multiplying the net balance sheet defined benefit liability or asset by the discount rate used to measure the employee benefit obligation, each as at the beginning of the annual period.
The PAS 19 (Revised) also amended the definition of short-term employee benefits and requires employee benefits to be classified as short-term based on expected timing of settlement rather than the employee’s entitlement to the benefits. In addition, the PAS 19 (Revised) modifies the timing of recognition for termination benefits. The modification requires the termination benefits to be recognized at the earlier of when the offer cannot be withdrawn or when the related restructuring costs are recognized.
Changes to definition of short-term employee benefits and timing of recognition for termination benefits do not have any impact to the Company’s financial position and financial performance.
2013 Annual Report 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The changes in accounting policies have been applied retrospectively. The effects of adoption on the financial statements are as follows:
As at As at As at December 31, 2013 December 31,2012 January 1,2012
Increase (decrease) in consolidated statements of financial position:
Pension liability (P155,261) P9,869 P25,713
Retained earnings 75,763 75,493 82,462
Deferred tax asset (46,578) 2,961 7,714
Other comprehensive income (loss) 32,920 (82,401) (100,461)
Years Ended December 31
2013 2012 2011
Increase (decrease) in consolidated statements of income and consolidated statements of comprehensive income:
Other comprehensive income (loss):
Remeasurement gain (loss) on retirement plans P164,745 P25,800 (P143,516)
Income tax effect 49,424 7,740 (43,055)
Pension cost (385) 9,956 –
Pension income – – (45,385)
Provision for (benefit from) deferred income tax 116 (2,987) 13,616
The adoption did not have material impact on the Company’s consolidated statements of cash flows.
• PAS 27, Separate Financial Statements (as revised in 2011)
As a consequence of the new PFRS 10, Consolidated Financial Statements, and PFRS 12, Disclosure of Interests in Other Entities, what remains of PAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in the separate financial statements. The adoption of the amended PAS 27 did not have a significant impact on the separate financial statements of the entities in the group.
• PAS 28, Investments in Associates and Joint Ventures (as revised in 2011)
As a consequence of the issuance of the new PFRS 11, Joint Arrangements and PFRS 12, Disclosure of Interests in Other Entities, PAS 28 has been renamed PAS 28, Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates.
• Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine
This interpretation applies to waste removal (stripping) costs incurred in surface mining activity during the production phase of the mine. The interpretation addresses the accounting for the benefit from the stripping activity. This new interpretation is not relevant to the Company.
Annual Improvements to PFRSs (2009-2011 cycle). The Annual Improvements to PFRSs (2009-2011 cycle) contain non-urgent but necessary amendments to PFRSs. The Company adopted these amendments for the current year.
73 Our Backstory • PFRS 1, First-time Adoption of PFRS – Borrowing Costs
The amendment clarifies that, upon adoption of PFRS, an entity that capitalized borrowing costs in accordance with its previous generally accepted accounting principles, may carry forward, without any adjustment, the amount previously capitalized in its opening statement of financial position at the date of transition. Subsequent to the adoption of PFRS, borrowing costs are recognized in accordance with PAS 23, Borrowing Costs. The amendment does not apply to the Company as it is not a first-time adopter of PFRS.
• PAS 1, Presentation of Financial Statements – Clarification of the requirements for comparative information
These amendments clarify the requirements for comparative information that are disclosed voluntarily and those that are mandatory due to retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the consolidated financial statements. An entity must include comparative information in the related notes to the consolidated financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The additional comparative period does not need to contain a complete set of financial statements. On the other hand, supporting notes for the third balance sheet (mandatory when there is a retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements) are not required. As a result, the Company has included comparative information in respect of the opening consolidated statement of financial position as at January 1, 2012.
• PAS 16, Property, Plant and Equipment – Classification of servicing equipment
The amendment clarifies that spare parts, stand-by equipment and servicing equipment should be recognized as property, plant and equipment when they meet the definition of property, plant and equipment and should be recognized as inventory if otherwise. The amendment does not have any significant impact on the Company’s financial position or performance
• PAS 32, Financial Instruments: Presentation – Tax effect of distribution to holders of equity instruments
The amendment clarifies that income taxes relating to distributions to equity holders and to transaction costs of an equity transaction are accounted for in accordance with PAS 12, Income Taxes. The amendment does not have any significant impact on the Company’s financial position or performance.
• PAS 34, Interim Financial Reporting – Interim financial reporting and segment information for total assets and liabilities
The amendment clarifies that the total assets and liabilities for a particular reportable segment need to be disclosed only when the amounts are regularly provided to the chief operating decision maker and there has been a material change from the amount disclosed in the entity’s previous annual financial statements for that reportable segment. The amendment affects disclosures only and has no impact on the Company’s financial position or performance.
2013 Annual Report 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Standards, Interpretations and Amendments to Existing Standards Not Yet Effective The Company did not early adopt the following amendments to existing standards and interpretations that have been approved but are not yet effective as at December 31, 2013. Except as otherwise indicated, the Company does not expect the adoption of these amendments and interpretations to have an impact on its consolidated financial statements.
Effective 2014
• Investment Entities (Amendments to PFRS 10, PFRS 12 and PAS 27) (effective for annual periods beginning on or after January 1, 2014)
These amendments provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under PFRS 10. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss. It is not expected that this amendment would be relevant to the Company since none of the entities in the Company would qualify to be an investment entity under PFRS 10.
• PAS 32, Financial Instruments: Presentation – Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after January 1, 2014, with retrospective application)
These amendments to PAS 32 clarify the meaning of “currently has a legally enforceable right to set-off” and also clarify the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. While the amendment is expected not to have any impact on the net assets of the Company, any changes in offsetting is expected to impact leverage ratios and regulatory capital requirements. The Company is currently assessing impact of the amendments to PAS 32.
• PAS 36, Impairment of Assets – Recoverable Amount Disclosures for Non-Financial Assets (Amendments) (effective for annual periods beginning on or after January 1, 2014, with retrospective application)
These amendments remove the unintended consequences of PFRS 13, Fair Value Measurement, on the disclosures required under PAS 36. In addition, these amendments require disclosure of the recoverable amounts for the assets or CGUs for which impairment loss has been recognized or reversed during the period. These amendments are effective retrospectively for annual periods beginning on or after January 1, 2014 with earlier application permitted, provided PFRS 13 is also applied. The Company has early adopted these amendments to PAS 36 in the current period since the amended/additional disclosures provide useful information. Accordingly, these amendments have been considered while making disclosures for impairment of non-financial assets. These amendments would continue to be considered for future disclosures.
• PAS 39, Financial Instruments: Recognition and Measurement – Novation of Derivatives and Continuation of Hedge Accounting (Amendments) (effective for annual periods beginning on or after January 1, 2014)
75 Our Backstory These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. The Company does not have derivatives during the current period. However, these amendments would be considered for future novations.
• Philippine Interpretation IFRIC 21, Levies (effective for annual periods beginning on or after January 1, 2014)
IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached.
• PAS 19, Employee Benefits –Defined Benefit Plans: Employee Contributions (Amendments) (effective for annual periods beginning on or after July 1, 2014)
The amendments apply to contributions from employees or third parties to defined benefit plans. Contributions that are set out in the formal terms of the plan shall be accounted for as reductions to current service costs if they are linked to service or as part of the remeasurements of the net defined benefit asset or liability if they are not linked to service. Contributions that are discretionary shall be accounted for as reductions of current service cost upon payment of these contributions to the plans.
Effective 2015
• PFRS 9, Financial Instruments: Classification and Measurement
PFRS 9, as issued, reflects the first and third phases of the project to replace PAS 39 and applies to the classification and measurement of financial assets and liabilities and hedge accounting, respectively. Work on the second phase, which relate to impairment of financial instruments, and the limited amendments to the classification and measurement model hedge accounting is still ongoing, with a view to replace PAS 39 in its entirety. PFRS 9 requires all financial assets to be measured at fair value at initial recognition. A debt financial asset may, if the fair value option (FVO) is not invoked, be subsequently measured at amortized cost if it is held within a business model that has the objective to hold the assets to collect the contractual cash flows and its contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal outstanding. All other debt instruments are subsequently measured at fair value through profit or loss. All equity financial assets are measured at fair value either through other comprehensive income (OCI) or profit or loss. Equity financial assets held for trading must be measured at fair value through profit or loss. For liabilities designated as at FVPL using the fair value option, the amount of change in the fair value of a liability that is attributable to changes in credit risk must be presented in OCI. The remainder of the change in fair value is presented in profit or loss, unless presentation of the fair value change relating to the entity’s own credit risk in respect of the liability’s credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. All other PAS 39 classification and measurement requirements for
2013 Annual Report 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
financial liabilities have been carried forward to PFRS 9, including the embedded derivative bifurcation separation rules and the criteria for using the FVO. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Company’s financial assets, but will potentially have no impact on the classification and measurement of financial liabilities.
PFRS 9 currently has no mandatory effective date. PFRS may be applied before the completion of the limited amendments to the classification and measurement model and impairment methodology. The Company will not adopt the standard before the completion of the limited amendments and the second phase of the project.
• Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate This interpretation covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The SEC and the Financial Reporting Standards Council (FRSC) have deferred the effectivity of this interpretation until the final Revenue standard is issued by the International Accounting Standards Board (IASB) and an evaluation of the requirements of the final Revenue standard against the practices of the Philippine real estate industry is completed. This interpretation is not relevant to the Company.
Annual Improvements to PFRSs (2010-2012 cycle) The Annual Improvements to PFRSs (2010-2012 cycle) contain non-urgent but necessary amendments to the following standards:
• PFRS 2, Share-based Payment – Definition of Vesting Condition
The amendment revised the definitions of vesting condition and market condition and added the definitions of performance condition and service condition to clarify various issues. This amendment shall be prospectively applied to share-based payment transactions for which the grant date is on or after July 1, 2014.
• PFRS 3, Business Combinations – Accounting for Contingent Consideration in a Business Combination
The amendment clarifies that a contingent consideration that meets the definition of a financial instrument should be classified as a financial liability or as equity in accordance with PAS 32. Contingent consideration that is not classified as equity is subsequently measured at fair value through profit or loss whether or not it falls within the scope of PFRS 9 (or PAS 39, if PFRS 9 is not yet adopted). The amendment shall be prospectively applied to business combinations for which the acquisition date is on or after July 1, 2014. The Company shall consider this amendment for future business combinations.
• PFRS 8, Operating Segments – Aggregation of Operating Segments and Reconciliation of the Total of the Reportable Segments’ Assets to the Entity’s Assets
The amendments require entities to disclose the judgment made by management in aggregating two or more operating segments. This disclosure should include a brief description of the operating segments that have been aggregated in this way and the economic indicators that have
77 Our Backstory been assessed in determining that the aggregated operating segments share similar economic characteristics. The amendments also clarify that an entity shall provide reconciliations of the total of the reportable segments’ assets to the entity’s assets if such amounts are regularly provided to the chief operating decision maker. These amendments are effective for annual periods beginning on or after July 1, 2014 and are applied retrospectively. The amendments affect disclosures only and have no impact on the Company’s financial position or performance.
• PFRS 13, Fair Value Measurement – Short-term Receivables and Payables
The amendment clarifies that short-term receivables and payables with no stated interest rates can be held at invoice amounts when the effect of discounting is immaterial.
• PAS 16, Property, Plant and Equipment-Revaluation Method – Proportionate Restatement of Accumulated Depreciation
The amendment clarifies that, upon revaluation of an item of property, plant and equipment, the carrying amount of the asset shall be adjusted to the revalued amount, and the asset shall be treated in one of the following ways:
a. The gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset. The accumulated depreciation at the date of revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account any accumulated impairment losses.
b. The accumulated depreciation is eliminated against the gross carrying amount of the asset.
The amendment is effective for annual periods beginning on or after July 1, 2014. The amendment shall apply to all revaluations recognized in annual periods beginning on or after the date of initial application of this amendment and in the immediately preceding annual period.
• PAS 24, Related Party Disclosures – Key Management Personnel
The amendments clarify that an entity is a related party of the reporting entity if the said entity, or any member of a group for which it is a part of, provides key management personnel services to the reporting entity or to the parent company of the reporting entity. The amendments also clarify that a reporting entity that obtains management personnel services from another entity (also referred to as management entity) is not required to disclose the compensation paid or payable by the management entity to its employees or directors. The reporting entity is required to disclose the amounts incurred for the key management personnel services provided by a separate management entity. The amendments are effective for annual periods beginning on or after July 1, 2014 and are applied retrospectively. The amendments affect disclosures only and have no impact on the Company’s financial position or performance.
2013 Annual Report 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• PAS 38, Intangible Assets-Revaluation Method – Proportionate Restatement of Accumulated Amortization
The amendments clarify that, upon revaluation of an intangible asset, the carrying amount of the asset shall be adjusted to the revalued amount, and the asset shall be treated in one of the following ways:
a. The gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset. The accumulated amortization at the date of revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account any accumulated impairment losses.
b. The accumulated amortization is eliminated against the gross carrying amount of the asset.
The amendments also clarify that the amount of the adjustment of the accumulated amortization should form part of the increase or decrease in the carrying amount accounted for in accordance with the standard.
The amendments are effective for annual periods beginning on or after July 1, 2014. The amendments shall apply to all revaluations recognized in annual periods beginning on or after the date of initial application of this amendment and in the immediately preceding annual period. The amendments have no impact on the Company’s financial position or performance.
Annual Improvements to PFRSs (2011-2013 cycle) The Annual Improvements to PFRSs (2011-2013 cycle) contain non-urgent but necessary amendments to the following standards:
• PFRS 1, First-time Adoption of Philippine Financial Reporting Standards – Meaning of ‘Effective PFRSs’
The amendment clarifies that an entity may choose to apply either a current standard or a new standard that is not yet mandatory, but that permits early application, provided either standard is applied consistently throughout the periods presented in the entity’s first PFRS financial statements. This amendment is not applicable to the Company as it is not a first- time adopter of PFRS.
• PFRS 3, Business Combinations – Scope Exceptions for Joint Arrangements
The amendment clarifies that PFRS 3 does not apply to the accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself. The amendment is effective for annual periods beginning on or after July 1 2014 and is applied prospectively.
79 Our Backstory • PFRS 13, Fair Value Measurement – Portfolio Exception
The amendment clarifies that the portfolio exception in PFRS 13 can be applied to financial assets, financial liabilities and other contracts. The amendment is effective for annual periods beginning on or after July 1, 2014 and is applied prospectively. The amendment has no significant impact on the Company’s financial position or performance.
• PAS 40, Investment Property
The amendment clarifies the interrelationship between PFRS 3 and PAS 40 when classifying property as investment property or owner-occupied property. The amendment stated that judgment is needed when determining whether the acquisition of investment property is the acquisition of an asset or a group of assets or a business combination within the scope of PFRS 3. This judgment is based on the guidance of PFRS 3. This amendment is effective for annual periods beginning on or after July 1, 2014 and is applied prospectively. The amendment has no significant impact on the Company’s financial position or performance.
The Company continues to assess the impact of the above new, amended and improved accounting standards and interpretations effective subsequent to December 31, 2013 on the consolidated financial statements in the period of initial application. Additional disclosures required by these amendments will be included in the consolidated financial statements when these amendments are adopted.
Business Combinations and Goodwill Business combinations are accounted for using the acquisition method of accounting. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed and included in costs and expenses.
When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree.
Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability, will be recognized in accordance with PAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it is not remeasured until it is finally settled within equity.
Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in the consolidated statement of income.
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After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Company’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. If the initial accounting for business combination can be determined only provisionally by the end of the period by which the combination is effected because the fair values to be assigned to the acquiree’s identifiable assets, liabilities can be determined only provisionally, the Company accounts the combination using provisional fair values. Adjustments to those provisional fair values as a result of completing the initial accounting shall be made within 12 months from the acquisition date. The carrying amount of an identifiable asset, liability or contingent liability that is recognized as a result of completing the initial accounting shall be calculated as if its fair value at the acquisition date had been recognized from that date and goodwill or any gain recognized shall be adjusted from the acquisition date by an amount equal to the adjustment to the fair value at the acquisition date of the identifiable asset, liability or contingent liability being recognized or adjusted.
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 acquisition date and that are subject to an insignificant risk of change in value.
Short-term Investments Short-term investments are investments with maturities of more than three months to one year.
Financial Assets and Financial Liabilities Date of Recognition. The Company recognizes a financial asset or a financial liability in the consolidated statement of financial position when it becomes a party to the contractual provisions of the instrument. In the case of a regular way purchase or sale of financial assets, recognition and derecognition, as applicable, are done using trade date accounting.
Initial Recognition. Financial assets and financial liabilities are recognized initially at fair value. Transaction costs are included in the initial measurement of all financial assets and liabilities, except for financial instruments measured at fair value through profit or loss (FVPL).
Financial assets are classified into the following categories: financial assets at FVPL, loans and receivables, held-to-maturity (HTM) investments, and AFS financial assets. Financial liabilities are classified as financial liabilities at FVPL or other financial liabilities. The Company determines the classification at initial recognition and, where allowed and appropriate, re-evaluates this designation at each reporting date.
Determination of Fair Value. The fair value of financial instruments that are actively traded in organized financial markets is determined by reference to quoted market bid prices at the close of business at the reporting date. 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
81 Our Backstory economic circumstances since the time of the transaction. For financial instruments where there is no active market, fair value is determined using valuation techniques. Such techniques include using reference to a similar instrument for which market observable prices exist, discounted cash flow analysis and other relevant valuation models.
‘Day 1’ difference. Where the transaction price in a non-active market is different from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Company recognizes the difference between the transaction price and fair value (a ‘Day 1’ difference) in the consolidated statement of 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 income when the inputs become observable or when the instrument is derecognized. For each transaction, the Company determines the appropriate method of recognizing the ‘Day 1’ difference amount.
Financial Assets and Financial Liabilities at FVPL. A financial asset or a financial liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the near term or upon initial recognition, it is designated by the management as at FVPL. Financial assets or financial liabilities at FVPL are designated by management on initial recognition when any of the following criteria are met:
• The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis;
• The assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or
• The financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.
Derivatives are also categorized as at FVPL, except those derivatives designated as effective hedging instruments or a financial guarantee contract.
Financial assets and financial liabilities at FVPL are recorded in the consolidated statement of financial position at fair value and are classified as current assets. Changes in fair value of such assets are accounted for in the consolidated statement of income. Interest earned is recorded in interest income, while dividend income is recorded in other operating income when the right to receive payment has been established.
The Company has no financial assets or financial liabilities at FVPL as at December 31, 2013 and 2012.
Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified or designated as AFS financial assets or financial assets at FVPL. After initial recognition, loans and receivables are carried at amortized cost in the consolidated statement of financial position using the effective interest method, less allowance for impairment. Amortization is
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calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. Gains and losses are recognized in the consolidated statement of income when loans and receivables are derecognized and impaired, as well as through the amortization process. Loans and receivables are included in current assets if maturity is within twelve months from the reporting date. Otherwise, these are classified as noncurrent assets.
This category includes the Company’s cash and cash equivalents, short-term investments, trade and other receivables, sinking fund, deposits and miscellaneous deposits shown as part of “Other noncurrent assets” account in the consolidated statements of financial position (see Notes 5, 6 and 7). HTM Investments. HTM investments are quoted non-derivative financial assets with fixed or determinable payments and fixed maturities wherein the Company has the positive intention and ability to hold to maturity. HTM investments are carried at cost or amortized cost in the consolidated statement of financial position. Amortization is determined by using the effective interest method. The losses arising from impairment are recognized in the consolidated statement of income. Assets under this category are classified as current assets if maturity is within twelve months from reporting date and as noncurrent assets if maturity date is more than a year from reporting date.
The Company has no HTM investments as at December 31, 2013 and 2012.
AFS Financial Assets. Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. These are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. After initial recognition, available-for-sale financial assets are measured at fair value with unrealized gains or losses being recognized in the consolidated statement of comprehensive income and presented as a separate component of equity until the investment is derecognized or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the consolidated statement of income. Investments in equity instruments that do not have a quoted market price in an active market and whose fair values cannot be reliably measured are carried at cost, net of impairment, if any. Assets under this category are classified as current assets if the Company intends to hold the assets within 12 months from financial reporting date and as noncurrent assets if it is more than a year from financial reporting date.
The Company’s unquoted AFS financial assets amounted to P210.6 million and nil as at December 31, 2013 and 2012, respectively. As at December 31, 2013 and 2012, the Company has fully impaired its AFS financial asset with total cost of P10.5 million (see Note 10).
Other Financial Liabilities at Amortized Cost. Financial liabilities are classified in this category if these are not held for trading or not designated as at FVPL upon the inception of the liability. These include liabilities arising from operations or borrowings.
After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the effective interest method.
Gains or losses are recognized in the consolidated statement of income when the liabilities are derecognized as well as through the amortization process.
83 Our Backstory Debt issuance costs are amortized using the effective interest method. The unamortized debt issuance costs are netted against the related carrying value of the debt instrument.
This category includes trade and other payables, interest-bearing loans, service concession obligation payable to MWSS and customers’ deposits (see Notes 11, 12 and 13).
Impairment of Financial Assets The Company assesses at each reporting date whether a financial asset or group of financial assets is impaired. A financial asset or 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 assets that can be reliably measured. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and when observable date indicate that there is a measureable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
Assets Carried at Amortized Cost. If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset shall be reduced either directly or through use of an allowance account. The amount of the loss shall be recognized in the consolidated statement of income.
The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. 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 of impairment.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to 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 the consolidated statement of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.
Assets Carried at Cost. If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.
AFS Financial Assets. If an AFS financial asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortization) and its current fair value, less any impairment loss previously recognized in the consolidated statement of comprehensive income, is transferred from other
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comprehensive income to the consolidated statement of income. Reversals of impairment losses on AFS financial assets are reversed through consolidated statement of comprehensive income, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognized in the consolidated statement of comprehensive income.
Derecognition of Financial Assets and Financial Liabilities Financial Assets. A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when:
• the right to receive cash flows from the asset has expired; or
• the Company has transferred its right to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through” arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
When the Company has transferred its right to receive cash flows from an asset 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 Company’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 original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay.
Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or has expired.
When an existing financial liability is replaced by another 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 the consolidated statement of income.
Offsetting Financial Assets and Financial Liabilities Financial assets and financial liabilities are offset and the net amount is 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 (shown as part of others under “Other current assets” account) are valued at the lower of cost and net realizable value. Cost is determined using the weighted average method. Net realizable value is the current replacement cost.
Service Concession Assets Parent Company. The Parent Company accounts for its concession arrangement with MWSS in accordance with IFRIC 12, Service Concession Arrangement under the Intangible Asset model as it receives the right (license) to charge users of public service. Under the Concession Agreement, the Parent Company is granted the sole and exclusive right and discretion during the concession period to manage, occupy, operate, repair,
85 Our Backstory maintain, decommission and refurbish the identified facilities required to provide water services. The legal title to these assets shall remain with MWSS at the end of the concession period.
Phil Hydro. Phil Hydro accounts for its Bulk Water Supply Agreements in accordance with IFRIC 12 under the Intangible Asset model as it receives the right (license) to charge users of public service. Service concession assets are recognized to the extent that the Company receives a license or right to charge the users of the public service. The “Service Concession Assets” (SCA) pertain to the fair value of the service concession obligations at drawdown date and construction costs related to the rehabilitation works performed by the Company. Beginning January 1, 2013, the Parent Company’s SCA is amortized using unit-of-production (UOP) method over the projected total billable volume during the remaining term of the service concession arrangement. Prior to January 1, 2013, the SCA is amortized using the straight-line method over the terms of the service concession arrangements. Phil Hydro continues to amortize its SCA using straight-line method over the terms of the Bulk Water Supply Agreements.
The Company recognizes and measures revenue from rehabilitation works using the percentage-of-completion method. Under this method, revenue is recognized as the related obligations are fulfilled, measured principally on the basis of the estimated physical completion of the contract work.
Cost of rehabilitation works, which includes all direct materials, labor costs, and those indirect costs related to contract performance, is recognized consistent with the revenue recognition method applied. Expected losses on contracts are recognized immediately when it is probable that the total contract costs will exceed total contract revenue. Changes in contract performance, contract conditions and estimated profitability including those arising from contract penalty provisions and final contract settlements which may result in revisions to estimated costs and gross margins are recognized in the year in which the revisions are determined.
Subsequent costs and expenditures related to the concession agreement are recognized as additions to service concession assets at fair value of obligations at drawdown date and cost of rehabilitation works.
Property and Equipment Property and equipment, except land, are stated at cost less accumulated depreciation and any impairment in value (see policy on “Impairment of Nonfinancial Assets”). Land is stated at cost.
The initial cost of property and equipment comprises its purchase price, including import duties, taxes and any directly attributable costs in bringing the asset to its working condition and location for its intended use. Expenditures incurred after the property and equipment have been put into operation, such as repairs and maintenance, are normally charged to income in the period such 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 costs of property and equipment.
Depreciation is calculated for each significant item or part of an item of property and equipment on a straight-line basis over the following estimated useful lives:
Land improvements 5 years
Instrumentation, tools and other equipment 5 years
Office furniture, fixtures and equipment 5 years
Transportation equipment 5 years
The Company computes for depreciation charges based on the significant component of the asset.
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The useful lives and depreciation method are reviewed periodically to ensure that the periods and method of depreciation are consistent with the expected pattern of economic benefits from items of property and equipment.
Fully depreciated property and equipment are retained in the accounts until they are no longer in use and no further depreciation is charged to current operations.
An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the items) is included in the consolidated statement of income in the year the item is derecognized.
Impairment of Nonfinancial Assets (Property and Equipment and Service Concession Assets) An assessment is made at each reporting date to determine whether there is any indication of impairment of any nonfinancial 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 fair value less cost to sell. 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. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators.
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 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.
Goodwill Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognized for controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in the consolidated statement of income.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Parent Company’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Each unit or group of units to which the goodwill is so allocated:
• represents the lowest level within the Company at which the goodwill is monitored for internal management purposes; and
• not larger than an operating segment determined in accordance with PFRS 8, Operating Segments.
87 Our Backstory Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.
Goodwill is reviewed for impairment, annually or more frequently, if events or changes in circumstances indicate that the carrying value may be impaired.
Impairment is determined by assessing the recoverable amount of the cash-generating unit, to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognized. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed and the portion of the cash-generating unit retained.
Excess of the fair values of acquired identifiable assets and liabilities of subsidiaries over the acquisition cost of that interest, is credited directly to income. Transfers of assets between commonly controlled entities are accounted for under historical cost accounting.
If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss.
When subsidiaries are sold, the difference between the selling price and the net assets plus cumulative translation adjustments and goodwill is recognized in the consolidated statement of income.
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:
• Restatement of foreign currency-denominated loans;
• 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;
• Excess of actual interest payments translated at exchange spot rates on settlement dates over the amounts of interest translated at drawdown date rates; and
• 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 date rates.
In view of the automatic reimbursement mechanism, the Parent Company recognized a deferred foreign currency differential adjustment (FCDA) (included as part of “Other noncurrent assets” or “Deferred credits” accounts in the consolidated statements of financial position) with a corresponding credit (debit) to FCDA
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revenues for the unrealized foreign exchange losses (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 new base foreign exchange rate, which is assumed in the business plan approved by the Regulatory Office during the latest Rate Rebasing exercise, unless indication of impairment of the deferred FCDA would be evident at an earlier date.
Deferred credits are calculated as the difference between the drawdown or rebased rate versus the closing rate. These were presented as part of “Deferred credits” account in the consolidated statements of financial position.
Customers’ Deposits Customers’ deposits are initially measured at fair value. After initial recognition, these deposits are subsequently measured at amortized cost using the effective interest method. Amortization of customers’ deposits is included under “Interest expense and other financing charges” account in the consolidated statement of income. The discount is recognized as deferred credits and amortized over the remaining concession period using the effective interest method. Amortization of deferred credits is included as part of “Other income” account in the consolidated statement of income.
As at December 31, 2013 and 2012, the discount, shown as part of “Deferred credits” account in the consolidated statements of financial position, amounted to P489.0 million and P453.5 million, respectively.
Assets Held in Trust Assets which are owned by MWSS but are used in the operations of the Parent Company under the Concession Agreement are not reflected in the consolidated statement of financial position but carried as Assets Held in Trust, except for certain assets transferred to the Parent Company as mentioned in Note 24.
Deposits for Future Stock Subscription Deposits for future stock subscription represent cash received by the Parent Company from its stockholder for subscription to additional shares. Cash received is presented as part of liabilities until such time that sufficient authorized capital stock becomes available to cover the amount of shares. When there is sufficient authorized capital stock, it will be presented as part of equity.
Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. Revenue is measured at the fair value of consideration received, excluding discounts, rebates and value-added tax (VAT). 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.
Revenue from water and sewerage services are recognized upon supply of water to the customers and when the related services are rendered. Billings to customers consist of the following:
a. Water charges
• Basic charges represent the basic tariff charged to consumers for the provision of water services.
89 Our Backstory • FCDA is the tariff mechanism that allows the Parent Company to recover foreign exchange losses or to compensate foreign exchange gains on a current basis beginning January 1, 2002 until the Expiration Date.
• Maintenance service charge represents a fixed monthly charge per connection. The charge varies depending on the meter size. b. Environmental charge (included as part of revenue from sewer/sanitation services) represents 20% in 2013 and 2012, and 16% in 2011 of the water charges, except for maintenance charge. c. Sewerage charge represents 20% of the water charges, excluding maintenance service charge, for all consumers connected to the Company’s sewer lines. Effective January 1, 2012 pursuant to RO Resolution No. 11-007-CA, sewerage charge applies only to commercial and industrial customers connected to sewer lines.
Interest income is recognized as the interest accrues using the effective interest method.
When the Company 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 based on the percentage of completion (shown as “Revenue from rehabilitation works” and “Cost of rehabilitation works” accounts in the consolidated statement of income).
Cost and Expense Recognition Expenses are decreases in economic benefits during the accounting period in the form of outflows or decrease of assets or incurrence of liabilities that result in decrease in equity, other than those relating to distributions to equity participants. Expenses are recognized in the consolidated statement of income as these are incurred.
Leases The determination of whether an arrangement is, or contains a lease, is based on the substance of the arrangement at inception date, whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. A reassessment is made after the inception of the lease only if one of the following applies:
(a) There is a change in contractual terms, other than a renewal of or extension of the arrangement;
(b) A renewal option is exercised or extension granted, unless the term of the renewal or extension was initially included in the lease term;
(c) There is a change in the determination of whether fulfillment is dependent on a specified asset; or
(d) There is a substantial change to the asset.
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Where reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment scenarios (a), (c) or (d) and at the date of renewal or extension period for scenario (b).
A lease where the lessor retains substantially all the risks and benefits of ownership of the asset is classified as an operating lease.
Operating lease payments are recognized as expense in the consolidated statement of income on a straight- line basis over the lease term.
Borrowing Costs Borrowing costs are generally expensed as incurred. Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization on that asset shall be determined as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization shall be determined by applying a capitalization rate to the expenditures on that asset. The capitalization rate shall be the weighted average of the borrowing costs applicable to the borrowings of the Company that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs capitalized during a period shall not exceed the amount of borrowing costs incurred during that period.
Capitalization of 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 all the activities necessary to prepare the asset for its intended use or sale are substantially complete. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognized.
Equity Capital stock is measured at par value for all shares issued. Incremental costs incurred directly attributable to the issuance of new shares are shown in equity as a deduction from proceeds, net of tax. Proceeds and fair value of consideration received in excess of par value are recognized as additional paid-in capital.
Treasury shares representing own equity instruments that are reacquired are recognised at cost and deducted from equity. No gain or loss is recognized in the consolidated statement of income on the purchase, sale, issuance or the cancellation of the Parent Company’s own equity instruments.
Retained earnings represent the Company’s accumulated earnings, net of dividends declared.
Value-Added Tax (VAT) Revenues, expenses and assets are recognized net of the amount of VAT except: where the VAT incurred on a purchase of assets or services is not recoverable from the tax authority, in which case the sales tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and receivables and payables that are stated with the amount of VAT included.
The net amount of current VAT recoverable from and payable to the tax authority is included as part of “Other current assets” and “Trade and other payables” accounts in the consolidated statement of financial position.
91 Our Backstory Income Taxes Current Income 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 authority. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted as at the financial reporting date.
Deferred Income Tax. Deferred income tax is provided, using the liability method, on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized. Deferred income tax, however, is not recognized when the deductible and taxable temporary differences arise from the initial recognition of asset or liability in a transaction that is not a business combination and, at the time of transaction, affects neither the accounting profit nor taxable profit or loss.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profit will allow all or part of the deferred tax assets to be recovered.
Deferred tax assets and deferred tax liabilities are measured at the tax rate that is expected to apply to the period when the assets are realized or the liabilities are settled, based on the tax rates (and tax laws) that have been enacted or substantively enacted as at the reporting date.
Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to offset current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
Provisions Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations and a reliable estimate can be made of the amount of the obligation. When the Company expects a provision to be reimbursed, such as under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the consolidated statement of income, net of any reimbursement. 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 assessments 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.
Pension Cost The Parent Company has a funded, noncontributory defined benefit plan. The cost of providing benefits under the defined benefit plans is actuarially determined using the projected unit credit method.
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The net defined benefit liability or asset is the aggregate of the present value of the defined benefit obligation at the end of the reporting period reduced by the fair value of plan assets (if any), adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The asset ceiling is the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.
Defined benefit costs comprise the following: (1) service cost; (2) net interest on the net defined benefit liability or asset; and (3) remeasurements of net defined benefit liability or asset.
Service costs which include current service costs, past service costs and gains or losses on non-routine settlements are recognized as expense in profit or loss. Past service costs are recognized when plan amendment or curtailment occurs. These amounts are calculated periodically by independent qualified actuaries.
Net interest on the net defined benefit liability or asset is the change during the period in the net defined benefit liability or asset that arises from the passage of time which is determined by applying the discount rate based on government bonds to the net defined benefit liability or asset. Net interest on the net defined benefit liability or asset is recognized as expense or income in profit or loss.
Remeasurements comprising actuarial gains and losses, return on plan assets and any change in the effect of the asset ceiling (excluding net interest on defined benefit liability) are recognized immediately in other comprehensive income in the period in which they arise. Remeasurements are not reclassified to profit or loss in subsequent periods.
Plan assets are assets that are held by a long-term employee benefit fund or qualifying insurance policies. Plan assets are not available to the creditors of the Parent Company, nor can they be paid directly to the Parent Company. Fair value of plan assets is based on market price information. When no market price is available, the fair value of plan assets is estimated by discounting expected future cash flows using a discount rate that reflects both the risk associated with the plan assets and the maturity or expected disposal date of those assets (or, if they have no maturity, the expected period until the settlement of the related obligations). If the fair value of the plan assets is higher than the present value of the defined benefit obligation, the measurement of the resulting defined benefit asset is limited to the present value of economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.
Share-based Payment MPIC has an Executive Stock Option Plan (ESOP) for eligible executives to receive remuneration in the form of share-based payment transactions, whereby executives render services in exchange for the share option.
Employees of the Parent Company are granted rights to equity instruments of MPIC as consideration for the services provided to the Parent Company.
The Parent Company measures the services received from its employees in accordance with the requirements applicable to equity-settled share-based payment transactions, with a corresponding increase recognized in equity as a contribution from MPIC, provided that the share-based arrangement is accounted for as equity- settled in the consolidated financial statements of MPIC.
A parent grants rights to its equity instruments to the employees of its subsidiaries, conditional upon the completion of continuing service with the group for a specified period. An employee of one subsidiary may transfer employment to another subsidiary during the specified vesting period without the employee’s rights
93 Our Backstory to equity instruments of the parent under the original share-based payment arrangement being affected. Each subsidiary shall measure the services received from the employee by reference to the fair value of the equity instruments at the date those rights to equity instruments were originally granted by the parent, and the proportion of the vesting period served by the employee with each subsidiary.
Such an employee may fail to satisfy a vesting condition other than a market condition after transferring between group entities. In this case, each subsidiary shall adjust the amount previously recognized in respect of the services received from the employee. Hence, no amount is recognized on a cumulative basis for the services received from that employee in the financial statements of any subsidiary if the rights to the equity instruments granted by the parent do not vest because of an employee’s failure to meet a vesting condition other than a market condition.
Long-term Employee Benefits The Long Term Incentive Plan (LTIP) of the Parent Company (starting 2013) and MPIC (prior to 2013) grants cash incentives to eligible employees of the Parent Company and key executives of MPIC and certain subsidiaries, respectively. Liability under the LTIP is determined using the projected unit credit method. Employee benefit costs include current service costs, interest cost, actuarial gains and losses, and past service costs. Past service costs and actuarial gains and losses are recognized immediately.
The long-term employee benefit liability comprise the present value of the defined benefit obligation (using discount rate based on government bonds) vested at the end of the reporting period.
Contingencies Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed in the notes to consolidated financial statements unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial statements but are disclosed in the notes to consolidated financial statements when an inflow of economic benefits is probable. Contingent assets are not recognized unless virtually certain.
Events After the Reporting Period Post year-end events that provide additional information about the Company’s position at the financial reporting date (adjusting events) are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to the consolidated financial statements when material.
Earnings per share (EPS) Basic EPS is computed based on the weighted average number of outstanding shares and adjusted to give retroactive effect to any stock split during the year. There are no dilutive potential common shares outstanding that would require disclosure of diluted EPS in the consolidated statements of income.
3. Significant Accounting Judgments, Estimates and Assumptions
The preparation of the consolidated financial statements in accordance with PFRS requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses and disclosure of contingent liabilities at the reporting date. In preparing the Company’s consolidated financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of relevant facts and circumstances as at the date of the
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consolidated financial statements. Future events may occur which will cause the assumptions used in arriving at the estimates to change. The effects of any change in estimates are reflected in the consolidated financial statements as they become reasonably determinable.
Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
Judgments In the process of applying the Company’s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the consolidated financial statements:
Fourth Rate Rebasing. In September 2013, the MWSS released its resolutions on the rate rebasing adjustment for the rebasing period 2013 to 2017 reducing the Parent Company’s 2012 average all-in tariff. The Parent Company has formally notified its objection and filed its Dispute Notice before the Appeals Panel (see Note 1). As at February 24, 2014, management cannot determine with reasonable certainty the probable outcome of the arbitration proceedings. The consolidated financial statements do not include any adjustments that might result from the decision by the Appeals Panel.
Amortization of Service Concession Assets. The Parent Company accounts for its concession arrangement with MWSS in accordance with IFRIC 12 under the Intangible Asset model as it receives the right (license) to charge users of public service.
Effective January 1, 2013, the Parent Company applied the UOP method of amortizing its SCA after management had determined that the UOP method of amortizing SCA is now the more appropriate method instead of using the straight-line basis given that the economic benefit of these assets are more closely aligned with billed volume, which the Parent Company can already estimate reliably. Prior to January 1, 2013, the Parent Company’s SCA is amortized using the straight-line method over the term of the concession arrangement.
The financial effect of this change in amortization method is to decrease the amortization of service concession assets in the current year by P467.7 million. In future years, the amortization expense is expected to decrease in the earlier period and increase in the later period of the concession agreement compared to straight-line method of amortization. Quantitative disclosure on future impact is not provided as it is impracticable to reliably estimate the difference in future amortization as the calculation of the UOP amortization is subject to other variables such as additional capital expenditures and concession fees paid every year, re-estimation of projected billable volume and actual billed volume during the year. All of these variables are subject to changes on annual basis.
Service concession assets, net of accumulated amortization of P14.9 billion and P13.3 billion, amounted to P54.6 billion and P50.8 billion as at December 31, 2013 and 2012, respectively (see Note 8).
Disputes with MWSS. Pending resolution of the dispute between the Parent Company and MWSS on certain claims of MWSS, the disputed amount of P4.9 billion and P4.5 billion as at December 31, 2013 and 2012, respectively, is considered as contingent liability. Prior to 2012, no reversal of accrued interest payable was made pending resolution of the matter in accordance with the dispute requirements of the Transitional
95 Our Backstory and Clarificatory Agreement (TCA). However, with the prescription of the TCA and in light of the Parent Company’s current negotiation and outstanding offer of US$14.0 million to fully settle the claim of MWSS, the Parent Company reversed the amount of accrued interest in excess of the US$14.0 million settlement offer amounting to P378.1 million and charged to other income in 2012 (see Notes 8, 13 and 20).
Operating Lease Commitments - Company as Lessee. The Company has determined, based on the evaluation of the terms and conditions of the arrangements, that the significant risks and rewards for properties leased from third parties are retained by the lessors and accordingly, accounts for these lease contracts as operating leases.
Total rental expense amounted to P158.9 million, P175.2 million and P208.2 million in 2013, 2012 and 2011, respectively (see Note 23).
Contingencies. The Company is currently involved in various legal and administrative proceedings. The Company’s estimate of the probable costs for the resolution of these claims has been developed in consultation with outside legal counsel handling defense in these matters and is based upon an analysis of potential results. The Company currently does not believe these proceedings will have a material adverse effect on the Company’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 strategies relating to these proceedings (see Notes 13 and 20).
Estimates and Assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting 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.
Fair Value of Service Concession Payable. The determination of the cost of service concession payable requires management to make estimates and assumptions to determine the extent to which the Company receives a right or license to charge users of the public service. In making those estimates, management is required to determine a suitable discount rate to calculate the present value of these cash flows. While the Company believes that the assumptions used are reasonable and appropriate, these estimates and assumptions can materially affect the consolidated financial statements.
Fair Values of Financial Assets and Financial Liabilities. PFRS requires that certain financial assets and financial liabilities be carried at fair value, which requires the use of accounting estimates and judgments. While significant components of fair value measurement are determined using verifiable objective evidence (i.e., foreign exchange rates, interest rates, volatility rates), the timing and amount of changes in fair value would differ with the valuation methodology used. Any change in the fair value of these financial assets and financial liabilities would directly affect income and equity.
The fair values of financial assets and financial liabilities are set out in Note 26.
Purchase Price Allocation in Business Combinations and Goodwill. The Company’s consolidated financial statements reflect acquired businesses after the completion of the respective acquisition. The Company accounts for the acquired businesses using the acquisition method which requires extensive use of accounting judgments and estimates to allocate the purchase price to the fair market values of the acquiree’s identifiable assets and liabilities and contingent liabilities, if any, at the acquisition date. Any excess in the purchase price
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over the fair market values of the net assets acquired is recorded as goodwill in the consolidated statement of financial position. Thus, the numerous judgments made in estimating the fair market value to be assigned to the acquiree’s assets and liabilities can materially affect the Company’s financial position and performance.
The Company’s acquisitions have resulted in recognition of goodwill. The carrying value of goodwill as at December 31, 2013 and 2012 amounted to P288.1 million arising from the acquisition of Phil Hydro (see Note 4).
Fair Value Measurement of Contingent Consideration. Contingent consideration, resulting from business combinations, is valued at fair value at acquisition date as part of the business combination. Where the contingent consideration meets the definition of a derivative and, thus, a financial liability, it is subsequently remeasured to fair value at each reporting date. The determination of the fair value is based on discounted cash flows. The key assumptions take into consideration the probability of meeting each performance target and the discount factor.
Recognition of Revenue and Cost. The Company’s revenue recognition policies require management to make use of estimates and assumptions that may affect the reported amount of revenue. The Company measures revenue from rehabilitation works at the fair value of the consideration received or receivable. The Company’s revenue from rehabilitation works recognized based on the percentage of completion are measured principally on the basis of the estimated completion of a physical proportion of the contract works. Given that the Company has subcontracted the rehabilitation works to outside contractors (excluding the cost of some materials for some contractors), the recognized revenue from rehabilitation works substantially approximates the related cost.
Estimated Billable Water Volume. The Parent Company estimated the billable water volume, where the amortization of service concession assets is derived from, based on the period over which the Parent Company’s concession agreement with MWSS is in force. The Parent Company reviews annually the billable water volume based on factors that include market conditions such as population growth and consumption, and the status of the Parent Company’s projects and their impact on non-revenue water. It is possible that future results of operations could be materially affected by changes in the Parent Company’s estimates brought about by changes in the aforementioned factors. A reduction in the projected billable water volume would increase amortization and decrease noncurrent assets. Service concession assets, net of accumulated amortization of P14.9 billion and P13.3 billion, amounted to P54.6 billion and P50.8 billion as at December 31, 2013 and 2012, respectively (see Note 8).
Allowance for Doubtful Accounts. The Company estimates the allowance for doubtful accounts related to the trade receivables based on two methods. The amounts calculated using each of these methods are combined to determine the total amount of allowance. First, the Company evaluates specific accounts that are considered individually significant for any objective evidence that certain customers are unable to meet their financial obligations. In these cases, the Company uses judgment, based on the best available facts and circumstances, including but not limited to, the length of its relationship with the customer and the customer’s current credit status based on third party credit reports and known market factors. The allowance provided is based on the difference between the present value of the receivables that the Company expects to collect, discounted at the receivables’ original effective interest rate and the carrying amount of the receivable. This specific allowance is re-evaluated and adjusted as additional information received affects the amounts estimated. Second, if it is determined that no objective evidence of impairment exists for an individually assessed receivable, the receivable is included in a group of receivables with similar credit risk characteristics and is collectively assessed for impairment. The provision under collective assessment is
97 Our Backstory based on historical collection, write-off, experience and change in customer payment terms. Impairment assessment is performed throughout the year.
The amount and timing of recorded expenses for any period would therefore differ based on the judgments or estimates made. Provision for doubtful accounts amounted to P143.0 million, P134.0 million and P154.9 million in 2013, 2012 and 2011, respectively. An increase in allowance for doubtful accounts would increase the Company’s recorded expenses and decrease trade and other receivables. Trade and other receivables, net of allowance for doubtful accounts, amounted to P2.0 billion and P2.5 billion as at December 31, 2013 and 2012, respectively (see Note 6).
Estimated Useful Lives of Property and Equipment. The useful life of each item of the Company’s property and equipment is estimated based on the period over which the asset is expected to be available for use. Such estimation is based on a collective assessment of practices of similar businesses, internal technical evaluation and experience with similar assets. The estimated useful life of each asset is reviewed periodically and updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the asset. It is possible, however, that future results of operations could be materially affected by changes in the amounts and timing of recorded expenses brought about by changes in the factors mentioned above. A reduction in the estimated useful life of any item of property and equipment would increase the recorded depreciation expense and decrease property and equipment.
There was no change in estimated useful lives of property and equipment in 2013 and 2012.
Property and equipment, net of accumulated depreciation and amortization of P1.2 billion and P1.0 billion, amounted to P548.3 million and P367.3 million as at December 31, 2013 and 2012, respectively (see Note 9).
Deferred Tax Assets. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. However, there is no assurance that sufficient taxable profit will be generated to allow all or part of the deferred tax assets to be utilized.
The Company recognized deferred tax assets on deductible temporary differences expected to reverse after the income tax holiday (see Note 21). The Company did not recognize deferred tax assets on deductible temporary differences that are expected to reverse during the income tax holiday period and on items where doubt exists as to the tax benefits they will bring in the future. Net deferred tax assets recognized amounted to P2.1 billion and P1.7 billion as at December 31, 2013 and 2012, respectively (see Notes 2 and 16). Unrecognized deferred tax assets amounted to P2.0 billion and P2.5 billion as at December 31, 2013 and 2012, respectively (see Note 16).
The change in amortization method of the Parent Company’s service concession assets starting 2013 from straight-line to UOP resulted in deferred tax asset write-off amounting to P469.5 million in 2012 as this would no longer be realized due to the lower amortization expense within the income tax holiday than previously projected (see Note 16).
Deferred FCDA and Deferred Credits. Under Amendment No.1 of the Concession Agreement, the Parent Company is entitled to recover (refund) foreign exchange losses (gains) arising from MWSS loans and any concessionaire loans. For the unrealized foreign exchange losses, the Parent Company recognized deferred
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FCDA as an asset since this is a resource controlled by the Company as a result of past events and from which future economic benefits are expected to flow to the Parent Company. Unrealized foreign exchange gains, however, are presented as deferred credits and will be refunded to the customers.
In accordance with MWSS-RO Resolution No. 2009-069, the new base foreign exchange rate was changed from P51.86 to P48.04 effective May 4, 2009.
Deferred credits representing the net effect of unrealized foreign exchange gains on service concession obligation payable to MWSS, and restatement of foreign currency-denominated interest-bearing loans and related interest that are still refundable to the customers amounted to P498.9 million and P1,675.8 million as at December 31, 2013 and 2012, respectively.
In 2013, the Parent Company realized foreign exchange gain amounting to P977.7 million arising from the refinancing of dollar-denominated Corporate Notes (see Note 11). This resulted in a significant FCDA refund to the customers and subsequent reduction in deferred credits account. As at February 24, 2014, such realized foreign exchange gain has been substantially refunded.
Asset Impairment. The Company assesses impairment on assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The factors that the Company 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 use of the acquired assets or the strategy for overall business; and
• significant negative industry or economic trends.
The Company recognizes an impairment loss whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is computed using the value in use (VIU) approach. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit to which the asset belongs. Determining the recoverable amount of assets requires the estimation of cash flows expected to be generated from the continued use and ultimate disposition of such assets. While it is believed that the assumptions used in the estimation of fair values reflected in the consolidated financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable amounts and any resulting impairment loss could have a material adverse impact on the results of operations.
Noncurrent nonfinancial assets and AFS financial asset carried at cost and subject to impairment test when certain impairment indicators are present follow:
December 31, 2013 December 31, 2012 (As restated - see Note 4)
Service concession assets (see Note 8) P54,560,728 P50,758,127
Property and equipment (see Note 9) 548,272 367,332
Goodwill (see Note 4) 288,082 288,082
AFS financial assets (see Note 10) 210,584 –
Total P55,607,666 P51,413,541
No impairment loss was recognized in 2013, 2012 and 2011.
99 Our Backstory Computation of Pension Cost. The cost of defined benefit pension plans and other post-employment benefits as well as the present value of the pension obligation are determined using actuarial valuations. The actuarial valuation involves making various assumptions. These include the determination of the discount rate, turnover rate, mortality rate and salary increase rate. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, defined benefit obligations are highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date.
In determining the appropriate discount rate, management considers the interest rates of government bonds that are denominated in the currency in which the benefits will be paid, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. Turnover rate is based on a 3-year historical information of voluntary separation and resignation by plan members.
The mortality rate is based on publicly available mortality tables for the specific country and is modified accordingly with estimates of mortality improvements. Future salary increases and pension increases are based on expected future inflation rates for the specific country.
Pension liability amounted to P192.9 million, P240.3 million and P165.4 million as at December 31, 2013 and 2012, and January 1, 2012, respectively (see Notes 2 and 17).
Computation of Share-based Payment Transactions. The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payments requires determining the most appropriate valuation model for a grant of equity instruments, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the option, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for share-based payments are disclosed in Note 14.
Equity based compensation expense presented as part of “Salaries, wages and benefits” account in consolidated statements of income amounted to P2.8 million, P7.5 million and P15.7 million in 2013, 2012 and 2011, respectively (see Note 14).
Determination of Other Long Term Incentives Benefits. The LTIP for key executives of MPIC and certain subsidiaries, including the Parent Company, was approved by the Executive Compensation Committee and the BOD of MPIC which is based on profit targets for the covered Performance Cycle. In addition, in 2013, the Parent Company has approved an LTIP for its managers and executives which is also based on profit targets for the covered Performance Cycle of 2013 to 2015. The cost of LTIP is determined using the projected unit credit method based on prevailing discount rates and profit targets. While management’s assumptions are believed to be reasonable and appropriate, significant differences in actual results or changes in assumptions may materially affect the Company’s other long-term incentive benefits.
Accrued LTIP amounted to P193.7 million and P60.4 million as at December 31, 2013 and 2012, respectively (see Notes 12 and 17). The total cost of the LTIP recognized by the Company presented as part of “Salaries, wages and benefits” account amounted to P148.3 million, P22.8 million and P54.1 million in 2013, 2012 and 2011, respectively. MPIC’s share in the LTIP cost of the Company as per LTIP Plan as at December 31, 2012 amounting to P5.7 million was recognized under “Other equity adjustments” in the equity section of the 2012 consolidated statement of financial position (see Note 17).
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Amortization of Debt Issuance Cost. As at December 31, 2012, the Parent Company had on-going negotiation for the refinancing on a clean basis of its outstanding Corporate Notes. Consequently, the amortization of capitalized debt issuance cost was accelerated in 2012 based on the revised expected cash flows. Related amortization of debt issuance costs amounted toP 328.5 million (see Note 11). On March 22, 2013, the loan refinancing has been completed.
4. Business Combination and Goodwill
The Company’s intention is to maintain and continue to develop a diverse set of infrastructure assets through its investments in water utilities. The Company is therefore committed to investing through acquisitions and strategic partnerships in prime infrastructure assets with the potential to provide synergies with its existing operations.
Acquisition of Phil Hydro. On August 3, 2012, the Parent Company, through a Share Purchase Agreement with a third party, acquired 100% ownership interest in Phil Hydro for a consideration of P595.0 million payable in tranches upon fulfillment and completion of certain conditions precedent. The Parent Company paid a portion of the consideration amounting to P210.0 million on August 8, 2012. In 2013, the Parent Company paid a portion of the consideration amounting to P195.4 million and was able to negotiate the purchase price by P68.1 million to cover for the seller’s failure to deliver certain documents and fulfill certain conditions precedent. As at December 31, 2013, the Parent Company completed the acquisition of 100% ownership interest in Phil Hydro.
In 2012, the Parent Company recorded its share in the identifiable assets and liabilities of Phil Hydro on the basis of provisional values. The Parent Company likewise finalized the purchase price allocation. The purchase price was allocated to the assets and liabilities on the basis of fair values at the date of acquisition.
Final Fair Values
Assets
Cash and cash equivalents P2,552
Receivables 34,655
Other current assets 5,739
Service concession assets 394,143
Other noncurrent assets 2,908
439,997
Liabilities
Accounts payable and other current liabilities 12,041
Other noncurrent liabilities 92,358
Interest-bearing loans 66,272
Deferred tax liability 30,458
201,129
Total net identifiable assets 238,868
Goodwill arising from acquisition 288,082
Purchase consideration transferred P526,950
On August 2013, the Parent Company finalized the purchase price allocation. The 2012 consolidated statement of financial position was restated to reflect the adjustments to the provisional amounts. As a result, there was a decrease in service concession assets and deferred tax liability amounting to P257.62 million and P77.29 million, respectively, and increase in goodwill amounting to P180.3 million. The decrease in amortization of service concession assets from the acquisition date to December 31, 2012 was recognized in 2013 as the amount is not material.
101 Our Backstory From the date of acquisition to December 31, 2012, Phil Hydro contributed P7.4 million to the consolidated net income of the Company from continuing operations. Had combination taken place at the beginning of 2012, Phil Hydro’s contribution to the Company’s consolidated net income from continuing operations in 2012 would have been P10.7 million and its contribution to the Company’s consolidated revenues from continuing operations would have been P48.5 million.
Net cash outflow on acquisition is as follows: 2013 2012 Total
Total cash paid on acquisition P195,368 P210,000 P405,368
Net cash acquired with the subsidiary – (2,552) (2,552)
Net cash outflow on acquisition P195,368 P207,448 P402,816
Transaction costs of P1.3 million have been expensed and are included in “Costs and expenses” in the 2012 consolidated statement of income.
Impairment Testing of Goodwill. The Parent Company believes that goodwill arising from the acquisition of Phil Hydro represents the fair value of expected economic benefits that the Parent Company will obtain arising from the acquisition. The impairment test of goodwill is based on VIU calculations that used the discounted cash flow model. The VIU was based on the cash flow projections on the most recent financial budgets and forecast of Phil Hydro. The length of the projections is up to 2035 based on the Bulk Water Supply Agreements entered into by Phil Hydro. The discount rate applied was 8.6%, which was based on the weighted average cost of capital. Based on the impairment test, the Parent Company did not identify an impairment loss. With regard to the assessment of VIU, management believes that no reasonably possible change in any key assumptions would cause the carrying values of the units to materially exceed the recoverable amount.
5. Cash and Cash Equivalents
This account consists of:
2013 2012
Cash on hand and in banks P660,530 P604,125
Cash equivalents 2,203,875 3,302,211
P2,864,405 P3,906,336
Cash in banks earn interest at the respective bank deposit rates. Cash equivalents are made for varying periods between one day and three months depending on the immediate cash requirements of the Company and earn interest at the respective short-term investment rates.
Short-term investments amounting to P3,627.0 million and P14.1 million as at December 31, 2013 and 2012, respectively, with original maturities of more than three months to one year are shown separately in the consolidated statements of financial position.
Interest income earned from cash in banks and short-term investments amounted to P90.6 million, P154.9 million and P118.6 million in 2013, 2012 and 2011, respectively (see Note 18).
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6. Trade and Other Receivables
This account consists of receivables from:
2013 2012
Customers:
Residential P1,702,657 P1,916,169
Semi-business 170,910 182,639
Commercial 544,845 659,711
Industrial 111,084 128,606
Bulk water supply 21,870 28,035
2,551,366 2,915,160
Employees 43,274 43,134
Others 683,138 699,281
3,277,778 3,657,575
Less allowance for doubtful accounts 1,267,613 1,124,661
P2,010,165 P2,532,914
The classes of the Company’s receivables from customers are as follows:
• Residential - pertains to receivables arising from water and sewer service use for domestic purposes only.
• Semi-business - pertains to receivables arising from water and sewer service use for small businesses.
• Commercial - pertains to receivables arising from water and sewer service use for commercial purposes.
• Industrial - pertains to receivables arising from water and sewer service use for industrial purposes, including services for manufacturing.
Receivables from customers and bulk water supply are non-interest bearing and generally have 60-day term.
Phil Hydro entered into guarantee contracts with LGU Guarantee Corporation (LGUGC), a private credit guarantee institution, to secure 85% of the monthly billing obligations of Legazpi City Water District (LCWD) and Norzagaray Water District (NWD). The secured amount shall not exceed the outstanding amount of loans obtained by Phil Hydro for the respective projects (see Note 11).
The movements in the Company’s allowance for doubtful accounts follow:
2013
Receivables from Customers Other Total Receivables Residential Semi-business Commercial Industrial
At January 1 P498,333 P131,571 P303,086 P116,078 P75,593 P1,124,661
Provision during 67,442 17,806 41,018 15,709 977 142,952 the year
At December 31 P565,775 P149,377 P344,104 P131,787 P76,570 P1,267,613
103 Our Backstory 2012
Receivables from Customers Other Total Receivables Residential Semi-business Commercial Industrial
At January 1 P447,234 P114,765 P264,372 P101,251 P75,593 P1,003,215
Provision during 63,653 16,806 38,714 14,827 – 134,000 the year
Write-off during (12,554) – – – – (12,554) the year
At December 31 P498,333 P131,571 P303,086 P116,078 P75,593 P1,124,661
7. Other Current Assets
This account consists of:
2013 2012
Sinking fund (see Note 11) P1,638,544 P1,130,191
Advances to contractors 261,226 219,365
Input VAT 149,695 163,158
Prepayments 130,156 124,970
Deposits 123,100 92,166
Others 90,160 65,284
P2,392,881 P1,795,134
Sinking fund represents the amount set aside to cover semi-annual principal and interest payment of loans (see Note 11).
Advances to contractors are normally applied within a year against progress billings.
Prepayments mainly pertain to insurance, premium bond, and taxes.
Deposits mainly consist of refundable rental deposits.
8. Service Concession Assets
The movements in this account are as follows:
2013 2012 (As restated - see Note 4)
Cost:
Balance at beginning of year P64,095,128 P56,093,099
Additions 5,368,245 7,607,886
Business combination (see Note 4) – 394,143
Balance at end of year 69,463,373 64,095,128
Accumulated amortization:
Balance at beginning of year 13,337,001 11,505,560
Amortization 1,565,644 1,831,441
Balance at end of year 14,902,645 13,337,001
P54,560,728 P50,758,127
Service concession assets consist of the present value of total estimated concession fee payments pursuant to the Concession Agreement and the costs of rehabilitation works incurred.
2013 Annual Report 104 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate Concession fee pursuant to the Concession Agreement is equal to the sum of the following:
a. 90% of the aggregate peso equivalent due under any MWSS loan which has been disbursed prior to the Commencement Date, including MWSS loans for existing projects and the raw water conveyance component of the Umiray-Angat Transbasin Project (UATP), on the relevant payment date set forth on the pertinent schedule of the Concession Agreement;
b. 90% of the aggregate peso equivalent due under any MWSS loan designated for the UATP which has not been disbursed prior to the Commencement Date on the relevant payment date set forth on the pertinent schedule of the Concession Agreement;
c. 90% of the local component costs and cost overruns related to the UATP in accordance with the pertinent schedule of the Concession Agreement;
d. 100% of the aggregate peso equivalent due under any MWSS loan designated for existing projects, which have not been disbursed prior to the Commencement Date and have been either awarded to third party bidders or been elected by the Parent Company for continuation in accordance with the pertinent sections of the Concession Agreement;
e. 100% of the local component costs and cost overruns related to the existing projects in accordance with relevant schedule of the Concession Agreement; and
f. Maintenance and operating expenditure (MOE) representing one-half of the annual budget for MWSS for that year, provided that such annual budget shall not exceed P200.0 million (as at 1997), subject to annual CPI adjustment.
Tranche B Concession Fees are additional concession fees being charged by MWSS to the Parent Company representing the cost of borrowings by MWSS as at December 2004. As at December 31, 2013 and 2012, the Parent Company had recognized and fully paid Tranche B Concession Fees of US$36.9 million and the related accrued interest thereon (see Note 13).
Pursuant to the recommendation of the Receiver, the disputed amount being claimed by MWSS of additional Tranche B Concession Fees of US$18.1 million is considered a contingent liability of the Parent Company, as discussed in Note 20.
The Parent Company recognized additional concession fees amounting to P249.2 million and P1,101.3 million in 2013 and 2012, respectively (see Note 13). These additional concession fees mainly pertain to the drawn portion of MWSS loans relating to new projects.
Certain items of service concession assets with a carrying value of nil and P152.6 million as at December 31, 2013 and 2012, respectively, are used as collaterals for Phil Hydro’s interest-bearing loans (see Note 11).
105 Our Backstory 9 . Property and Equipment
The rollforward analysis of this account follows:
2013
Land and Land Instrumentation, Office Furniture, Transportation Total Improvements Tools and Other Fixtures and Equipment Equipment Equipment
Cost
At January 1 P9,851 P640,471 P561,383 P193,028 P1,404,733
Additions 30,224 174,681 152,417 55,326 412,648
Reclassification – – 730 (730) –
Disposals – (4,494) (17,278) (22,716) (44,488)
At December 31 40,075 810,658 697,252 224,908 1,772,893
Accumulated Depreciation and Amortization
At January 1 888 445,810 444,961 145,742 1,037,401
Depreciation and amortization 1,459 125,912 83,751 20,119 231,241
Disposals – (4,250) (17,193) (22,578) (44,021)
At December 31 2,347 567,472 511,519 143,283 1,224,621
Net Book Value at December 31 P37,728 P243,186 P185,733 P81,625 P548,272
2012
Land and Land Instrumentation, Office Furniture, Transportation Total Improvements Tools and Other Fixtures and Equipment Equipment Equipment
Cost
At January 1 P9,237 P547,887 P507,125 P170,106 P1,234,355
Additions 614 116,549 48,063 27,331 192,557
Reclassification – (23,228) 23,228 – –
Disposals – (737) (17,033) (4,409) (22,179)
At December 31 9,851 640,471 561,383 193,028 1,404,733
Accumulated Depreciation and Amortization
At January 1 738 363,205 408,462 126,748 899,153
Depreciation and amortization 150 83,342 53,532 21,327 158,351
Disposals – (737) (17,033) (2,333) (20,103)
At December 31 888 445,810 444,961 145,742 1,037,401
Net Book Value at December 31 P8,963 P194,661 P116,422 P47,286 P367,332
As at December 31, 2013 and 2012, there were no capitalized borrowing costs.
10 . AFS Financial Assets
This account pertains to the Company’s investment in unquoted equity shares.
The movement in the AFS financial assets is as follows:
2013 2012
Balance at beginning of year P10,509 P10,509
Additional investment 210,584 –
Balance at end of year 221,093 10,509
Less allowance for impairment 10,509 10,509
P210,584 P–
2013 Annual Report 106 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at December 31, 2013, unquoted shares classified as AFS financial assets are carried at cost as there are no other reasonable basis for its fair value.
In 2013, the Parent Company acquired 10% ownership interest in Subic Water and Sewerage Co., Inc.
11 . Interest-Bearing Loans
This account consists of:
2013 2012
P21.2 billion Term Loan P20,305,965 P–
P5.0 billion Corporate Notes 5,000,000 –
US$137.5 million Loan 88,790 –
Peso-denominated Bank Loan 29,168 52,604
US$365.0 million Corporate Notes:
Peso-denominated loan (Series 1) – 9,640,081
Dollar-denominated loan (Series 2) – 4,977,313
P7.0 billion Corporate Notes – 7,000,000
25,423,923 21,669,998
Less unamortized debt issuance costs 81,888 14,819
25,342,035 21,655,179
Less current portion 1,703,831 1,031,600
P23,638,204 P20,623,579
US$365.0 Million Corporate Notes On June 30, 2008, the Parent Company entered into an Omnibus Notes Facility and Security Agreement (the 2008 ONFSA) with Banco de Oro Unibank, Inc. and Development Bank of the Philippines (Noteholders) for US$365.0 million notes (“the Notes”) for the purpose of financing the capital expenditures and payment of advances from shareholders. The Notes are composed of Series 1 amounting to US$240.0 million (P11.0 billion) and Series 2 amounting to US$125.0 million. Series 1 is a peso-denominated loan which consists of a fixed peso equivalent of US$120.0 million (P5.5 billion) fixed rate note and US$120.0 million (P5.5 billion) floating rate note. Series 2 is a US$125.0 million floating rate dollar-denominated note.
Series 1 Fixed and Floating Rate Note. Bears interest of fixed and floating rate and is payable within ten years to commence at the end of the 36th month after the initial issue date.
Series 1 Fixed bears interest of 8.8173% per annum subject to review and renegotiation should the 10-Y PDST-F be equivalent to or higher than 8.2852% per annum. Series 1 Floater Rate Notes bears interest of 4.75% per annum or 6-month PDSTF plus 2% spread, whichever is higher.
Series 2 Floating Rate Note. Bears interest of LIBOR and CDS rate plus 2.0% spread per annum and is payable within ten years to commence at the end of the 36th month after the initial issue date.
Debt Issuance Costs. All legal, professional and registration fees incurred in relation to the availment of the US$365.0 million Corporate Notes, totaling P451.8 million, were capitalized starting July 2008. Debt issuance costs are amortized using the effective interest method. Amortization of debt issuance costs amounting to P12.1 million, P378.5 million and P51.1 million in 2013, 2012 and 2011, respectively, are presented as part of “Interest expense and other financing charges” account in the consolidated statements of income (see Note 18).
107 Our Backstory P7.0 Billion Corporate Notes On March 23, 2011, the Parent Company entered into a P7.0 billion Omnibus Notes Facility and Security Agreement (the 2011 ONFSA) from various financing institutions for the purpose of capital expenditure financing. The loan was made available in two equal drawdowns, on March 30, 2011 and on September 30, 2011. The loan is payable in semi-annual installments within ten years to commence at the end of the 36th month after the initial issue date and bears an interest rate per annum equal to the higher of (i) the applicable benchmark rate plus 0.75% per annum, or (ii) 6.5% per annum. The benchmark rate shall be determined by reference to the PDST-F rate.
Debt Issuance costs. All legal and professional fees incurred in relation to the debt, totaling P118.8 million, were capitalized in 2011. Debt issuance costs are amortized using the effective interest method. Amortization of debt issuance costs attributed to this loan, amounted to P2.7 million, P10.6 million and P7.5 million in 2013, 2012 and 2011, respectively, is presented as part of “Interest expense and other financing charges” account in the consolidated statements of income (see Note 18).
As at December 31, 2012, the Parent Company had on-going negotiation for the refinancing on a clean basis of its outstanding Corporate Notes. Consequently, the amortization of capitalized debt issuance cost was accelerated in 2012 based on the revised expected cash flows. Related amortization of debt issuance costs amounted to P328.5 million (see Note 3).
The Parent Company’s outstanding Corporate Notes were secured by a first ranking mortgage over all of the Parent Company’s mortgageable assets and an assignment of all rights, title and interest of the Parent Company to its assigned accounts, accounts receivable, project documents and performance guarantee with Banco De Oro Unibank, Inc. as collateral agent. The Corporate Notes were secured further by a third party mortgage of the Parent Company shares representing 40.9% of the outstanding shares of the Parent Company and a voting trust over 31.0% of the outstanding shares of the Parent Company. The third party mortgage and voting trust over the Parent Company shares shall cease, terminate, and become void at such time that the Parent Company’s nonrevenue water or NRW is reduced to 45%. As at December 31, 2012 and 2011, the Parent Company had already breached the 45% threshold, and therefore, the condition for the release, cancellation and discharge of the mortgage lien over the mortgaged shares has been fulfilled to the satisfaction of the secured parties.
Loan Refinancing On March 22, 2013, the Parent Company entered into several loan agreements for the refinancing of all of its existing loans under the aforementioned 2008 ONFSA and 2011 ONFSA (collectively referred to as “Corporate Notes”), whereby the Parent Company was granted a Term Loan Facility (the “Term Loan”) in the aggregate amount of P21.2 billion. Under the new terms, the loans shall be payable in semi-annual installments within ten years to commence at the end of the 6th month after the initial issue date and bears an interest rate per annum equal to the higher of (i) the applicable benchmark rate plus 0.75% per annum, or (ii) 5.75% per annum. The benchmark rate shall be determined by reference to the PDST-F rate. The Term Loan is secured by a negative pledge. The change in the terms of the loan contracts was assessed as substantial modification of the Corporate Notes and thus, resulted to derecognition of the old loan and recognition of new financial liability.
All transaction costs incurred in relation to the loan refinancing totaling P748.5 million were charged to expense presented as part of “Interest expense and other financing charges” and “Other expense” accounts in the 2013 consolidated statement of income (see Note 18).
2013 Annual Report 108 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
P5.0 Billion Corporate Notes On April 29, 2013, the Parent Company entered into a Loan Agreement (Corporate Notes) with a local bank. The loan shall be payable in semi-annual installments within ten years to commence at the end of the 42nd month, and bears a fixed rate per annum equal to the higher of (i) the applicable benchmark rate plus 0.75% per annum, or (ii) 5.75% per annum. The benchmark rate shall be determined by reference to the PDST-F rate.
Debt Issuance costs. All legal and professional fees incurred in relation to the debt, totaling P42.8 million, were capitalized in 2013. Debt issuance costs are amortized using the effective interest method. Amortization of debt issuance costs attributed to this loan amounting to P2.5 million in 2013 is presented as part of “Interest expense and other financing charges” account in the consolidated statements of income (see Note 18).
As at December 31, 2013, the Term Loan and P5.0 Billion Corporate Notes have negative pledge collateral.
US$137.5 million Loan The World Bank (“WB”), through the Metro Manila Wastewater Management Project (“MWMP”), provided a US$275 million loan to the Land Bank of the Philippines (“LBP”) for relending at an equal share to the two Concessionaires of the MWSS namely, Maynilad and Manila Water. The MWMP is expected to finance investments in wastewater collection and treatment, and septage management in Metro Manila.
The loan will fund the following projects:
1. Rehabilitation of Ayala Alabang Sewage Treatment Plant (“STP”) 2. Talayan STP (part of the SJRBP) 3. Valenzuela STP and associated wastewater conveyance system 4. Pasay STP Muntinlupa STP and associated wastewater conveyance system 5. Muntinlupa STP and associated wastewater conveyance system 6. South Septage Treatment Plant
The WB and the LBP signed the Loan Agreement on May 31, 2012 while the Subsidiary Loan Agreement between LBP and Maynilad was executed on October 25, 2012.
The loan shall be payable in semi-annual installments within 25 years, inclusive of seven years grace period. The interest shall be paid semi-annually based on the same rate of interest payable by LBP under the WB Loan Agreement, plus fixed spread of 1.25% per annum.
Summary of transactions during the year is as follows:
Balance at beginning of year US$–
Amount received during the year 2,000,000
Bank charges (15)
Net amount 1,999,985
Expenditures during the year (537,770)
Balance at end of year US$1,462,215
The US$1.5 million shown above represents the outstanding balance of LBP designated account No. 3404- 031-936, under the account name MWMP- Category 2 – MWSI, and is presented as part of “Sinking fund” under “Other current assets” account in the 2013 consolidated statement of financial position.
109 Our Backstory The US$2.0 million drawn amount is presented as part of the noncurrent portion of the interest-bearing loans outstanding as at December 31, 2013.
The proceeds of the World Bank loan have been expended in accordance with the intended purposes as specified in the Loan Agreement.
Debt Issuance costs. All legal and professional fees incurred in relation to the debt, totaling P42.8 million, were capitalized in 2013. Debt issuance costs are amortized using the effective interest method. Amortization of debt issuance costs attributed to this loan amounting to P1.3 million in 2013 is presented as part of “Interest expense and other financing charges” account in the consolidated statements of income (see Note 18).
The movements in the balance of unamortized debt issuance costs related to all interest-bearing loans are as follows:
2013 2012
Balance at beginning of year P14,819 P403,904
Additions during the year 85,622 −
Amortization during the year (see Note 18) (18,553) (389,085)
P81,888 P14,819
The repayments of loans based on existing terms are scheduled as follows:
In Original Currency
Year US Dollar-denominated* Peso Loans Total Peso Equivalent*
(In Millions)
2014 $– P1,703.83 P1,703.83
2015 – 1,703.83 1,703.83
2016 – 1,748.00 1,748.00
2017 – 1,792.16 1,792.16
2018 onwards 2.00 18,387.31 18,476.10
$2.00 P25,335.13 P25,423.92
* Translated using the December 31, 2013 exchange rate of P44.39:US$1.
Covenants. The loan agreements contain, among others, covenants regarding the maintenance of certain financial ratios such as debt-to-equity ratio and debt service coverage ratio, and maintenance of debt service reserve account (see Note 7). As at December 31, 2013 and 2012, the Parent Company has complied with these covenants.
Under the terms of the loan agreements, the Parent Company may, at its option and without premium and penalty, redeem the Corporate Notes in whole or in part, subject to the conditions stipulated in the agreements. The embedded early redemption and prepayment options are clearly and closely related to the host debt contract, and thus, do not require to be bifurcated and accounted for separately in the host contract.
Peso-denominated Loan of Phil Hydro Phil Hydro obtained loans from local banks amounting to P70.0 million and P105.0 million in 2009 and 2007, respectively, to finance its capital expenditures in Legazpi City and Norzagaray, Bulacan.
2013 Annual Report 110 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Both loans are payable in quarterly installments over seven years from the respective dates of availment. The loan obtained in 2009 is subject to interest rate based on Philippine Dealing System Treasury - Fixing (PDST-F) rates plus a certain spread. On the other hand, the loan obtained in 2007 is subject to repricing every quarter.
Covenants. Among the significant covenants are as follows: (1) the prohibition against declaration or payment of dividends to Phil Hydro’s stockholders (other than dividends payable solely in shares of its capital stock) if payment of any sum due to the lenders is in arrears or it if would affect negatively the Phil Hydro’s financial condition. As at December 31, 2013 and 2012, Phil Hydro has no payments in arrears due to its lenders; (2) maintenance of current ratio of at least 1:1 and debt-to-equity ratio not greater than 2.5:1; and (3) non- granting of loans or advances to any of its directors, officers, and/or stockholders which, in the aggregate, would exceed 10% of its net worth at any time.
As at December 31, 2012, Phil Hydro was able to comply with the covenants, except for the current ratio. As a result, the noncurrent portion of the loan obtained in 2009 amounting to P40.8 million was presented as part of current liabilities in the 2012 consolidated statement of financial position.
With the amendment of the current ratio to 0.27:1 in 2013, Phil Hydro was able to comply with all the covenants as at December 31, 2013. Thus, the noncurrent portion of the loan obtained in 2009 amounting to P17.0 million was reclassified as part of noncurrent liabilities in the 2013 consolidated statement of financial position.
The loans are secured by the assigned guarantee coverage of the Company at 85% of the customers’ monthly billing obligation but not to exceed P75.0 million and P150.0 million for the loans obtained in 2009 and 2007, respectively. In addition to the above guarantee, the loan obtained in 2007 is secured by certain properties located in Legazpi City (see Note 8). On the other hand, the loan obtained in 2009 is secured by a continuing surety made by Phil Hydro’s former shareholder (see Note 7).
The loan obtained in 2007 has been fully paid on April 2013.
12 . Trade and Other Payables
This account consists of:
2013 2012
Trade payables P2,513,341 P2,188,896
Accrued construction costs (see Note 15) 4,640,469 4,996,260
Due to related party (see Note 15) 1,900 115,251
Other accrued expenses (see Note 17) 5,070,608 4,029,282
P12,226,318 P11,329,689
Trade and other payables are non-interest bearing and are normally settled within one year.
Trade payables include liabilities relating to assets held in trust (see Note 24) used in the Company’s operations amounting to P97.3 million as at December 31, 2013 and 2012.
Other accrued expenses mainly consist of provisions, salaries, wages and benefits, contracted services and interest payable to the banks. Details of provisions required by PAS 37 are not disclosed as these may prejudice the Company’s positions in relation to the cases pending before the courts or quasi-judicial bodies.
111 Our Backstory 13 . Service Concession Obligation Payable to MWSS
This account consists of:
2013 2012
Concession fees payable (see Note 8) P8,262,856 P8,380,294
Accrued interest 607,217 607,217
8,870,073 8,987,511
Less current portion 954,706 1,012,526
P7,915,367 P7,974,985
Disputes with MWSS In prior years, the Parent Company has been contesting certain charges billed by MWSS relating to: (a) the basis of the computation of interest; (b) MWSS cost of borrowings; and (c) additional penalties. Consequently, the Parent Company has not provided for these additional charges. These disputed charges have been reflected by virtue of the Debt and Capital Restructuring Agreement (DCRA) entered into in 2005. Accordingly, the Parent Company has recognized these additional charges, referred to as Tranche B Concession Fees in the DCRA, amounting to US$30.1 million. As discussed in Note 8, the Receiver has determined an additional amount of Tranche B Concession Fees of US$6.8 million. As at December 31, 2013 and 2012, the Parent Company had recognized Tranche B Concession Fees of US$36.9 million (see Note 8).
The Parent Company reconciled its liability to MWSS with the confirmation and billings of MWSS. The difference between the amount confirmed by MWSS and the amount recognized by the Parent Company amounted to P4.9 billion and P4.5 billion as at December 31, 2013 and 2012, respectively. The difference mainly pertains to disputed claims of MWSS consisting of additional Tranche B Concession Fees (see Note 8), borrowing cost and interest penalty under the Concession Agreement (prior to the DCRA). The Parent Company’s position on these charges is consistent with the Receiver’s recommendation which was upheld by the Rehabilitation Court (see Notes 8 and 20).
Following the issuance of the Rehabilitation Court’s Order on December 19, 2007 disallowing the MWSS’ disputed claims and the termination of the Parent Company’s rehabilitation proceedings, the Parent Company and MWSS sought to resolve the matter in accordance with the dispute resolution requirements of the TCA.
Prior to the DCRA, the Parent Company has accrued interest on its payable to MWSS based on the terms of the Concession Agreement, which was disputed by the Parent Company before the Rehabilitation Court. These already amounted to P985.3 million as at December 31, 2011 and have been charged to interest expense in prior years. The Parent Company maintains that the accrued interest on its payable to MWSS has been adequately replaced by the Tranche B Concession Fees discussed above. The Parent Company’s position is consistent with the Receiver’s recommendation which was upheld by the Rehabilitation Court (see Notes 8 and 20). With the prescription of the TCA and in light of the Parent Company’s current negotiation and outstanding offer of US$14.0 million to fully settle the claim of MWSS, the Parent Company reversed the amount of accrued interest in excess of the US$14.0 million settlement offer amounting to P378.1 million and charged to other income in 2012. The remaining balance of P607.2 million as at December 31, 2013 and 2012, which pertains to the disputed interest penalty under the Concession Agreement prior to DCRA, has remained in the books pending resolution of the remaining disputed claims of MWSS.
2013 Annual Report 112 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The schedule of undiscounted estimated future concession fee payments, based on the term of the Concession Agreement, is as follows:
In Original Currency
Year Foreign Currency Loans Peso Loans/ Project Local Support Total Peso Equivalent* (Translated to US$)*
(In Millions)
2014 $17.2 P818.6 P1,582.9
2015 15.7 783.3 1,481.7
2016 16.6 509.5 1,247.4
2017 14.2 498.7 1,130.1
2018-2037 87.4 10,350.6 14,229.7
$151.1 P12,960.7 P19,671.8
* Translated using the December 31, 2013 exchange rate of P44.39:US$1.
Additional concession fee liability relating to the extension of the Concession Agreement (see Note 1) is only determinable upon loan drawdown of MWSS and the actual construction of the related concession projects.
14 . Equity
a. The Parent Company’s authorized and issued shares as at December 31, 2013 and 2012 are presented below:
Number of Shares
2013 2012
Authorized and issued - P1,000 par value
Common shares at beginning of year
Class A 3,686,393 3,686,393
Class B 236,000 236,000
ESOP 88,500 88,500
4,010,893 4,010,893
Increase of common shares
Class A 536,089 –
Class B – –
ESOP – –
536,089 –
Common shares at end of year
Class A 4,222,482 3,686,393
Class B 236,000 236,000
ESOP 88,500 88,500
4,546,982 4,010,893
Class A shares, comprising sixty percent (60%) of the authorized common shares, may only be subscribed by Filipino citizens or corporations or associations organized under the laws of the Philippines with at least sixty percent (60%) of the capital owned by Filipino citizens.
Class B shares, comprising forty percent (40%) of the authorized common shares, may be subscribed by, transferred to and owned by either Filipino citizens or by aliens.
113 Our Backstory b. ESOP
The employees of the Parent Company are allowed equity participation of up to six percent (6%) of the issued and outstanding capital stock of the Parent Company upon the effective date of the increase in authorized capital stock of the Parent Company pursuant to and in accordance with the provisions of Clause 2.6 of the DCRA. For this purpose, a series of 88,500,000 nonvoting convertible redeemable shares (ESOP Shares) was created from common Class A shares as reflected in the Parent Company’s amended Articles of Incorporation. In 2008, the ESOP shares were effectively reduced to 88,500 shares due to change in par value from P1 to P1,000. The ESOP shares have no voting rights, except for those provided under Section 6 of the Corporation Code and have no pre-emptive rights to purchase or subscribe to future or additional issuances or disposition of shares of the Parent Company.
Within thirty (30) days after the earlier of (i) the end of the fifth year from the creation of the ESOP Shares, and (ii) the listing date for common shares in a recognized Philippine Stock Exchange, the Parent Company may redeem the ESOP shares at a redemption ratio equal to one common share for every ESOP share held and such common shares so exchanged shall have the same rights and privileges as all other common shares.
Each ESOP Share will be convertible, at the option of the holder thereof, at any time during the period commencing the earlier of (i) the end of the fifth year from the creation of the ESOP Shares; or (ii) the listing date for common shares in a recognized Philippine Stock Exchange into one fully-paid and non-assessable common share. Such common share shall have the same rights and privileges as all other common shares. Conversion of the ESOP Share may be effected by surrendering the certificates representing such shares to be converted to the Parent Company at the Parent Company’s principal office or at such other office or offices as the BOD may designate, and a duly signed and completed notice of conversion in such form as may from time to time be specified by the Parent Company (a “Conversion Notice”), together with such evidence as the Parent Company may reasonably require to prove the title of the person exercising such right. A Conversion Notice once given may not be withdrawn without the consent in writing of the Parent Company.
In 2012, ESOP shares reacquired by the Parent Company from its resigned employees amounting to P3.2 million were presented as treasury shares.
In 2012, the Board and shareholders of the Parent Company approved the amendment of its Articles of Incorporation to allow for the reissuance of ESOP shares that have been bought back by the Parent Company from separated employees. Upon approval by the SEC of the amendment on January 31, 2013, said ESOP shares were subsequently reissued to all qualified employees of the Parent Company. c. Deposits for Future Stock Subscription
Pursuant to the Subscription Agreement between MWHCI and the Parent Company, MWHCI subscribed to additional 134,022 common shares of the Parent Company with par value of P1,000 on December 28, 2012 (see Note 1). However, pending Parent Company’s
2013 Annual Report 114 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
application for the increase in authorized capital stock with the SEC as at December 31, 2012, the subscription payment amounting to P33.5 million was presented as “Deposits for future stock subscription” under current liabilities in the 2012 consolidated statement of financial position.
On January 31, 2013, the SEC approved the Parent Company’s application for the increase in its authorized capital from P4.0 billion to P4.5 billion. Consequently, the deposits for future subscription were reclassified to equity. On February 13, 2013, MWHCI paid for the balance of P100.5 million and subscribed to additional 402,067 common shares at a subscription price of P25,533 per share, resulting in additional paid-in capital of P9.9 billion (see Note 1).
d. Dividends
On June 25, 2012, during the regular meeting, the Parent Company’s BOD set and approved the declaration of cash dividends of P499.5 per common share amounting to P2.0 billion. Payments were made on June 29, 2012.
On February 13, 2013, Parent Company’s BOD set and approved the declaration of cash dividends of P2,841.32 per common share amounting to P11.4 billion to all shareholders of record as at February 4, 2013. Payments were made in tranches from February 13, 2013 up to April 5, 2013.
On June 24, 2013, during the regular meeting, the Parent Company’s BOD set and approved the declaration of cash dividends of P241.92 per common share amounting to P1.1 billion to all shareholders of record as at June 24, 2013. Payments were made in tranches from July 22, 2013 up to September 27, 2013.
On November 25, 2013, during the regular meeting, the Parent Company’s BOD set and approved the declaration of cash dividends of P219.93 per common share amounting to P1.0 billion to all shareholders of record as at November 25, 2013. Payments were made in tranches from December 10 to 26, 2013.
On February 24, 2014, during the regular meeting, the Parent Company’s BOD set and approved the declaration of cash dividends of P220.01 per common share amounting to P1.0 billion to all shareholders of record as at February 24, 2014. Payments will be made on April 2, 2014.
e. Appropriation of Retained Earnings
On November 25, 2013, the Parent Company’s BOD approved the appropriation of its retained earnings amounting to P4.0 billion for various water and sewerage projects expected to be implemented in the next two years.
On November 26, 2012, the Parent Company’s BOD approved the appropriation of P10.2 billion for distribution of cash dividends to its stockholders. On February 13, 2013, the BOD reversed the P2.0 billion previously appropriated for capital expenditures and declared cash dividends amounting to P11.4 billion.
115 Our Backstory On August 24, 2011, the Parent Company’s BOD approved the appropriation of its retained earnings amounting to P2.0 billion for its capital expenditures. f. Equity Adjustments
As discussed in item (a), the Parent Company has issued and redeemed preferred shares in 2008. Foreign exchange fluctuation from date of issuance of the preferred shares to the date of notice of redemption is issued, amounting to P351.0 million, is recognized as part of “Other equity adjustments” account shown as part of equity in the consolidated statements of financial position.
Share-based Payment On June 24, 2007, the shareholders of MPIC approved a share option scheme (the Plan) under which MPIC’s directors may, at their discretion, invite executives of MPIC upon the regularization of employment of eligible executives, to take up share option of MPIC to obtain an ownership interest in MPIC and for the purpose of long-term employment motivation. The scheme became effective on June 14, 2007 and is valid for 10 years. An amended plan was approved by the stockholders on February 20, 2009.
As amended, the overall limit on the number of shares that may be issued upon exercise of all options to be granted and yet to be exercised under the Plan must not exceed 5.0% of the shares in issue from time to time.
The exercise price in relation to each option shall be determined by the Parent Company’s Compensation Committee, but shall not be lower than the highest of: (i) the closing price of the shares for one or more board lots of such shares on the PSE on the option offer date; (ii) the average closing price of the shares for one or more board lots of such shares on the PSE for the five business days on which dealings in the shares are made immediately preceding the option offer date; and (iii) the par value of the shares.
MPIC allocated and set aside stock options relating to an additional 145,000,000 common shares, of which, (a) 94,300,000 common shares were granted to its new directors and senior management officers, as well as members of the management committee of certain MPIC subsidiaries (includes 15,200,000 common shares granted to officers of the Parent Company) at the exercise price of P2.73 per common share on July 2, 2010 and (b) another 10,000,000 common shares were granted at the exercise price of P3.50 on December 21, 2010 to officers of the Parent Company.
On March 8, 2011, 1,000,000 common shares were granted at the exercise price of P3.53 to senior management of the Parent Company.
No stock option activity was received from MPIC in 2009.
The weighted average remaining contractual life for the share options outstanding as at December 31, 2011 for the second and third grants is 4.6 years and 5.0 years, respectively.
2013 Annual Report 116 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of the options granted is estimated at the date of grant using Black-Scholes- Merton formula, taking into account the terms and conditions upon which the options were granted. The following tables list the inputs to the model used for the ESOP in 2013 and 2012:
Grant dated July 2, 2010
30.0% vesting on 35.0% vesting on 35.0% vesting on July 2, 2011 July 2, 2012 July 2, 2013
Grant date July 2, 2010
Spot price P2.65 P2.65 P2.65
Exercise price P2.73 P2.73 P2.73
Risk-free rate 4.61% 5.21% 5.67%
Expected volatility* 69.27% 67.52% 76.60%
Term to vesting (in days) 365 731 1,096
Grant dated December 21, 2010
30.0% vesting on 35.0% vesting on 35.0% vesting on August 1, 2011 August 1, 2012 August 1, 2013
Grant date December 21, 2010
Spot price P3.47 P3.47 P3.47
Exercise price P3.50 P3.50 P3.50
Risk-free rate 1.62% 2.83% 3.73%
Expected volatility* 46.62% 68.23% 72.82%
Term to vesting (in days) 223 589 954
*The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may also not necessarily be the actual outcome.
Grant dated March 8, 2011
30.0% vesting on 35.0% vesting on 35.0% vesting on March 8, 2012 March 8, 2013 March 8, 2014
Grant date March 8, 2011
Spot price P3.53 P3.53 P3.53
Exercise price P3.53 P3.53 P3.53
Risk-free rate 2.56% 4.38% 5.01%
Expected volatility* 39.32% 61.39% 64.42%
Term to vesting (in days) 366 731 1,096
Call price P0.58 P1.28 P1.62
*The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may also not necessarily be the actual outcome.
In 2012, no additional stock option activity was received from MPIC.
Stock options expense recognized by the Company under “Salaries, wages and benefits” account in the consolidated statements of income amounted to P2.8 million, P7.5 million and P15.7 million in 2013, 2012 and 2011, respectively.
Carrying value of the ESOP recognized under “Other equity adjustments” in the equity section of the consolidated statements of financial position amounted to P41.8 million and P28.6 million as at December 31, 2013 and 2012, respectively.
117 Our Backstory 15 . Related Party Transactions
Parties are considered to be related if one party has the ability to control, directly or indirectly, the other party or exercise influence over the other party in making financial and operating decisions. Parties are considered to be related if they are subject to common control or common significant influence.
Category Year Amount/Volume Outstanding Terms Conditions of Transactions Balance
Affiliate -
DM Consunji, Inc. 2013 P504.5 million P1.9 million Non-interest Unsecured Construction costs (see Note 12) bearing, 2012 1,089.2 million 115.3 million settlement in cash and payable on demand
Terms and Conditions of Transactions with Related Parties The outstanding transactions with related parties are made at normal market prices. Outstanding balances at year-end are unsecured, interest-free, settlement occurs in cash and payable on demand.
Total compensation and benefits of key management personnel of the Company consist of:
2013 2012 2011
Compensation P142,051 P131,763 P110,822
Pension costs 8,176 7,444 6,908
Short-term benefits 7,580 6,922 7,329
P157,807 P146,129 P125,059
16 . Income Taxes
The Company recognized deferred taxes on deductible temporary differences expected to reverse after the income tax holiday (ITH) period (see Note 21). The components of the net deferred tax assets of the Company as at December 31, 2013 and 2012 shown in the consolidated statements of financial position are as follows:
2013 2012 (As restated - see Note 2)
Service concession assets - net P1,304,894 P1,288,827
Accrued expenses 610,569 371,650
Unamortized debt issuance cost 119,280 –
Pension liability and unamortized past service cost 38,254 52,476
P2,072,997 P1,712,953
Deferred tax asset written off due to the Company’s change in method of amortization of service concession assets amounted to P469.5 million in 2012 (see Note 3).
The Company has the following temporary differences for which no deferred tax assets (liability) have been recognized since these are expected to reverse during the ITH period or management believes that it is not probable that these will be realized in the near future. For tax purposes, concession fees, presented as part of
2013 Annual Report 118 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2013 2012 (As restated - see Note 2)
Service concession assets - net P3,082,513 P4,227,911
Allowance for doubtful accounts 1,266,636 1,125,638
Accretion of financial liabilities 1,052,144 1,562,239
Accrued expenses 772,364 1,177,834
LTIP 148,297 –
Unamortized debt issuance costs 109,683 –
Pension liability 82,290 82,290
Unamortized past service costs 27,718 41,577
Unrealized foreign exchange gain - net (78) (86)
P6,541,567 P8,217,403
“Service concession assets” account in the consolidated statements of financial position, are amortized using UOP method as approved by the Bureau of Internal Revenue.
On December 16, 2009, the BOI released the Certificate of Registration certifying 6-year income tax holiday incentive up to 2015 for Bulk Water Supply and Distribution Projects pertaining to the La Mesa Treatment Plants 1 and 2, while up to 2016 for Bulk Water Supply and Distribution Projects in Putatan, Muntinlupa (see Note 21).
Provision for current income tax in 2013 and 2012 represents the regular corporate income tax on miscellaneous income not covered by the ITH (see Note 21).
The reconciliation of provision for income tax computed at the statutory income tax rate to provision for income (benefit from) tax as shown in the consolidated statements of income is summarized as follows:
2013 2012 2011 (As restated - see Note 2) (As restated - see Note 2)
Income tax at statutory tax rate of 30% P1,958,782 P1,951,598 P1,689,263
Add (deduct) the tax effects of:
Net taxable income under ITH (see Note 21) (1,806,223) (1,889,863) (1,569,419)
Change in unrecognized net deferred tax assets (502,751) (123,833) (239,825)
Interest income already subjected to final tax (27,172) (46,470) (35,588)
Other nondeductible items - net (29,578) 234,602 (46,634)
Provision for (benefit from) income tax (P406,942) P126,034 (P202,203)
17 . Employee Benefits
MPIC’s LTIP On December 16, 2010, MPIC’s BOD approved, in principle, the broad outline of MPIC’s strategic plans for 2010 to 2012 focusing on the development of new revenue streams to drive future growth while protecting the existing core business. To ensure the proper execution of the three-year plan, particularly with respect to the manpower resources being committed to such plans, the 2010 to 2012 LTIP, upon endorsement of the Compensation Committee, was approved by the BOD to cover the period from January 1, 2010 to December 31, 2012, or the 2010 to 2012 Performance Cycle. The payment under the 2010 to 2012 LTIP is intended to be made at the end of the 2010 to 2012 Performance Cycle (without interim payments) and contingent upon the achievement of an approved target core income of the Parent Company by the end of the 2010 to 2012 Performance Cycle.
119 Our Backstory Total amount of LTIP under these plans is fixed upon achievement of the target Core Income and is not affected by changes in future salaries of the employees covered. The liability of the 2010 to 2012 LTIP was determined using the projected unit credit method. The long term employee benefit liability comprises the present value of the defined benefit obligation (using discount rate based on government bonds) at the end of the reporting period.
The total cost of the LTIP recognized by the Parent Company in 2012 and 2011 presented as part of “Salaries, wages and benefits” amounted to P22.8 million and P54.1 million, respectively, of which, P5.7 million and P10.8 million, respectively, was recognized under “Other equity adjustments” in the equity section of the consolidated statements of financial position representing MPIC’s share in the LTIP cost of the Company as per LTIP Plan as at December 31, 2012, and the balance of P17.1 million was presented as part of “Other accrued expenses” under “Trade and other payables” account as at December 31, 2012, and P43.3 million was presented as part of “Other noncurrent liabilities” account in the consolidated statements of financial position as at December 31, 2012. As at December 31, 2013, unpaid balance of LTIP amounted to P45.6 million (see Note 12).
Parent Company’s LTIP The Parent Company has approved an LTIP for its managers and executives which is also based on profit targets for the covered Performance Cycle of 2013 to 2015.
The total cost of the LTIP recognized by the Company in 2013 presented as part of “Salaries, wage and benefits” amounted to P148.3 million as at December 31, 2013 and was presented as part of “Other accrued expenses” under “Trade and other payables” account in the consolidated statement of financial position (see Note 12).
Pension Plan The Company has a funded, noncontributory and actuarially computed pension plan covering substantially all of its employees. The benefits are based on years of service and compensation during the last year of employment.
Changes in net defined benefit liability of funded funds in 2013 are as follows:
Present value of defined Fair value of plan assets Net defined benefit benefit obligation liability
At January 1, 2013 (As restated - see Note 2) P1,008,747 P768,443 P240,304
Net benefit cost in consolidated statement of income:
Current service cost 103,139 – 103,139
Net interest 60,519 46,318 14,201
1,172,405 814,761 357,644
Benefits paid (12,692) (12,692) –
Remeasurements in other comprehensive income:
Interest income (excluding amount included in net – 3,394 (3,394) interest)
Actuarial changes arising from changes in (161,351) – (161,351) financial assumptions
(161,351) 3,394 (164,745)
At December 31, 2013 P998,362 P805,463 P192,899
2013 Annual Report 120 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in net defined benefit liability of funded funds in 2012 are as follows:
Present value of defined Fair value of plan assets Net defined benefit liability benefit obligation
At January 1, 2012 (As restated - see Note 2) P829,180 P663,725 P165,455
Net benefit cost in consolidated statement of income:
Current service cost 89,894 – 89,894
Net interest 53,897 43,142 10,755
972,971 706,867 266,104
Benefits paid (11,091) (11,091) –
Remeasurements in other comprehensive income:
Interest income (excluding amount included in – 72,667 (72,667) net interest)
Actuarial changes arising from changes in 46,867 – 46,867 financial assumptions
46,867 72,667 (25,800)
At December 31, 2012 (As restated - see Note 2) P1,008,747 P768,443 P240,304
The maximum economic benefit available is a combination of expected refunds from the plan and reductions in future contributions.
The fair value of plan assets by each classes as at the end of the reporting period are as follows:
At December 31, 2013 At December 31, 2012 At January 1, 2012
Investments in:
Government securities P387,994 P366,831 P459,904
Equity securities 306,843 356,151 138,028
Unit trust funds 21,150 20,294 30,304
Loans/notes receivable 2,990 17,525 23,383
Cash and cash equivalents 23,691 5,642 9,438
Receivables and others 62,795 2,000 2,668
P805,463 P768,443 P663,725
The plan asset’s carrying amount approximates its fair value since these are short-term in nature or marked- to-market. All equity and debt instruments held have quoted prices in active market. The remaining plan assets do not have quoted market prices in active market.
The plan assets have diverse investments and do not have any concentration risk.
As at December 31, 2013, the plan assets consist of the following:
• Investments in government securities consist primarily of fixed-rate treasury notes and retail treasury bonds that bear interest ranging from 4.00% to 8.13% per annum and have maturities from 2014 to 2035.
• Investments in equity securities are composed of investment in shares of various listed entities. The carrying amounts of investments in equity securities also approximate their fair values since they are marked-to-market.
121 Our Backstory • Unit trust funds include mutual funds invested in quoted shares.
• Loans and notes receivables include unsecured fixed-rate notes of a related party, unsecured notes of unaffiliated companies, dividend, interest and other receivables. The notes bear interest ranging from 6.26% to 6.73%.
• Cash and cash equivalents include regular savings and time deposits, which bear interest ranging from 1.25% to 5.50% per annum.
• Receivables and others include certificate of deposit with a term of 7 years and bear interest at 5.25%.
The cost of defined benefit pension plans and other post-employment benefits as well as the present value of the pension obligation are determined using actuarial valuations. The actuarial valuation involves making various assumptions. The principal assumptions used in determining pension and post-employment benefit obligations for the defined benefit plans are shown below:
2013 2012
Discount rate 4.69% 6.07%
Salary increase rate 4.00% 7.00%
In 2013, the sensitivity analysis below has been determined based on reasonably possible changes of each significant assumption on the defined benefit obligation as at the end of the reporting period, assuming all other assumptions were held constant:
Increase (decrease) in Basis Points Amount
Discount rate 100 (P86,564)
(100) 101,925
Salary increase rate 100 96,146
(100) (83,816)
Turnover rate 132 (24,163)
(68) 14,601
Shown below are the maturity analyses of the undiscounted benefit payments:
2013
Normal Retirement Other than Normal Retirement Total
Less than one year P17,535 P8,311 P25,846
More than one year to five years 366,992 66,286 433,278
More than five years to 10 years 868,730 81,795 950,525
More than 10 years to 15 years 503,317 69,317 572,634
More than 15 years to 20 years 173,815 55,783 229,598
More than 20 years to 25 years 482,069 78,031 560,100
More than 25 years 2,138,410 156,126 2,294,536
P4,550,868 P515,649 P5,066,517
2013 Annual Report 122 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2012
Normal Retirement Other than Normal Retirement Total
Less than one year P22,254 P2,957 P25,211
More than one year to five years 296,590 25,858 322,448
More than five years to 10 years 1,097,341 48,514 1,145,855
More than 10 years to 15 years 852,466 62,097 914,563
More than 15 years to 20 years 354,431 47,565 401,996
More than 20 years to 25 years 640,760 57,009 697,769
More than 25 years 5,976,499 153,336 6,129,835
P9,240,341 P397,336 P9,637,677
There are no expected contributions to the defined benefit pension plan in 2014.
18 . Interest Income and Interest Expense and Other Financing Charges
2013 2012 2011
Interest income:
Cash in banks and short-term investments (see Note 5) P90,572 P154,900 P118,625
Accretion on miscellaneous deposits – – 3,126
P90,572 P154,900 P121,751
Interest expense and other financing charges:
Bank loans (see Note 11) P1,377,285 P1,385,240 P1,240,407
Accretion on service concession obligation payable to 716,605 707,524 749,834 MWSS (see Note 13)
Loan refinancing costs 441,375 – –
Amortization of debt issuance costs (see Note 11) 18,553 389,085 58,646
Accretion on financial liabilities 17,133 12,564 2,835
P2,570,951 P2,494,413 P2,051,722
19 . Basic/Diluted Earnings Per Share
2013 2012 2011
Net income (a) P6,936,214 P6,379,293 P5,833,081
Weighted average number of shares at beginning of year 4,004,032 4,010,893 4,010,893
Add weighted average number of additional issuances 469,078 – – (see Note 14)
Less weighted average number of treasury shares 348 6,861* – (see Note 14)
Weighted average number of shares at end of year (b) 4,472,762 4,004,032 4,010,893
Basic/Diluted Earnings per share (a/b) P1,550.77 P1,593.22 P1,454.31
*Substantially acquired by fourth quarter in 2012 and middle of the year in 2011.
The Company’s basic and diluted earnings per share are the same as the dilutive effect of potential common shares from share-based payments have no impact.
20 . Contingent Liabilities
Following are the significant contingent liabilities of the Company as at December 31, 2013 and 2012:
a. Additional Tranche B Concession Fees and interest penalty are being claimed by MWSS in excess of the amount recommended by the Receiver. Such additional charges being claimed
123 Our Backstory by MWSS (in addition to other miscellaneous claims) amounted to P4.9 billion and P4.5 billion as at December 31, 2013 and 2012, respectively. The Rehabilitation Court has resolved to deny and disallow the said disputed claims of MWSS in its December 19, 2007 Order, upholding the recommendations of the Receiver on the matter. Following the termination of the Parent Company’s rehabilitation proceedings, the Parent Company and MWSS sought to resolve this matter in accordance with the dispute requirements of the TCA (see Note 13). b. On October 13, 2005, the Parent Company and Manila Water (the “Concessionaires”) were jointly assessed by the Municipality of Norzagaray, Bulacan for real property taxes on certain common purpose facilities purportedly due from 1998 to 2005 amounting to P357.1 million. It is the position of the Concessionaires that it is the Republic of the Philippines that owns these properties, and is therefore, exempt from taxation.
The supposed joint liability of the Concessionaires for real property tax, including interests, amounted to about P1.0 billion as at December 31, 2013.
After the Local Board of Assessment Appeals (“LBAA”) ruled in favor of the Municipality of Norzagaray, Bulacan, the Concessionaires elevated the ruling of the LBAA to the Central Board of Assessment Appeals (“CBAA”) by filing separate appeals. As at February 24, 2014, the decision is still pending. c. On November 24, 2006, the Labor Arbiter issued a decision in favor of the Maynilad Water Supervisors Association (“MWSA”), ordering the payment of COLA to the Parent Company’s supervisor-employees, retroactive to the date when they were hired by the Parent Company in 1997, with legal interest from the date of promulgation of the decision until full payment of the award or P249.5 million as computed and claimed by MWSA. This decision was reversed and set aside by the National Labor Relations Commission (“NLRC”) in 2007, but reinstated by the Court of Appeals in 2010. After the issuance of the Labor Arbiter’s decision in 2007, the Parent Company executed a compromise agreement with MWSA, wherein the Parent Company agreed to pay MWSA residual benefits equivalent to its claim for COLA for 23 months, from August 1997 to June 1999. Thus, the Parent Company’s dispute with MWSA was limited to the supervisor-employees claim for COLA from July 1999 up to the present time. In 2011, the Court of Appeals granted the motion for reconsideration filed by the Parent Company by issuing an amended decision reinstating and affirming the resolutions of the NLRC. The Court of Appeals thereafter issued a resolution denying the motion for reconsideration filed by MWSA. On November 16, 2011, MWSA filed a Petition for Review on Certiorari before the Supreme Court, seeking to annul the said amended decision and the resolution of the Court of Appeals.
On December 11, 2013, Notice of Judgment was issued by the Supreme Court which upheld the assailed Amended Decision and Resolution of the Court of Appeals which held that the employees of the Parent Company are not entitled to receive COLA pursuant to the terms of the Concession Agreement. d. The Company is a party to various civil and labor cases relating to breach of contracts with damages, illegal dismissal of employees, and nonpayment of backwages, benefits and performance bonus, among others.
2013 Annual Report 124 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21 . Registration with the Board of Investments (BOI)
Maynilad The Parent Company is registered with the BOI under Executive Order No. 226, as amended, as a new operator of water supply and sewerage system for the West Service Area on a pioneer status.
The registration entitles the Parent Company to incentives which include, among others, an ITH for a period of six years beginning on Commencement Date or from actual start of commercial operations, whichever comes first.
On April 16, 2008, the BOI granted the request of the Parent Company for the extension of the period for the ITH availment from August 2001 - July 2007 to January 2003 - December 2008.
On October 20, 2008, the Parent Company filed an application for an ITH bonus year. The application was for the extension of the availment of the ITH incentive by the Parent Company for one (1) year or for the period January 1, 2009 to December 31, 2009. The BOI approved the Parent Company’s application on December 22, 2008.
On December 16, 2009, the Parent Company was issued with BOI Registration Certificate Nos. 2009-188 and 2009-189 as a new operator of the 1500 million liters per day (MLD) and 900 MLD Bulk Water Supply and Distribution Projects pertaining to the La Mesa Treatment Plants 1 and 2, respectively. The registrations entitle the Parent Company to incentives which include an ITH for six years from January 2010 or actual start of commercial operations, whichever is earlier, but in no case earlier than the date of registration. Registration as new operator of 200 MLD Bulk Water Supply and Distribution Project (Putatan, Muntinlupa) was likewise approved by the BOI in December 2009. The Certificates of Registration were issued in December 2009. This also entitles the Project to a six year ITH commencing on January 2011 or actual start of commercial operations. Commercial operations of the Project started on January 1, 2011. The ITH incentives shall be limited to the sales/revenue generated from the operation of the three plants which substantially cover the total capacity of the Parent Company. ITH incentive enjoyed by the Parent Company amounted to P1,799.4 million, P1,889.9 million and P1,569.4 million in 2013, 2012 and 2011, respectively (see Note 16).
Phil Hydro On November 22, 2007, Phil Hydro’s operations in Legazpi City were registered with the BOI as New Bulk Supplier of Treated Water on a pioneer status under Omnibus Investments Code of 1987 (the Code). Subject to certain conditions and requirements, Phil Hydro’s operations in Legazpi City are entitled to the following benefits, among others:
a. ITH for six years until December 31, 2013 limited to the revenue generated from the sales of bulk water supply to LCWD representing the value of transactions as covered by the registration;
b. Employment of foreign nationals for supervisory, technical or advisory positions for five years;
c. Importation of consigned equipment for a period of 10 years from date of registration, subject to the posting of re-export bond; and,
d. Importation of capital equipment at 0% duty from date of registration up to June 16, 2011.
For (d) above, Phil Hydro has not imported any capital equipment in 2013, 2012 and 2011.
125 Our Backstory On December 18, 2009, the BOI approved Phil Hydro’s another application for ITH for the operations in Norzagaray, Bulacan as New Operator of Bulk Water Supply Facility (Water Filtration Plant) on a non- pioneer status under the Code. As a registered enterprise, Phil Hydro is entitled to the following benefits, among others, subject to certain conditions and requirements:
a. ITH for four years until December 31, 2013 limited to the revenue generated from the registered bulk water supply facility with NWD; and,
b. Importation of capital equipment at 0% duty from date of registration up to June 16, 2011.
For (b) above, Phil Hydro has not imported any capital equipment in 2013 and 2012.
22. Significant Contracts with Manila Water (East Concessionaire)
In relation to the Concession Agreement, the Parent Company entered into the following contracts with the East Concessionaire:
a. Interconnection Agreement wherein the two Concessionaires shall form an unincorporated joint venture that will manage, operate, and maintain interconnection facilities. The terms of the agreement provide, among others, the cost and the volume of water to be transferred between zones; and,
b. Common Purpose Facilities Agreement that provides for the operation, maintenance, renewal, and, as appropriate, decommissioning of the Common Purpose Facilities, and performance of other functions pursuant to and in accordance with the provisions of the Concession Agreement and performance of such other functions relating to the Concession (and the Concession of the East Concessionaire) as the Parent Company and the East Concessionaire may choose to delegate to the Joint Venture, subject to the approval of MWSS.
23 . Commitments
Concession Agreement Significant commitments under the Concession Agreement follow:
a. Payment of Concession Fees (see Note 8)
b. Posting of performance bond (see Note 7)
Under Section 6.9 of the Concession Agreement, the Parent Company is required to post a performance bond to secure the performance of its obligations under certain provisions of the Concession Agreement. The aggregate amount drawable in one or more installments under such performance bond during the Rate Rebasing Period to which it relates is set out below.
Rate Rebasing Period Aggregate Amount Drawable Under Performance Bond
(In Millions)
First (August 1, 1997–December 31, 2002) US$120.0
Second (January 1, 2003–December 31, 2007) 120.0
Third (January 1, 2008–December 31, 2012) 90.0
Fourth (January 1, 2013–December 31, 2017) 80.0
Fifth (January 1, 2018–May 6, 2022) 60.0
2013 Annual Report 126 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Within 30 days from the commencement of each renewal date, the Parent Company shall cause the performance bond to be reinstated to the full amount applicable to the rate rebasing period as set forth above.
In connection with the extension of the term of the Concession Agreement (see Note 1), certain adjustments to the obligation of the Parent Company to post the performance bond under Section 6.9 of the Concession Agreement have been approved and summarized as follows:
• The aggregate amount drawable in one or more installments under each performance bond during the Rate Rebasing Period to which it relates has been adjusted to US$30.0 million until the Expiration Date;
The amount of the Performance Bond for the period covering 2023 to 2037 shall be mutually agreed upon in writing by the MWSS and the Parent Company consistent with the provisions of the Concession Agreement.
The Parent Company posted the Surety Bond for the amount of US$90.0 million issued by Prudential Guarantee and Assurance, Inc. (the Surety) in favor of MWSS, as security for the Parent Company’s proper and timely performance of its obligations under the Concession Agreement. On December 6, 2012, the Parent Company renewed the Surety Bond for the amount of US$80.0 million issued by the Surety in favor of MWSS. The liability of the Surety under this bond will expire on December 31, 2017.
c. Payment of half of MWSS and MWSS-RO’s budgeted expenditures for the subsequent years, provided the aggregate annual budgeted expenditures do not exceed P200.0 million, subject to CPI adjustments. As a result of the extension of the life of the Concession Agreement, the annual budgeted expenditures shall increase by 100%, subject to CPI adjustments, effective January 2010 (see Note 8).
d. To meet certain specific commitments in respect to the provision of water and sewerage services in the West Service Area, unless modified by the MWSS-RO due to unforeseen circumstances.
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 West Service Area 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 Concession Agreement.
h. Non-incurrence of debt or liability that would mature beyond the term of the Concession Agreement, without prior notice to MWSS.
127 Our Backstory Failure of the Parent Company to perform any of its obligations under the Concession Agreement of a kind or to a degree which, in a reasonable opinion of the MWSS-RO, amounts to an effective abandonment of the Concession Agreement and which failure continues for at least 30 days after written notice from the MWSS-RO, may cause the Concession Agreement to be terminated.
Operating Lease Commitments The Company leases the office space and branches where service outlets are located, equipment and service vehicles, renewable under certain terms and conditions to be agreed upon by the parties. Total rent expense for the above operating leases amounted to P158.9 million, P175.2 million and P208.2 million in 2013, 2012 and 2011, respectively.
Future minimum operating lease payments as at December 31 are as follows:
Period Covered 2013 2012
(In Millions)
Not later than one year P132.40 P114.74
More than one year and not later than five years 76.18 184.77
24 . Assets Held in Trust
Materials and Supplies The Parent Company has the right to use any items of inventory owned by MWSS in carrying out its responsibility under the Concession Agreement, subject to the obligation to return the same at the end of the concession period, in kind or in value at its current rate, subject to CPI adjustments.
Facilities The Parent Company has been granted the right to operate, maintain in good working order, repair, decommission and refurbish the movable property required to provide the water and sewerage services under the Concession Agreement. MWSS shall retain legal title to all movable property in existence at the Commencement Date. However, upon expiration of the useful life of any such movable property as may be determined by the Parent Company, such movable property shall be returned to MWSS in its then-current condition at no charge to MWSS or the Parent Company (see Note 8).
The Concession Agreement also provides the Parent Company and the East Concessionaire to have equal access to MWSS facilities involved in the provision of water supply and sewerage services in both West and East Service Areas including, but not limited to, the MWSS management information system, billing system, telemetry system, central control room and central records.
The net book value of the facilities transferred to the Parent Company on Commencement Date based on MWSS’ closing audit report amounted to P7.3 billion with a sound value of P13.8 billion.
Beginning at the Commencement Date, MWSS’ corporate headquarters were made available for a one-year lease to the Parent Company and the East Concessionaire, subject to yearly renewal with the consent of the parties concerned. As at December 31, 2013, the lease has been renewed for another year. Rent expense amounted to P33.8 million, P33.1 million and P35.7 million in 2013, 2012 and 2011, respectively.
2013 Annual Report 128 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25 . Financial Risk Management Objectives and Policies
The Company’s principal financial instruments are its debts to the local banks and concession fees payable to MWSS per Concession Agreement. Other financial instruments of the Company are purchase contracts, cash and cash equivalents and short-term investments. The main purpose of those financial instruments is to finance the Company’s operations.
The main risks arising from the Company’s principal financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk.
The BOD reviews and approves the policies for managing the Company’s financial risks. The Company monitors risks arising from all financial instruments and regularly reports financial management activities and the results of these activities to the BOD.
Interest Rate Risk Interest rate risk is the risk that the future cash flows of financial instruments will fluctuate because of the changes in market interest rates. The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s interest-bearing loans.
The Company maintains a mix of floating and fixed rate interest-bearing loans, currently at a ratio of 1% floating and 99% fixed per abovementioned loan agreements. The floating rate interest-bearing loans will increase to a higher portion over time because of future drawdowns in connection to the MWMP loan agreement.
The following table shows the Company’s significant financial liabilities that are exposed to cash flow interest rate risk:
P21.2 billion Term Loan Fixed rate benchmark+0.75% (5.75%, March 25, 2013 to March 25, 2018)
P5.0 billion Corporate Notes (1st drawdown) Fixed rate benchmark+0.75% (5.75%, April 29, 2013 to April 29, 2018)
P5.0 billion Corporate Notes (2nd drawdown) Fixed rate benchmark+0.75% (5.75%, October 29, 2013 to October 29, 2018)
US$137.5 million Loan (US$2 million drawdown) Floating rate benchmark+1.25% (2.14%, October 1, 2013 to May 15, 2014)
Peso-denominated Bank Loan Fixed rate benchmark (9.00%, June 3, 2009 to June 3, 2016)
Interest on financial liabilities classified as fixed rate is fixed until the maturity of the instrument.
The following tables show information about the Company’s financial liabilities that are exposed to cash flow and fair value interest rate risks.
2013
Within 1 Year Total
Short-term cash investments:
Cash and cash equivalents (1-90 days)* P2,844,095 P2,844,095
Short-term investments (91-364 days) 3,627,000 3,627,000
P6,471,095 P6,471,095
* Excludes cash on hand amounting to P20,310.
129 Our Backstory 2013
Within 1 Year More than 1 Year Total - Gross Total -Gross (In P) (In US$)
Liabilities:
Interest-bearing loans:
Interest rate 5.75% 5.75% and 2.14%
Current - local P1,703,831 – – P1,703,831
Noncurrent - foreign – $1,061 $1,061 47,094
Noncurrent - local – P23,591,110 – 23,591,110
25,342,035
Service concession obligation payable to MWSS:
Interest rate 3.00%
Current - foreign $10,795 – $10,795 479,266
Current - local P475,440 – – 475,440
Noncurrent - foreign – $102,255 102,255 4,539,630
Noncurrent - local – P3,375,737 – 3,375,737
8,870,073
P34,212,108
2012
Within 1 Year Total
Short-term cash investments -
Cash and cash equivalents (1-90 days)* P3,884,146 P3,884,146
Short-term investments (91-364 days) 14,085 14,085
P3,898,231 P3,898,231
* Excludes cash on hand amounting to P22,190
2012
Within 1 Year More than 1 Year Total - Gross Total -Gross (In P) (In US$)
Liabilities:
Interest-bearing loans:
Interest rate 5.97% –
Current - foreign $2,500 – $2,500 P102,625
Current - local P928,975 – – 928,975
Noncurrent - foreign – $118,750 118,750 4,784,688
Noncurrent - local – P15,748,891 – 15,748,891
21,655,179
Service concession obligation payable to MWSS:
Interest rate 3.00% –
Current - foreign $11,357 – $11,357 466,201
Current - local P546,325 – – 546,325
Noncurrent - foreign – $113,528 113,528 4,660,317
Noncurrent - local – P3,314,668 – 3,314,668
8,987,511
P30,642,690
2013 Annual Report 130 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table demonstrates the sensitivity of the Company’s profit before tax to a reasonably possible change in interest rates for the years ended December 31, 2013 and 2012, with all variables held constant (through the impact on floating rate borrowings). The estimates are based on the management’s annual financial forecast. There is no impact on the Company’s equity other than those already affecting income.
2013
Increase/Decrease in Basis Points Effect on Income Before Tax
Floating rate borrowings +50 (P236)
-50 236
2012
Increase/Decrease in Basis Points Effect on Income Before Tax
Floating rate borrowings +50 (P48,987)
-50 48,987 Foreign Currency Risk Foreign currency risk is the risk that the fair value or future value of financial instruments will fluctuate because of changes in foreign exchange rates.
The Company’s foreign currency risk results primarily from movements of the Philippine Peso against the United States Dollar, European Euro and the Japanese Yen. The servicing of foreign currency denominated loans of MWSS is among the requirements of the Concession Agreement. Revenues are generated in Philippine Peso. However, there is a mechanism in place as part of the Concession Agreement wherein the Company (or the end consumers) can recover currency fluctuations through the FCDA that is approved by the Regulatory Office.
Information on the Company’s foreign currency-denominated monetary assets and liabilities and the Philippine Peso equivalent of each as at December 31, 2013 and 2012 is presented as follows:
2013
US Dollar Euro JPY Total Peso Equivalent
Asset
Cash and cash equivalents and short-term investments $305 €– ¥– P13,540
Liabilities
Interest-bearing loans ($2,000) €– ¥– (P88,790)
Service concession obligation payable to MWSS (96,082) (595) (1,708,638) (5,018,896)
(98,082) (595) (1,708,638) (5,107,686)
Net foreign currency denominated liabilities ($97,777) (€595) (¥1,708,638) (P5,094,146)
The spot exchange rates used were P44.39:US$1, P60.82:EUR1, and P0.42:JPY1 as at December 31, 2013.
2012
US Dollar Euro JPY Total Peso Equivalent
Asset
Cash and cash equivalents and short-term investments $380 €– ¥– P15,599
Liabilities
Interest-bearing loans ($121,250) €– ¥– (P4,977,313)
Service concession obligation payable to MWSS (97,131) (913) (2,269,803) (5,126,518)
(218,381) (913) (2,269,803) (10,103,831)
Net foreign currency denominated liabilities ($218,001) (€913) (¥2,269,803) (P10,088,232)
The spot exchange rates used were P41.05:US$1, P54.53:EUR1, and P0.48:JPY1 as at December 31, 2012.
131 Our Backstory The following table demonstrates the sensitivity to a reasonably possible change in foreign exchange rates, with all variables held constant, of the Company’s profit before tax (due to changes in the fair value of monetary assets and liabilities) and equity as at December 31, 2013 and 2012. The estimates in the movement of the foreign exchange rates were based on the management’s annual financial forecast.
Increase/Decrease in Peso and U.S Foreign Exchange Rate Effect on Income Before Dollar, Euro and JPY Exchange Rates Income Tax
2013
U.S Dollar +1% 44.39 (P43,403)
Euro +1% 60.82 (362)
JPY +1% 0.42 (7,176)
U.S Dollar -1% 44.39 43,403
Euro -1% 60.82 362
JPY -1% 0.42 7,176
Increase/Decrease in Peso and U.S Foreign Exchange Rate Effect on Income Before Income Dollar, Euro and JPY Exchange Rates Tax
2012
U.S Dollar +1% 41.05 (P89,489)
Euro +1% 54.53 (498)
JPY +1% 0.48 (10,895)
U.S Dollar -1% 41.05 89,489
Euro -1% 54.53 498
JPY -1% 0.48 10,895
The Company recognized net foreign exchange gain of P0.2 billion, P1.0 billion and P1.3 billion in 2013, 2012, and 2011, respectively, mainly arising from the translation of the Company’s cash and cash equivalents, short-term investments, deposits, interest-bearing loans and service concession obligation payable to MWSS. However, the net foreign exchange gain/loss on interest-bearing loans and service concession obligation payable to MWSS is subject to foreign exchange recovery mechanisms under the Concession Agreement (see Note 2).
Credit Risk Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss.
The Company trades only with recognized, creditworthy third parties. It is the Company’s policy that except for connection fees and other highly meritorious cases, it does not offer credit terms to its customers. Because of the basic need service it provides, historical collections of the Company are relatively high. Credit exposure is widely dispersed. Receivable balances are monitored on an ongoing basis with the result that the Company’s exposure to bad debts is not significant.
With respect to credit risk arising from the other financial assets of the Company, consisting of cash and cash equivalents, short-term cash investments, deposits and sinking fund and miscellaneous deposits, the Company’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. The Company transacts only with institutions or banks which have demonstrated financial soundness for the past five years.
The Company has no significant concentrations of credit risk.
2013 Annual Report 132 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below shows the maximum exposure to credit risk for the components of the consolidated statements of financial position as at December 31, 2013 and 2012:
2013 2012
Cash and cash equivalents* (see Note 5) P2,844,095 P3,884,146
Short-term investments 3,627,000 14,085
Trade and other receivables - net (see Note 6) 2,010,165 2,532,914
Deposits and sinking fund (see Note 7) 1,761,644 1,222,357
Miscellaneous deposits** 155,364 92,247
Total credit risk exposure P10,398,268 P7,745,749
*Excludes cash on hand amounting to P20,310 and P22,190 as at December 31, 2013 and 2012, respectively. ** Included as part of noncurrent assets in the consolidated statements of financial position.
As at December 31, 2013 and 2012, the credit quality per class of financial assets that were neither past due nor impaired are as follows: 2013
Neither Past Due nor Impaired Past Due but not Impaired Total Impaired High Grade Standard
Cash and cash equivalents P2,864,405 P– P– P– P2,864,405
Short term investments 3,627,000 – – – 3,627,000
Trade and other receivables 791,539 650,811 567,815 1,267,613 3,277,778
Deposits and sinking fund 1,761,644 – – – 1,761,644
Miscellaneous deposits – 155,364 – – 155,364
P9,044,588 P806,175 P567,815 P1,267,613 P11,686,191
2012
Neither Past Due nor Impaired Past Due but not Impaired Total Impaired High Grade Standard
Cash and cash equivalents P3,906,336 P– P– P– P3,906,336
Short term investments 14,085 – – – 14,085
Trade and other receivables 1,182,764 674,864 675,286 1,124,661 3,657,575
Deposits and sinking fund 1,222,357 – – – 1,222,357
Miscellaneous deposits – 92,247 – – 92,247
P6,325,542 P767,111 P675,286 P1,124,661 P8,892,600
Past due accounts amounting to P0.6 billion and P0.7 billion as at December 31, 2013 and 2012, respectively, are not impaired since based on the Company’s experience, these receivables are normally collected the following year.
The credit quality of the financial assets was determined as follows:
Cash and cash equivalents, short-term investments, and deposits and sinking fund are placed in various banks. These are held by large prime financial institutions that have good reputation and low probability of insolvency. Management assesses the quality of these financial assets as high grade.
For trade and other receivables, high grade relates to those which are consistently collected before the maturity date, normally seven days from bill delivery. Standard grade includes receivables from customers that are collectible beyond seven days from bill delivery even without an effort from the Company to follow them up, or those advances from officers and employees that are collected through salary deduction. For miscellaneous deposits, standard grade consists of meter and security deposits that are normally refundable upon termination of service.
133 Our Backstory Liquidity Risk Liquidity risk is the potential for not meeting the obligations as they become due because of an inability to liquidate assets or obtain adequate funding.
The Company monitors its risk to a shortage of funds using a recurring liquidity planning. Cash planning considers the maturity of both its financial investments and financial assets (e.g. trade and other receivables, other financial assets) and projected cash flows from operations.
The Company’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank drafts, bank loans, debentures, preference shares, finance leases and hire purchase contracts.
The tables below summarize the maturity profile of the Company’s financial liabilities as at December 31, 2013 and 2012 based on contractual undiscounted payments.
2013
On Demand Due Within 3 Due Between 3 and Due after 12 Months Total Months 12 Months
Interest-bearing P– P1,210,970 P846,082 P23,620,704 P25,677,756 loans*
Trade and other 583,255 1,148,281 6,005,964 3,836,584 11,574,084 payables**
Service concession – – 954,706 7,915,367 8,870,073 obligation payable to MWSS
Customers’ deposits – – – 687,396 687,396
P583,255 P2,359,251 P7,806,752 P36,060,051 P46,809,309
**Principal plus interest payment **Excludes taxes payable
2012
On Demand Due Within 3 Due Between 3 and Due after 12 Months Total Months 12 Months
Interest-bearing P– P868,576 P558,415 P20,658,579 P22,085,570 loans*
Trade and other 564,096 1,233,446 5,892,802 2,800,601 10,490,945 payables**
Service concession – – 1,012,526 7,974,985 8,987,511 obligation payable to MWSS
Customers’ deposits – – – 617,712 617,712
P564,096 P2,102,022 P7,463,743 P32,051,877 P42,181,738
**Principal plus interest payment **Excludes taxes payable
The table below shows the maturity profile of the Company’s financial assets based on contractual undiscounted cash flows as at December 31, 2013 and 2012:
2013
On Demand Due Within 3 Due Between 3 Due after 12 Total Months and 12 Months Months
Cash and cash equivalents P2,864,405 P– P– P– P2,864,405
Short term investment – – 3,627,000 – 3,627,000
Trade and other receivables 791,539 650,811 567,815 – 2,010,165
Deposits and sinking fund 1,761,644 – – – 1,761,644
AFS Financial Assets 210,584 – – – 210,584
Miscellaneous deposits – 155,364 – – 155,364
P5,628,172 P806,175 P4,194,815 P– P10,629,162
2013 Annual Report 134 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2012
On Demand Due Within 3 Due Between 3 Due after 12 Total Months and 12 Months Months
Cash and cash equivalents P3,906,336 P– P– P– P3,906,336
Short term investment – – 14,085 – 14,085
Trade and other receivables 1,150,216 707,412 675,286 – 2,532,914
Deposits and sinking fund 1,222,357 – – – 1,222,357
Miscellaneous deposits – 92,247 – – 92,247
P6,278,909 P799,659 P689,371 P– P7,767,939
Capital Management The primary objective of the Company’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 Company closely manages its capital structure vis-a-vis a certain target gearing ratio, which is net debt divided by total capital plus net debt. The Company’s target gearing ratio is 75%. This target is to be maintained over the next five years by managing the Company’s level of borrowings and dividend payments to shareholders.
For purposes of computing its net debt, the Company includes the outstanding balance of its long-term interest-bearing loans, service concession obligation payable to MWSS and trade and other payables, less the outstanding cash and cash equivalents, short-term investments, deposits and sinking fund. To compute its capital, the Company uses net equity.
2013 2012
Interest-bearing loans and service concession P34,212,108 P30,642,690 obligation payable to MWSS (see Notes 11 and 13)
Trade and other payables (see Note 12) 12,226,318 11,329,689
Less cash and cash equivalents, short-term investments, (8,253,049) (5,142,778) deposits and sinking fund (see Notes 5 and 7)
Net debt (a) 38,185,377 36,829,601
Net equity 20,692,917 16,718,463
Net equity and debt (b) P58,878,294 P53,548,064
Gearing ratio (a/b) 65% 69%
For purposes of monitoring debt ratio covenants, the Company computes using both interest-bearing debt and total liabilities. The Company closely monitors its debt covenants and maintains a capital expenditure program and dividend declaration policy that keeps the compliance of these covenants into consideration.
26 . Financial Assets and Financial Liabilities
The following table summarizes the carrying values and fair values of the Company’s financial assets and financial liabilities as at December 31, 2013 and 2012:
2013 2012
Carrying Value Fair Value Carrying Value Fair Value
Financial Assets
Loans and receivables -
Miscellaneous deposits (included under “Other noncurrent assets” P155,364 P109,015 P92,247 P82,253 account)
Financial Liabilities
Other financial liabilities:
Interest-bearing loans P25,342,035 P29,320,921 P21,655,179 P22,085,570
Service concession obligation payable to MWSS 8,870,073 10,909,218 8,987,511 12,605,537
Customers’ deposits 240,543 607,459 206,278 574,022
P34,452,651 P40,837,598 P30,848,968 P35,265,129
135 Our Backstory The following methods and assumptions were used to estimate the fair value of each class of financial assets and financial liabilities for which it is practicable to estimate such value:
Cash and Cash Equivalents, Short-term Investments, Trade and Other Receivables, Deposits and Sinking Fund, and Trade and Other Payables. Due to the short-term nature of these transactions, the carrying values approximate the fair values as at the reporting date.
AFS Financial Assets. Fair value is equivalent to the carrying value because the Company’s AFS financial assets pertain to unquoted equity investments.
Interest-bearing Loans. For floating rate loans, the carrying value approximates the estimated fair value as at the reporting date due to quarterly repricing of interest rates. For fixed rate loans, the estimated fair value is based on the discounted value of future cash flows using the applicable rates for similar types of financial instruments.
Miscellaneous Deposits, Service Concession Obligation Payable to MWSS and Customers’ Deposits. Estimated fair value is based on the discounted value of future cash flows using the applicable rates for similar types of financial instruments.
Fair Value Hierarchy The Company uses the following hierarchy for determining and disclosing the fair value of financial assets and financial liabilities by valuation technique:
Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities.
Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly.
Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.
The fair vales of fixed rate interest-bearing loans, miscellaneous deposits, service concession obligation payable to MWSS and customers’ deposits are determined using Fair Value Hierarchy Level 3.
27 . Supplemental Disclosure of Cash Flow Information
2013 2012 2011
Noncash operating activity - Unpaid concession fees P214,495 P1,080,802 P1,033,888 (see Notes 8 and 13)
Noncash investing activity - Unpaid consideration relat- – 316,950 – ed to the acquisition of Phil Hydro (see Note 4)
2013 Annual Report 136
MWSS Compound, Katipunan Avenue Balara, Quezon City, Philippines www.mayniladwater.com.ph (632) 981 3333
139 Our Backstory