COVER SHEET for ANNUAL REPORT
SEC Registration Number A S 0 9 3 0 4 3 6 9 Company Name L O P E Z HOLDI NGS CORPORATI ON AND
SUBS I D I AR I E S
Principal Office (No./Street/Barangay/City/Town/Province) 4 t h Fl o o r , Be n p r e s Bu i l d i n g , E
x c h a n g e Road , Pa s i g Ci t y 1605
Form Type Department requiring the report Secondary License Type, If Applicable 17A CRMD
COMPANY INFORMATION Company’s Email Address Company’s Telephone Number/s Mobile Number www.lopez-holdings.ph 910-3040
Annual Meeting Fiscal Year No. of Stockholders Month/Day Month/Day 8,663 June 8 December 31
CONTACT PERSON INFORMATION The designated contact person MUST be an Officer of the Corporation Name of Contact Person Email Address Telephone Number/s Mobile Number Mr. Salvador G. Tirona [email protected] 910-3040 0917-5237307
Contact Person’s Address 4/F Benpres Building, Exchange Road, Pasig City 1605
Note: In case of death, resignation or cessation of office of the officer designated as contact person, such incident shall be reported to the Commission within thirty (30) calendar days from the occurrence thereof with information and complete contact details of the new contact person designated. SECURITIES AND EXCHANGE COMMISSION
SEC FROM 17-A
ANNUAL REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE AND SECTION 141 OF CORPORATION CODE OF THE PHILIPPINES
1. For the fiscal year ended December 31, 2016
2. SEC Identification No. AS 09304369 3. BIR Tax Identification No. 002-825- 058
4. Exact name of the registrant as specified in its charter LOPEZ HOLDINGS CORPORATION
5. Philippines 6. ______(SEC use only) Province, Country or other jurisdiction of Industry Classification code: Incorporation or organization
7. 4th Floor, Benpres Building, Exchange Road, Pasig City, 1605. Address of principal office Postal code
8. (632) 910-3040 Registrant’s telephone number, including area code
9. ______Former name, former address, and former fiscal year, if changed since last year
10. Securities registered pursuant to Sections 8 and 12 of the SRC, OR Sec. 4 and 8 of the RSA
Title of Each Class Number of Shares of Common Stock Outstanding and Amount of Debt Outstanding
Common Stock 4,626,158,482 shares
11. Are any or all of these securities listed on the Philippine Stock Exchange?
Yes [x] No [ ]
12. Check whether the registrant:
a) has filed all reports to be filed by Section 17 of the SRC and SRC 17 thereunder or Section 11 of the RSA Rule 11(a)-1 thereunder and Sections 26 and 141 of the Corporation Code of the Philippines during the preceding 12 months (or for such shorter period that the registrant was required to file such reports): Yes [x] No [ ]
b) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
13. State the aggregate market value of the voting stock held by non-affiliates of the registrant:
Php16.7 billion (as of December 31, 2016)
(Note: Item No. 14 and 15 in the Form is not applicable) TABLE OF CONTENTS
Page No.
PART I – BUSINESS AND GENERAL INFORMATION
Business 1 Properties 10 Legal Proceedings 10 Submission of Matters to a Vote of Security Holders 10
PART II – OPERATIONAL AND FINANCIAL INFORMATION
Market for Issuer’s Common Equity and Related Stockholders Matters 10 Management’s Discussion and Analysis or Plan of Operation 12 Financial Statements 18 Changes in and Disagreements with Accountants and Financial Disclosure 18 Compliance with Leading Practice on Corporate Governance 18
PART III – CONTROL AND COMPENSATION INFORMATION
Directors and Executive Officers of the Issuer 19 Executive Compensation 24 Security Ownership of Certain Beneficial Owners and Management 24 Certain Relationships and Related Transactions 25
PART IV – EXHIBITS AND SCHEDULES
List of Subsidiaries and Direct Affiliates of the Registrant 26 Reports on SEC Form 17-C (Current Report) 26
SIGNATURES 40
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES 41 PART I – BUSINESS AND GENERAL INFORMATION
The Company
Lopez Holdings Corporation (Lopez Holdings or the Parent Company) was incorporated in 1993 by the Lopez family to serve as the holding company for investments in major development sectors such as broadcasting and cable; power generation and distribution. It added to its portfolio, investments in other basic service sectors but has since sold its interest in banking, toll roads, information technology, property development, telecommunications and health care delivery.
Its current interests are in power generation, especially in the development of clean, indigenous and/or renewable energy sources and in multimedia communications, including broadcast, cable and telecom. No new businesses were developed in the last three years.
The Parent Company changed its corporate name from “Benpres Holdings Corporation” to “Lopez Holdings Corporation” as approved by the Philippine Securities and Exchange Commission (SEC) on June 23, 2010.
Vision A world class conglomerate committed to investments that improve the lives of Filipinos.
Mission We will: (1) invest in industries vital to nation-building; (2) build on our strengths and competencies in our core power and media businesses; (3) conduct ourselves in a manner that is mindful of the long- term mutual benefits of the Lopez Group, and the various publics we serve by living the Lopez Credo and its attendant values of a pioneering entrepreneurial spirit, business excellence, unity, nationalism, social justice, integrity and employee welfare and wellness; and, (4) provide the highest standard of service and value to our shareholders, affiliates, regulators, creditors, employees and community in which we operate.
Values In fulfilling its mission to serve the Filipinos, Lopez Holdings Corporation adheres to the attendant values of a pioneering entrepreneurial spirit, business excellence, unity, nationalism, social justice, integrity, employee welfare and wellness.
Quality Policy Lopez Holdings exists to lead in quality management practices and adheres to good corporate governance in the conduct of all business.
We shall innovate and continually pursue improvements in all our services and processes to achieve business excellence.
Lopez Holdings Corporation is a holding company which invested in leading Philippine corporations: First Philippine Holdings Corporation (FPH), which has investments in sustainable energy development, infrastructure, property development and green manufacturing, and ABS-CBN Corporation (ABS-CBN), the country’s largest multimedia conglomerate. Lopez Holdings, FPH and ABS-CBN are listed in the Philippine Stock Exchange.
The company received a total of P880 million in cash dividends from its major investees in 2016: P365 million from ABS-CBN and P515 million from FPH. This compares with P800 million in cash dividends received in 2015: P289 million from ABS-CBN and P511 million from FPH; and P801 million in cash dividends received in 2014: P293 million from ABS-CBN and P508 million from FPH.
Lopez Holdings declared a cash dividend of P0.20 per share in 2016, P0.10 per share in 2015 and 2014.
Lopez Holdings reported P6.557 billion in net income attributable to equity holders of the Parent in 2016, 6% higher than the P6.191 billion in net income attributable to equity holders of the Parent
1 reported in 2015. The steady performance of investees FPH and ABS-CBN accounted for the results. FPH, which is consolidated by Lopez Holdings, also reported one-off gains in 2016.
Consolidated revenues for the period decreased by 5% year-on-year to P91.910 billion from P96.510 billion.
As of December 31, 2016, Lopez Holdings had US$5 million in direct obligations, compared to end- 2015 debt levels of US$10 million and P26 million. On a consolidated basis, total liabilities stood at P206.725 billion at yearend-2016 versus P214.415 billion at yearend-2015.
Power and Energy
FPH reported an 84% increase in net income attributable to equity holders of the Parent to P9.933 billion in 2016 from P5.406 billion in 2015. Its revenues were lower by 5% at P91.910 billion compared to P96.510 billion last year. Higher margins on the sale of electricity, receipt of liquidated damages and arbitration settlement proceeds by FPH subsidiaries, and higher dividend income accounted for the results. Sale of electricity accounted for 81% of revenues in 2016 versus 86% in 2015.
FPH paid out cash dividends totaling P1.00 per share to common shareholders and P13.75 to preferred shareholders for the year 2016
FPH extended its common shares buy-back program from July 2016 to July 2018 for up to P6.0 billion. The original program began in 2010 and was extended for two years in 2012, and for another two years in 2014. The program aims to strike a balance between enhancing the company’s capital structure and maintaining the ability to fund future growth and investments. By the end of 2016, some P3.526 billion worth of shares have been purchased out of the P6.0 billion funding approved by the FPH board for the purpose.
Meanwhile, with respect to disputes and proceedings between First Philec and First Philec Solar Corporation (FPSC) with SunPower Philippines Manufacturing Limited (SPML), such disputes were settled and as a result, First Philec, FPSC and SPML filed the appropriate Consent Order, motions or manifestation and have done all such things as are reasonably necessary in order to discontinue, terminate or dismiss (as the case may be) all the legal proceedings that were pending between them in Hong Kong and in the Philippines.
Under the terms of their settlement, SPML paid FPSC US$25,239,860 (which is equal to the full amount that SPML was ordered to pay FPSC in the arbitration), and First Philec US$25,260,140, and transferred all of SPML’s shares of stock in FPSC to First Philec.
FPSC is a joint venture company established by First Philec and SPML. SPML is a wholly owned subsidiary of SunPower Corporation, a US corporation focusing on the solar industry and listed on the Nasdaq Global Select Market.
FGEN is the leading clean and renewable energy company in the Philippines with an installed capacity of 3,468 MW as of December 31, 2016. It paid cash dividends of P0.35 per common share annually in 2016, 2015 and 2014.
In 2016, FGEN reported 19% year-on-year increase in net income attributable to equity holders of the Parent to US$200 million from US$167 million. Consolidated revenues decreased by 15% to US$1.561 billion from US$1.836 billion. The FGEN gas plants accounted for US$834.8 million, or 54% of the total consolidated revenues. FGEN subsidiary Energy Development Corporation (EDC) accounted for US$675.6 million, or 43%, of the total. First Gen Hydro Power Corporation contributed US$49.12 million of revenues, or 3%.
FGEN completed its 414-MW San Gabriel combined cycle and 97-MW Avion open cycle natural gas- fired plants at the First Gen Clean Energy Complex in Batangas. San Gabriel is the country’s first Flex-Plant. The Flex-Plant technology helps enable a more stable and reliable grid amid increasing installations of intermittent energy. The San Gabriel Flex-Plant can be turned on (and off) on a daily basis in time to serve the power requirements of schools, offices and shopping malls. San Gabriel likewise has the ability of being a baseload power plant providing 24/7 service; hence, the Flex-Plant terminology. Avion, which can run on either natural gas or diesel, is designed as a peaking plant,
2 capable of coming online in six minutes and achieving full load in less than 20 minutes. Commercial operations began in September 2016 for Avion and in November 2016 for San Gabriel.
FGEN extended its share buy-back programs from June 1, 2016 to May 31, 2018 for up to 300 million FGEN common shares and up to P10 billion worth of FGEN Series F and Series G preferred shares under the same terms and conditions as the original buyback programs. The buyback of common and preferred shares does not involve active and widespread solicitation from the stockholders in general. It is undertaken only to the extent that the transaction is deemed advantageous to the company and enhances shareholder value. As of the end of 2016, a total of 10,010 FGEN Series F preferred shares and 5,026,280 FGEN Series G preferred shares have been purchased under the program.
FGEN has three proposed run-of-river hydro projects in Mindanao with a combined potential output of 95 MW. FGEN estimates project costs of US$5-6 million per megawatt for the 32-MW Bubunawan, 30-MW Puyo and 33-MW Tagoloan run-of-river projects. Planned capital expenditures for the Bubunawan project is expected to cover 42 months of construction.
Meanwhile, site preparation began last year for FGEN’s planned liquefied natural gas (LNG) import terminal. The company spent approximately $6 million in 2016 for pre-development work, including the elevation of the site. The LNG terminal project is expected to be completed by 2022 to coincide with the expiration of the company’s gas sale and purchase agreements. FGEN is in discussions with potential joint venture partners, as well as an engineering, procurement and construction contractor, for the project.
EDC celebrated 40 years of corporate existence in 2016. Together with and its subsidiaries, it has made a strong foundation for a green future, with a clean energy portfolio consisting of 1,169 MW of geothermal, 150 MW of wind, 132 MW of hydro and 7MW of solar energy. It declared cash dividends to common shareholders totaling P0.12 per share in 2016, P0.21 per share in 2015, and P0.20 per share in 2014.
EDC posted a consolidated recurring net income attributable to equity holders of the Parent of P9.2 billion in 2016, 4% higher than P8.8 billion in 2015, as EDC successfully lowered operating expenses. Consolidated revenues decreased marginally to P34.2 billion from P34.4 billion the previous year, affected by record-low electricity spot market prices despite higher sales volumes firm-wide. Inclusive of nonrecurring items, consolidated net income attributable to equity holders of the Parent stood at P9.35 billion, 23% higher than P7.6 billion in 2015.
In June 2016, the company executed a loan agreement with Union Bank of the Philippines for the total amount of P5.0 billion.
EDC bought back shares pursuant to a share buyback program approved by its board of directors. By the end of 2016, EDC had bought back P73.511 million worth of shares, out of the P4.0 billion approved by its board for the purpose. The company started buying back shares in December 2015.
EDC budgeted P14 billion for capital expenditures in 2016 with P4.3 billion allotted for the rehabilitation of the three-unit, 112.5 MW Tongonan geothermal power plant. Full retrofitting works began in 2016 with the rehabilitation of all units expected to be completed in 2017.
Bac-Man Geothermal, Inc. (BGI), a wholly owned subsidiary of EDC, satisfactorily settled all claims under its contract with Weir Engineering Services, Ltd., contractor for the rehabilitation works on three units of the Bacon-Manito (Bacman) geothermal power plant. BGI and Weir jointly took steps to discontinue arbitration proceedings between them. BGI also successfully entered into a settlement agreement with its insurers in relation to BGI claims for loss, damage and costs related to the restoration of its Bacman Unit 2 to full operation following an incident that occurred in February 2013. All Bacman units were operational as of the end of 2016 with a gross output of 140 MW.
EDC has wind service contract areas approved by the Department of Energy. The company is authorized to conduct grid impact studies for potential wind power projects in Matnog, Sorsogon; Batad, San Dionisio and Concepcion, Iloilo; and Burgos, Ilocos Norte.
EDC also ventured into solar rooftop installation in 2016, together with First Gen Energy Solutions, Inc.
3 Media and Communications
ABS-CBN reported a 39% increase in net income in 2016 to P3.525 billion from P2.545 billion, on account of solid advertising revenues, boosted by election-related advertisements, and a recovery in consumer sales. Net revenues reached P41.631 billion, 9% higher than P38.278 billion in 2015. Ad sales accounted for 57% of ABS-CBN revenues in 2016, compared to 56% in 2015.
The media conglomerate declared a cash dividend of P0.75 per common share in 2016, and P0.60 per common share annually in 2015 and 2014.
ABS-CBN signed a 10-year, P4.75 billion loan agreement with Union Bank of the Philippines in March 2016 to refinance a syndicated loan acquired in 2010.
ABS-CBN’s trailblazing pricing model, CPIRP or “cost per individual rating point” (CPIRP), gave advertisers measurable indicators on the reach of their material. The CPIRP, which became effective in May 2015, is based on the globally accepted and proven “cost per target audience rating point” (CTARP) and replaces the traditional practice of applying a fixed cost on ad placements regardless of program performance. CPIRP rates vary each day based on the actual number of people reached by a chosen TV show.
ABS-CBN programs remained unbeaten in nationwide ratings, satisfying advertisers and audiences alike. According to multinational audience measurement provider Kantar Media, ABS-CBN Channel 2 topped all networks with an average audience share of 45% throughout 2016 from January to December across both urban and rural homes. Kantar Media uses a nationwide panel size of 2,610 urban and rural homes that represent 100% of the total Philippine TV viewing population.
Across all time blocks, ABS-CBN remained on top especially in primetime (6PM-12MN) where it scored 49%. The primetime block is the most important part of the day when most Filipinos watch TV and advertisers put a larger chunk of their investment in to reach more consumers effectively. ABS- CBN also led the morning block (6AM-12NN) with 39%, the noontime block (12NN-3PM) with 44%, and the afternoon block (3PM-6PM) with 44%.
Meanwhile, ABS-CBN topped the list of most watched programs for 2016 and produced 16 out of the top 20 regularly airing programs from January to December 2016 (excluding Holy week). Taking the lead on the top spot is “FPJ’s Ang Probinsyano” (40%) followed by the “The Voice Kids” (37.6%), “Pangako Sa ‘Yo” (34.3%), “Dolce Amore” (33.8%), “Pilipinas Got Talent” (31.9%), “Dance Kids” (31%), “Wansapanataym” (30.7%), “TV Patrol” (30.6%), “Pinoy Boyband Superstar” (30%), and “MMK 25” (29.9%).
ABS-CBN’s special “PiliPinas Debates 2016” was the most watched program for 2016 scoring a national TV rating of 40.6%. Other one-time specials such as “Meron Akong Kwento: Ang Himig ng Buhay Ko” (32.9%) and “Halalan 2016 Ang Huling Harapan” (25.7%) also made the list of top 20 most watched programs for 2016 (combined regular and special programs).
TOP 10 MOST WATCHED REGULARLY AIRING PROGRAMS IN 2016 (EXCLUDING SPECIALS) Rank Channel Title Rating in % 1 ABS-CBN FPJ'S ANG PROBINSYANO 40.0 2 ABS-CBN THE VOICE KIDS 37.6 3 ABS-CBN PANGAKO SA'YO 34.3 4 ABS-CBN DOLCE AMORE 33.8 5 ABS-CBN PILIPINAS GOT TALENT 31.9 6 ABS-CBN DANCE KIDS 31.0 7 ABS-CBN WANSAPANATAYM 30.7 8 ABS-CBN TV PATROL 30.6 9 ABS-CBN PINOY BOYBAND SUPERSTAR 30.0 10 ABS-CBN MMK 25 29.9
4 ABS-CBN also maintained its leadership in digital through iWant TV, its pioneering video-on-demand service and the leading OTT (over-the-top) platform in the country, with at least six million subscribers. Rapidly transitioning into a digital company, ABS-CBN leads all media networks in bringing its content online to address the change in the Filipinos' viewing habits.
ABS-CBN partnered with Philippine Long Distance Telephone Company (PLDT) and Smart Communications, Inc. (Smart) to make iWant TV available to PLDT and Smart subscribers. Launched in 2007, iWant TV is the leading source of online content, offering on-demand catch-up and live stream viewing of ABS-CBN programs, local and foreign movies, and original or exclusive content.
ABS-CBN signed with Ayala Malls to open the first ABS-CBN Experience Store in Trinoma, an Ayala mall in Quezon City. It will offer fresh and exciting retail experiences as ABS-CBN delivers an immersive experience of its stories and characters from its massive library.
ABS-CBN also leads in the local music, film, cable TV, and publishing industries and is also the pioneer of digital television in the country. Launched in February 2015, ABS-CBN TVplus ended 2016 with over two million boxes sold nationwide.
ABS-CBN News Channel (ANC) opened a new studio in 8 Rockwell, Makati City, enhancing its news gathering and delivery, especially for business.
ABS-CBN subsidiary SKY Cable Corporation (SKY) launched SKYdirect, its direct-to-home digital service available nationwide. SKYdirect gives subscribers superior programming with a channel line- up rich in exclusive content, including high definition (HD) channels in every must-have genre. With the service available for as low as P99 for 30 days on prepaid, SKYdirect offers more value at affordable price points. The P99 load already includes four HD channels, such as NBA Premium HD and Cartoon Network HD, aside from 22 standard-definition (SD) channels. Higher tiers add more HD and SD channels. SKYdirect is also available via postpaid subscription plans.
The Philippine Rating Services Corporation (PhilRatings) maintained the credit rating of the P6.0- billion bond issuance of ABS-CBN PRS Aaa. The bonds are due on February 10, 2021 and carry an interest rate of 5.3350%. Obligations rated PRS Aaa, the highest rating assigned by PhilRatings, are of the highest quality with minimal credit risk. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.
The rating was maintained due to the following: (1) continued production of hit programs and development and retention of a popular talent pool, enabling the company to dominate nationwide ratings; (2) substantial experience and track record of management and key officers who keep up with new trends; (3) sustained profitability; and (4) sustained ample coverage for interest and principal payments.
Corporate Sustainability (Social Responsibility +)
Sustainable development has been defined as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” (Our Common Future, 1987) Corporate social responsibility (CSR) is now integrated into this discipline which calls for the convergence of economic development, social equity and environmental protection.
In 2016, Lopez Holdings Corporation invested P2.8 million in sustaining the operations of Lopez Group Foundation, Inc. (LGFI) and its member foundations, particularly in the areas of arts and culture through Eugenio Lopez Foundation, Inc. which administers the Lopez Museum and Library; disaster relief and rehabilitation through ABS-CBN Lingkod Kapamilya Foundation, Inc. (ALKFI); and education through Knowledge Channel Foundation, Inc. (KCFI) and Phil-Assistance Foundation, Inc. (PAAFI). These causes are consistent with its vision to improve the lives of Filipinos.
Lopez Group Foundation, Inc. (LGFI)
In 2016, LGFI raised the awareness of Lopez Group members on sustainable development goals (SDGs) adopted by the United Nations Member States, including the Philippines, in a bid to end 5 poverty, fight inequality and injustice, and tackle climate change. It continued its efforts to improve organizational efficiency and effectiveness among its members and the Lopez Group CSR Council by conducting two workshops: Project Cycle Management and Regulatory Requirements for Non-Profits.
LGFI, which is certified by the Philippine Council for NGO Certification (PCNC) and an auxiliary social welfare and development organization registered with the Department of Social Welfare and Development (DSWD), began to pilot test a group-wide volunteerism initiative by identifying one school where the efforts of various Lopez Group companies could be harnessed. The expressed needs and wants of the students and the school’s teaching and non-teaching personnel were synthesized into areas covering human resources development, office administration and finance, personality and development and other special topics. The same school benefited from the Brigada Eskwela effort, which involves the cleaning, repair and overall preparation of classrooms and other physical facilities for the new school year.
A follow-up volunteering activity was held by yearend, wherein employees packed and distributed Christmas gifts for more than 1,000 scholars of Phil-Asia Assistance Foundation, Inc. (PAAFI).
LGFI’s livelihood efforts for the year focused on micro and small enterprises in the Province of Guimaras, where it worked with the Department of Trade and Industry (DTI)-Region VI. It was recognized as one of the department’s partners in the implementation of programs and services. LGFI was also re-accredited as Civil Society Organization (CSO) in Guimaras for 2016-2019, in recognition of its work in the province.
Eugenio Lopez Foundation, Inc. / Lopez Museum and Library
The Lopez Museum and Library ran the exhibition Drawing the Lines from February 24 to July 8, 2016. The exhibition presented editorial cartoons and illustrations by artists Francisco Coching, Danilo Dalena, Neil Doloricon, E.Z. Izon, Dengcoy Miel, Dante Perez, Jose Tence Ruiz and Pinggot Zulueta.
Cartoonists Doloricon and Ruiz were featured in Artist Talk, where they shared art practices and experiences as illustrators. History professor and newspaper columnist Dr. Ambeth Ocampo gave a lecture, Telembang! Pakakak! Buntut Pague!, that showcased illustrations from the Spanish and American periods in Philippine history rendered by the likes of Jose Pereira, Jorge Pineda and Fernando Amorsolo, among others. Cartoonists Manix Abrera and Gilbert Daroy spoke at Drawing for Juan, where they talked about individual practices as illustrators. A panel discussion on censorship under martial law, “Newsroom Shutdown”, had Pete Lacaba, Ceres Doyo and Vergel Santos as speakers.
In partnership with the Film Development Council of the Philippines and Cinematheque Manila, the Lopez Museum and Library hosted a successful run of its film screening event, Replay, featuring back-to-back screenings of Aparisyon by Vicente Sandoval and Dahling Nick by Sari Dalena. The films revisited the country’s time under martial law.
Architect and newspaper columnist Paulo Alcazaren presented a lecture, Buried, that discussed the lost art and architecture of the country, and showed participants photos of old Manila, Philippine pavilions in World’s Fairs and art deco and neoclassical structures.
The Museum simultaneously ran two exhibitions from August 26 to December 23, 2016: Two Halves of a Whole, co-presented by Fundacion Sanso, that put together works by artist Juvenal Sanso to highlight the role or patronage and generosity in the making of institutional collections; and Exposition, co-presented by Instituto Cevantes with support from the Cultural Department of the Embassy of Spain in Manila, that revisited Philippine and Spanish relations with works by Cian Dayrit, Liv Vinluan and Renan Laru-an augmenting the museum’s permanent collection.
National Museum of the Philippines artists Rolf Campos and Aissa Domingo led a panel discussion and workshop, Field Notes, that taught participants the basics of illustrating specimens and artifacts. Scientific illustrations have remained relevant in the age of photography and electronic documentation.
EnCOUNTERS, a counter-mapping forum in partnership with the University of the Philippines (UP) Geographical Society, the UP Geography Department, the Junior Philippine Geographical Society
6 and the Philippine Geographical Society, presented alternative perspectives and practices of looking at cartography.
ABS-CBN Lingkod Kapamilya Foundation, Inc. (ALKFI)
Since 1989, ABS-CBN Lingkod Kapamilya Foundation, Inc. (ALKFI) has been at the forefront of development programs that uniquely affect strategic sectors in the Philippines – each one with distinct goals and considerable impact. A duly registered non-stock, non-profit organization, ALKFI addresses the plight of the disadvantaged while also ensuring that donations are properly allotted and utilized.
BANTAY BATA 163
Since 1997, Bantay Bata 163 has catered children from 0 to 12 years old through the following services:
Hotline: 380,383 reports received and acted upon Medical: 63,161 patients served Scholarships: 5,176 scholars Community Service: 1,035,064 beneficiaries served Rescue: 2,464 children Legal: 4,015 services Rehabilitation: 9,342 children
BANTAY KALIKASAN
Launched in 1998, Bantay Kalikasan (BK), ALKFI’s environment advocacy arm, has propelled massive changes towards the protection and sustainability of the country’s natural environment.
Bantay Kalikasan paved the way for rehabilitating the sole watershed in Metro Manila – the La Mesa Watershed. To date, from 9 species, the watershed now houses 100 endemic species. More than a hundred thousand seedlings are nurtured and cultivated. From only 20, there are now a total of 125 species of birds in the forest. More than 400,000 visitors from 27 companies have shown and expressed their support to restore the splendor of La Mesa.
OPERATION SAGIP
Through the outpouring of support from donors, Operation Sagip (formerly known as Sagip Kapamilya) provided immediate relief assistance and school kits to 33,254 survivors of calamities and disasters in 2016.
A total of 131 schools were built for Yolanda sites as of January 2017. There were 35 classrooms built in 16 school sites in Bukidnon, Camarines Norte, Compostela Valley, Bohol, Nueva Vizcaya and Davao Oriental. Operation Sagip, through its Ronda Eskwela Project, distributed a total of 4,424 school kits in Batangas, Nueva Ecija, Bohol, Leyte and Zambales.
The donations of Operation Sagip supporters also funded the different livelihood programs in the areas of Samar and Leyte namely: Marabut Multi-Purpose Center, Wespal Visitor Center and Eco- Lodge, San Juan Floating Restaurant and Boardwalk by the Bay, San Jose Skimboarding Camp, Dao Balay Kawilan and Sabang Daguitan Surf Camp.
Alternative livelihood was also provided by Operation Sagip: 430 students underwent alternative learning and school-skills training in Compostela Valley; 77 sewing machines were distributed to Tarlac, Compostela Valley and Davao Oriental; 56 families who survived Typhoon Lando were granted farming seeds and; 17 boats were given to five barangays in Baler, Aurora. Water facilities were also granted to 905 families in San Luis, Aurora; 450 families in Campao Oriental; 400 families in Bagangga Davao Oriental; and 102 families in New Bataan, Compostela Valley.
7 Knowledge Channel Foundation, Inc. (KCFI)
KCFI signed another 10-year partnership with the Department of Education (DepEd) focusing on support for the development and provision to schools of multi-media learning resources for early childhood development, K-to-12, and the Alternative Learning System, as well as for the professional development of teachers and education leaders. Since 1999, Knowledge Channel, the all-educational flagship of KCFI, has provided students and teachers with videos, games and other resources to supplement lessons in the classroom. These curriculum-based resources cover the different levels and topics in Science, Math, English, Filipino, Araling Panlipunan, and Health and Values Education. Knowledge Channel is available on SKY Cable and other cable-partner service providers, on satellite through SKY Direct, on digital terrestrial television via ABS-CBN TV Plus, and the internet through kchonline.ph and on the Knowledge Channel On-Demand packages.
In 2016, KCFI produced new content: the second season of AgriCOOLture in cooperation with Land Bank of the Philippines; new episodes of Payong K-lusugan one of which is on communicable diseases produced in cooperation with Unilever, and two on safety with animals developed in partnership with the Global Alliance for Rabies Control; MathDali, which promotes mastery and development of positive attitude towards Math, is a collaboration with ABS-CBN and ALKFI; a new episode of Estudyantipid with Insular Foundation, which teaches financial literacy, insurance and investments to ninth graders; a new episode of the travelogue, Wow on Misamis Occidental produced in cooperation with the DepEd Division Office of Misamis Occidental; and a new season of Puno ng Buhay, which features basic science concepts on Plants for third graders. AgriCOOLture and MathDali are also accessible on iWantTV, ABS-CBN Corporation’s homegrown video-on-demand service.
In partnership with ALKFI’s Operation Sagip and with the support of the Psychological Association of the Philippines (PAP), KCFI designed a video-and-workshop module on psychological first aid (PFA) to guide teachers and principals in addressing the psychological first aid needs of children immediately after calamities. PFA was integrated in Knowledge Channel’s training program for teachers and principals called LEEP (Learning Effectively through Enhanced and Evidenced-Based Pedagogies) that stresses learner-centeredness and constructivism, which are relevant features of DepEd’s K to 12 curriculum. By the end of 2016, LEEP-PFA was able to train 86 schools in Busuanga, Aklan, Antique, Capiz, Roxas, Iloilo, Tacloban, Ormoc, Cagayan de Oro, Camiguin, Bukidnon, Davao Oriental and Compostela Valley.
KCFI also spearheaded a series of workshops entitled Martial Law for the Millennials to equip Araling Panlipunan teachers with knowledge and skills for teaching this vital topic in Philippine history.
Phil-Asia Assistance Foundation, Inc. (PAAFI)
PAAFI assists elementary, high school and college students in Metro Manila public schools by providing a monthly allowance to help with transportation, uniforms and projects. In addition, it conducts regular social worker visits, medical and dental missions for scholars, cultural exposure and values education in partnership with local parishes.
In 2016, cultural exposure included sponsorships for select students to see “Opera” at the Cultural Center of the Philippines, the ballets “The Masterpieces” and “Simon Ibarra”, and a tour of the Manila Ocean Park as incentives for outstanding performance.
Operation Blessing Philippines was the partner for the medical and dental missions conducted on May 28 and June 4, 2016. Operation Blessing provided doctors, dentists, nurses, as well as volunteer storytellers and counselors for the scholars.
Parents of scholars also find support with PAAFI for livelihood training. In 2016, First Philippine Realty Corporation sponsored training in soap making while Live for Others Movement sponsored longganisa making.
PAAFI collects books for its portable libraries. A portable library has over 200 books that scholars may borrow for a month. It rotates among sites that serve scholars every six months. At the end of 2016, PAAFI had seven portable libraries under management.
8 PAAFI also benefited from Google’s Global Leadership Program that provided four Googlers for a three-week consultation. The team of Googlers helped PAAFI establish its website and data management system.
Since 1987, PAAFI has given 12,944 grants, with 1,162 scholars enrolled for schoolyear 2016-2017. It is certified by the PCNC and registered with the DSWD. For the last schoolyear, Lopez Holdings adopted 27 scholars and donated a portable library.
Competition Lopez Holdings is a publicly-listed conglomerate focused on utilities and basic infrastructure. Its operating companies are among the leaders in their respective industries.
FPH’s power generation business competes with other independent power producers. ABS-CBN competes with other radio-TV broadcasting companies.
Customers Lopez Holdings has a broad customer base for its core businesses in communications and utilities. Major customers for FPH’s generation concerns are the National Power Corporation and Meralco. Rockwell caters to the high-end property market.
Sources and availability of raw materials and names of suppliers Not Applicable.
Employees Lopez Holdings had 15 full-time employees as of December 31, 2016. It anticipates the same number of employees within the next twelve months. Six (6) among them belong to executive and managerial position, six (6) are supervisory level and three (3) are professional/technical or rank and file. They are not subjected to any Collective Bargaining Agreements. As discussed in Note 22 of the Consolidated Financial Statements attached and incorporated herein by reference, the Company has employee stock purchase plan and executive stock option plan.
Agreements of Labor Contracts, Including Duration ABS-CBN management recognizes two labor unions, one for the supervisory employees and another for the rank and file employees of the Company. The collective bargaining agreement (CBA) for the supervisory union was renewed last August 13, 2010, covering the period from August 1, 2010 until July 31, 2013, while the CBA for the rank and file employees, covering the period December 11, 2011 to December 10, 2014, was signed last February 17, 2012.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Republic Act No. 7966, approved on March 30, 1995, granted ABS-CBN the franchise to operate TV and radio broadcasting stations in the Philippines through microwave, satellite or whatever means including the use of new technologies in television and radio systems. The franchise is for a term of 25 years. ABS-CBN is required to secure from the National Telecommunications Commission (NTC) appropriate permits and licenses for its stations and any frequency in the TV or radio spectrum.
Working Capital As a holding company, Lopez Holdings is involved in project financing. It did not conduct any major fund-raising exercises in the last three years.
Effect of Existing or Probable Government Regulations in the Business The Electricity Power Industry Reform Act of 2001 (EPIRA) was enacted in 2001. FPH, First Gen and EDC, which represent interests in power generation and distribution, are expected to comply with the requirements of the law toward a deregulated industry.
Estimate of the Amount Spent for Research and Development Activities (3 years) Not Applicable. The Company is not engaged in research and development-intensive business.
Costs and Effects of Compliance with Environmental Laws All operating businesses are compliant with or are in the process of complying with environmental laws. The costs of compliance with these laws are effectively taken into account in their existing cost structure of the respective businesses.
9 Properties
Lopez Holdings owns part of the roof deck of the PCCI Corporate Center located in Makati City. The following operating companies also own properties: FPH (for Philippine Electric Corporation in Rizal, First Sumiden Realty in Laguna, First Philippine Industrial Corporation, Rockwell Land Corporation in Makati City, Panay Power Corporation in Iloilo City and Energy Development Corporation in various parts of the Philippines); ABS-CBN (for head office and subsidiary offices in Quezon City, TV and/or radio originating stations in Bacolod City, Cebu City, Davao City, Dagupan City, Naga City, Legaspi City, Zamboanga and General Santos).
Facilities owned by the operating companies are generally in good condition.
Lopez Holdings has no intention nor expect to acquire properties in the next twelve months. Please also refer to Notes 10 and 12 of the Consolidated Financial Statements attached and incorporated herein by reference.
Legal Proceedings
The Group is currently involved in various legal proceedings. The Group’s estimate of the probable costs for the resolution of these claims has been developed in consultation with outside counsel handling defense in these matters and is based upon an analysis of potential results. The Group currently does not believe these proceedings will have a material adverse effect on its consolidated financial position and results of operations. 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.
Contingencies of Lopez Holdings, subsidiaries and associates are described in Notes 32, 33 and 34 of the Consolidated Financial Statements, attached and incorporated herein by reference.
Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
10 PART II – OPERATIONAL AND FINANCIAL INFORMATION
Market for Registrant’s Common Equity and Related Stockholder Matters
Market Information Lopez Holdings common stock principally trades on the Philippine Stock Exchange.
Stock Prices High Low 2017 April 11 P7.85 P7.81 First Quarter 8.06 7.68 2016 First Quarter P7.15 P5.03 Second Quarter 8.10 6.81 Third Quarter 8.30 7.50 Fourth Quarter 8.28 7.40 2015 First Quarter P9.25 P6.63 Second Quarter 8.98 6.95 Third Quarter 7.58 5.14 Fourth Quarter 7.85 5.50 2014 First Quarter P4.90 P4.00 Second Quarter 5.48 4.43 Third Quarter 6.55 4.87 Fourth Quarter 7.08 6.10
Shareholder Information The number of shareholders of record as of December 31, 2016 was 8,663. Common shares issued as of December 31, 2016 were 4,626,158,482.
Top 20 stockholders as of December 31, 2016 were: Names No. of Shares % 1 Lopez, Inc. 2,407,244,215 52.08% 2 PCD Nominee Corp. (Filipino) 1,355,133,867 29.32% 3 PCD Nominee Corp. (Non-Filipino) 636,364,360 13.77% 4 First Phil. Holdings Corp. Pension Fund 50,000,000 1.08% 5 Mercantile Securities Corporation 20,002,100 0.43% 6 Croslo Holdings Corporation 12,032,687 0.26% 7 Lopez, Oscar Moreno 11,095,677 0.24% 8 Manuel M. Lopez &/or Ma. Teresa Lopez 10,985,000 0.24% 9 Lucio W. Yan &/or Clara Yan 8,216,500 0.18% 10 Lopez, Manuel Moreno 7,456,487 0.16% 11 Ma. Consuelo R. Lopez 7,292,225 0.16% 12 Manuel Moreno Lopez or Maria Teresa L. Lopez 6,520,000 0.14% 13 Montelibano, Andrew Ramon L. 6,089,604 0.13% 14 Enriquez, Albert N. 5,000,000 0.11% 15 Lopez Inc. (Pledge to Metrobank) 3,375,730 0.07% 16 Quality Investment & Sec. Corp. A/C#017003 2,683,000 0.06% 17 Montelibano, Jordana Eden 2,137,141 0.05% 18 Elpidio Ibanez y Laureano 1,834,217 0.04% Ching Tiong Keng &/or Felix Chung &/or Lin Lin 19 Chung 1,540,000 0.03% 20 Mendoza, Alberto &/or Jeanie Mendoza 1,368,020 0.03%
11 Dividend Information The Parent Company is authorized to pay dividends on common shares in cash, in additional shares, in kind, or in a combination of the foregoing. Dividends paid in cash are subject to approval by the Board and no stockholder approval is required. Dividends paid in the form of additional shares are subject to approval by the Board and holders of at least two-thirds of the outstanding capital stock of the Company. Holders of outstanding shares on a dividend record date for such shares will be entitled to the full dividend declared without regard to any subsequent transfer of such shares.
The Board of Directors of the Parent Company approved the cash dividends to stockholders as follows:
Date Declared Record Date Dividend Per Share Amount May 30, 2016 June 14, 2016 P=0.200 P=924 million May 28, 2015 June 15, 2015 P=0.100 P=463 million May 28, 2014 June 27, 2014 P=0.100 P=463 million May 30, 2013 June 14, 2013 P=0.125 P=578 million May 3, 2012 May 21, 2012 P=0.100 P=458 million September 7, 2011 September 21, 2011 P=0.100 P=458 million
As of the date hereof, the Board of Directors has yet to declare a dividend payable in 2017.
There were no sales of unregistered securities.
Management Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the accompanying audited consolidated financial statements and the related notes as at December 31, 2016 and 2015 and for each of the three years in the period ended December 31, 2016.
PFRS 10 -- Consolidated Financial Statements replaces the portion of PAS 27 -- Consolidated and Separate Financial Statements which addresses the accounting for consolidated financial statements. A reassessment of control was performed by the Group on all its subsidiaries and associates in accordance with the provisions of PFRS 10. Following the reassessment and based on the new definition of control under PFRS 10, the Group determined that it does not control ABS-CBN (accounted for as a subsidiary in 2012 and prior years) but it controls First Philippine Holdings Corporation (FPH) (accounted for as an associate in 2012 and prior years).
As a result, since January 1, 2013, the Group deconsolidated ABS-CBN and consolidated FPH retrospectively.
Results of Operations for the year ended December 31, 2016 compared with December 31, 2015
Lopez Holdings reported P6.557 billion in net income attributable to equity holders of the Parent in 2016. This is 6% higher than the P6.191 billion in net income attributable to equity holders of the Parent reported in 2015. The steady performance of investees First Philippine Holdings Corporation (FPH) and ABS-CBN Corporation (ABS-CBN) accounted for these results. FPH units also reported one-off gains during the period.
Consolidated revenues decreased by 5% year-on-year (YoY) to P91.910 billion from P96.510 billion. This was primarily due to the decrease in the sale of electricity (-11%) of FPH subsidiary First Gen Corporation (FGEN). Revenues from real estate (+41%), contracts and services (+37%) and sale of merchandise (+3%) were higher.
Consolidated costs and expenses decreased by 10% to P67.408 billion from P74.670 billion, reflecting essentially the decrease in the costs of sale of electricity (-21%). Costs and expenses for real estate (+63%), contracts and services (+55%), merchandise sold (+24%), and general and administrative expenses (-9%) also reflect accounts consolidated by FPH. 12 Equity in net earnings of associates, PDRs and a joint venture surged by 30%, representing the record performance of ABS-CBN Corporation for the period, as well as share in the performance of FPH units. ABS-CBN’s net income increased by 39% YoY. All other income and expenses primarily reflect FPH accounts, including the 198% increase in net other income comprising one-time gains booked by FPH units.
Associates, PDRs and joint venture
FPH posted an 84% increase in net income attributable to equity holders of the parent to P9.933 billion in 2016 from P5.406 billion in 2015. It reported a 5% decrease in revenues to P91.910 billion from P96.510 billion. Sale of electricity accounted for 81% of revenues in 2016, and 86% of revenues in 2015. Costs and expenses declined by 10% YoY. FPH registered P6.432 billion in net other income during the period, compared to P2.204 million in 2015. Other income consists primarily of one-off gains from arbitration settlement proceeds received by the First Philec group, income from First Philec affiliate First Philippine Solar Corporation for the final settlement of outstanding liabilities at lower than provision, and collection of liquidated damages by FGEN for the San Gabriel flex-plant.
ABS-CBN reported a 39% increase in net income in 2016 to P3.525 billion from P2.545 billion, driven by an 11% growth in advertising revenues that included election-related spending. It reported revenues of P41.630 billion, 9% higher than P38.278 billion in 2015. Ad revenues accounted for 57% of 2016 revenues, compared to 56% in 2015. The top 10 most watched TV programs from January to December 2016 were all aired on ABS-CBN’s flagship Channel 2, based on average audience share during the period.
Key Performance Indicators
As a holding company, Lopez Holdings receives revenues from asset sales and dividends from investees. Hence, the key performance indicator with the most direct impact on Lopez Holdings is the net income of investees. Any dividend received by Lopez Holdings is based on the investees’ net income in the previous year. For the period in review, the financial performance of investees was within expectations.
Lopez Holdings received cash dividends amounting to P365 million from ABS-CBN and P515 million from FPH in 2016. ABS-CBN declared cash dividends of P0.75 per common share in April, while FPH declared cash dividends of P1 per common share in May and the same in November.
Following are the KPIs for Lopez Holdings for comparative periods 2016 and 2015:
13 KPI Formula December 2016 2015 Return on Average Stockholders' Equity - reflects how much the Net Income*/Average 11.42% 11.97% Company has earned on the funds Equity** invested by the shareholders Dividend per share P0.20 P0.10
Current Ratio - indicator of the Current assets/Current Company's ability to pay short-term 1.95 2.03 liabilities obligations
Earnings per Share - the portion of the Company's profit allocated to Net income*/ Weighted P1.4206 P1.3496 each outstanding share of common average number of shares stock Book Value per Share - measure used by owners of common shares of the Equity**/ Weighted Company to determine the level average number of P13.06 P11.88 of safety associated with each shares individual share after all debts are paid *Net income attributable to equity holders of Parent **Equity pertains to equity attributable to equity holders of the parent company and excludes cumulative translation adjustments, share in other comprehensive income, effect of equity transactions of subsidiaries
The only operating subsidiary of Lopez Holdings is FPH. The KPIs of FPH (Consolidated) were:
December 2016 2015 Financial ratios Return on average stockholders’ equity 11.48% 6.75% Interest coverage ratio 3.63 2.81 Earnings Per Share (diluted) P17.74 P9.58 Assets to equity ratio 2.46 2.67 Long-term debt (net) to total equity ratio 1.15 1.33 Current ratio 1.94 2.04 Quick ratio 1.33 1.45 Book value per share (common) P158.42 P147.43
Return on average equity increased from 6.75% in 2015 to 11.48% this year due to the P4.5 billion or 84% jump in consolidated net income attributable to equity holders of the Parent (from P5.4 billion to P9.9 billion). Correspondingly, earnings per common share (diluted) also increased from P9.58 to P17.74 or 85% as the increase in net income attributable to Parent resulted into higher net earnings available to common shareholders for 2016.
Interest coverage ratio also improved from 2.81:1 in 2015 to 3.63:1 this year brought by the stronger consolidated earnings before interest and taxes (up by P8.3 billion or 33%).
The ratio of total assets to total equity decreased from 2.67:1 in 2015 to 2.46:1 this year mainly due to the P13.7 billion or 11% increase in stockholder’s equity (from P127.5 billion in December 2015 to P141.0 billion in December 2016). The growth in total equity was primarily driven by the P6.4 billion or 52% increase in net income for the current period, partly reduced by the unrealized fair value losses (P2.4 billion) on the Group’s Meralco shares due the decline in its share price. Consolidated net income reached the P18.5 billion as the strong earnings from operations were supplemented by significant non-recurring gains from (a) FNPC’s receipt of P1.7 billion (after tax) liquidated damages 14 paid by its contractor for delays in the construction of the San Gabriel plant; and (b) First Philec and FPSC receipt of arbitration settlement proceeds amounting to P2.4 billion . Meanwhile, total assets in 2016 had a 2% modest increase from last year as higher year end balances of Property, plant and equipment and Investment Properties were partially negated by the decline in Cash and cash equivalents and Short-term investments.
The debt to equity ratio decreased from 1.33:1 in 2015 to 1.15:1 in 2016 mainly due to the increase in stockholder’s equity supplemented by lower total long term debt outstanding as of year-end. The decline in total debt was largely caused by the loan principal repayments of the Group in 2016 tempered by the loan drawdowns of FNPC ($35.4 million), Rockwell (P4.0 billion), EDC (P3.5 billion), and First Philec Inc. (P235 million).
Current ratio also registered a downward movement from 2.04:1 in 2015 to 1.94:1 this year primarily due to the P3.2 billion decline in the total balance of current assets (from P103.0 billion in December 2015 to P99.1 billion in December 2016). Decline in current assets was caused by the combined P9.3 billion or 20% drop in Cash and cash equivalents and Short-term investments following the debt service payments made by various companies of the Group partly tempered by additional drawdown of loans. Cash was also utilized for the Group’s acquisition of various investments and capital assets, and First Gen’s buyback of its Series “F” and Series “G” preferred shares during the year.
Similarly, quick ratio declined from 1.45:1 in 2015 to 1.33:1 this year also as a result of the decline in Cash and Short-term investments partly tempered by the increase in Trade and other receivables. Trade and other receivables were up by P3.6 billion or 13% primarily on account of the higher trade receivable balances of First Gen’s EDC, FNPC, and PMPC as well as Rockwell.
Book value per common share grew from P147.43 in 2015 to P158.42 this year. The increase was brought about by the P6.1 billion or 8% increase (from P81.7 billion* in December 2015 to P87.8 billion* in December 2016) in equity attributable to equity holders of the parent, which mostly reflects the net income generated during the period.
Financial Condition
Changes in: Cash and cash equivalents (-22%), short-term investments (-10%), trade and other receivables (+15%), inventories (+4%), other current financial assets (-7%), prepayments and other current assets (+23%), assets of discontinued operations held for sale (-100%), property, plant and equipment (+6%), investments accounted for at equity method (+8%), available-for-sale financial assets (-12%), goodwill and intangible assets (-1%), investment properties (+20%), net deferred tax assets (+8%), other noncurrent financial assets (+11%), other noncurrent assets (+8%), trade payables and other current liabilities (+7%), loans payable (-31%), income tax payable (+43%), current portion of long-term debts (+3%), liabilities related to assets of discontinued operations held for sale (-100%), long-term debts-net of current portion (-5%), derivative liabilities (-34%), deferred tax liabilities (+20%), retirement and other long-term employee benefits liability (-24%), asset retirement and preservation obligations (+0.2%), other noncurrent liabilities (+3%), capital stock (+1%), unrealized fair value gains on investments in equity securities (-41%), cumulative translation adjustments (-15%), equity reserve (+2%), and share-based payment plans (-87%) are FPH accounts.
Capital in excess of par value (+176%) reflects the effect of the exercise of Employee Stock Option and full payment of Employee Stock Purchase Plans during the year. Increase in retained earnings (+11%) reflects the net income for the period minus dividends paid. Lopez Holdings paid out cash dividends of P0.20 per common share in June 2016.
Results of Operations for the year ended December 31, 2015 compared with December 31, 2014
Lopez Holdings posted P6.191 billion in net income attributable to equity holders of the Parent for the year 2015. This is 65% higher than the P3.760 billion in net income attributable to equity holders of the Parent reported in 2014. This was primarily due to the partial recovery of impairment losses related to its erstwhile telecom unit.
15 Lopez Holdings and Bayan Telecommunications Holdings Corporation (BTHC) sold all their equity in Bayan Telecommunications, Inc. (Bayan) in July 2015. The sale followed the conversion of Bayan debt into equity provided under the resolution of Bayan’s Rehabilitation Court (Regional Trial Court Branch 158 Pasig City) in SEC Case 03-25 dated August 27, 2013, and approved by the National Telecommunications Commission on July 2, 2015. The sale involved up to 70,763,707 Bayan shares and increased the buyer’s equity interest in Bayan from 56.87% to 98.57% of outstanding capital stock. Prior to the sale, Lopez Holdings held 717,335 shares in Bayan.
The Lopez Holdings board approved the sale on July 9, 2015. It allowed the unlocking of the intrinsic value of Bayan as a duly enfranchised entity whose performance was hindered by its significant debt load, and allowed Lopez Holdings to recover a portion of its investment in Bayan. Partial recovery of impairment losses related to BTHC/Bayan as a result of the sale amounted to P1.8 billion, net of related expenses.
Consolidated revenues decreased by 3% to P96.510 billion from P99.301 billion. This resulted from decreases in the sale of electricity (-1%), real estate (-3%) and contracts and services (-32%), from units of FPH. Revenues from contracts and services declined due to the lower value of project completion of FPH unit First Balfour, Inc. Sale of merchandise, representing the manufacturing business of FPH, rose by 4% while the stellar performance of ABS-CBN Corporation lifted equity in net earnings of associates/PDRs and joint venture by 22%.
Consolidated costs and expenses decreased by 4% to P74.670 billion from P77.688 billion. Cost of sale of electricity (-0.4%), real estate costs and expenses (-3%), contracts and services costs and expenses (-56%), costs and expenses for merchandise sold (-17%) and general and administrative expenses reflect the movement in revenues for the respective accounts.
Recovery of impairment loss-net (+26%) reflects primarily Parent accounts covering partial recoveries from the sale of equity in Bayan, the exercise of options in BTHC and assignment of SKY Cable Corporation options, net of provision for impairment loss at the FPH level. Excess of carrying value over buy-back price (-97%) represents minimal amount of debt (Perpetual Convertible Bonds) bought back by the Parent during the year.
All other items represent primarily FPH accounts, as follows: finance costs (+1%), finance income (- 1%), dividend income (+22%), foreign exchange loss (P1.526 billion in 2015 versus P115 million in 2014), mark-to-market gain on derivatives (-81%), and other income-net (+20%). The peso depreciated and closed the year 2015 at P47.060 against the US dollar compared to P44.720 per US dollar at the end of 2014.
Subsidiaries, Associates, PDRs and joint venture
FPH reported a 4% decrease in net income attributable to equity holders of the Parent to P5.406 billion in the year 2015, from P5.632 billion in 2014. FPH consolidated revenues eased by 3% to P96.643 billion from P99.307 billion. Sale of electricity accounted for 86% of consolidated revenues in 2015 and 85% in 2014. The improvements in the FPH Group’s margins were reversed by the impact of foreign exchange losses and the absence of non-recurring gains (booked in 2014 for the recovery of impairment related to the Northern Negros Geothermal Plant of Energy Development Corporation, a unit of First Gen Corporation). On a recurring net income basis, FPH’s earnings improved by 11% to P5.2 billion from P4.7 billion, driven by the strong performance of the power generation, manufacturing and geothermal well drilling businesses, together with lower operating expenses for FPH Parent.
ABS-CBN reported a 25% increase in net income for 2015 to P2.545 billion, driven by solid advertising revenues (+13%) and consumer sales (+16%). Revenues reached P38.278 billion, 14% higher than P33.544 billion in 2014. Ad sales accounted for 56% of ABS-CBN revenues during the period, the same level as in 2014.
Key Performance Indicators
As a holding company, Lopez Holdings receives revenues from asset sales and dividends from investees. Hence, the key performance indicator (KPI) with the most direct impact on Lopez Holdings is the net income of investees. Any dividend received by Lopez Holdings is based on the investees’
16 net income in the previous year. For the period in review, the financial performance of investees was within expectations.
Following are selected KPIs for Lopez Holdings for comparative periods 2015 and 2014:
KPI Formula December 2015 2014 Return on Average Stockholders' Equity - reflects Net Income*/Average how much the Company has 11.97% 8.04% Equity** earned on the funds invested by the shareholders Dividend per share P0.100 P0.100 Current Ratio - indicator of the Current assets/Current Company's ability to pay short- 2.03 1.91 liabilities term obligations Earnings per Share - the portion of the Company's profit Net income/ Weighted P1.3496 P0.8188 allocated to each outstanding average number of shares share of common stock Book Value per Share - measure used by owners of common shares of the Equity**/ Weighted Company to determine the level P11.88 P10.63 average number of shares of safety associated with each individual share after all debts are paid. *Net income attributable to equity holders of Parent **Equity pertains to equity attributable to equity holders of the parent company and excludes cumulative translation adjustments, share in other comprehensive income, effect of equity transactions of subsidiaries and excess of acquisition cost over carrying value of minority interest
The only operating subsidiary of Lopez Holdings is FPH. The KPIs of FPH (Consolidated) were:
December 2015 2014 Financial ratios Return on average stockholders’ equity * 6.75% 7.65% Interest coverage ratio 2.84 3.24 Earnings Per Share (diluted) P9.581 P10.095 Assets to equity ratio * 2.67 2.77 Long-term debt (net) to total equity ratio * 1.33 1.38 Current ratio 2.04 1.95 Quick ratio 1.45 1.53 Book value per share* (common) P147.43 P135.45
Return on average equity decreased from 7.65% in 2014 to 6.75% this year due to the drop in net income attributable to Parent by P226 million or 4% (from P5.63 billion to P5.41 billion).
Interest coverage ratio declined from 3.24:1 in 2014 to 2.84:1 this year due to the P273 million or 3% jump in interest expense (from P8.7 billion to P9.0 billion) aggravated by the lower consolidated earnings before interest and taxes by P2.7 billion or 10% (from P28.28 billion to P25.59 billion).
17 Earnings per common share (diluted) decreased from P10.095 to P9.581 or 5% as the decrease in consolidated net income attributable to equity holders of the Parent resulted into lower net earnings available to common shareholders for the current year.
The ratio of total assets to total equity decreased from 2.77:1 in 2014 to 2.67:1 this year despite the increase in total assets by P17.6 billion or 5% mainly due to the P10.8 billion or 9% increase in stockholder’s equity (from P116.7 billion in December 2014 to P127.5 billion in December 2015). The P17.6 billion growth in total assets from (from P323.3 billion to P340.9 billion) was primarily due to the P14.1 billion or 12% increase in Property, Plant and Equipment (from P118.9 billion to P133.0 billion) which represents the recognition of capitalized construction costs of First Gen’s San Gabriel and Avion power plants as well as EDC’s plant improvement and drilling activities in Southern Negros and Unified Leyte.
The debt to equity ratio decreased from 1.38:1 in 2014 to 1.33:1 in 2015 despite the increase of total debt by P8.1 billion or 5% (from P161.2 billion in December 2014 to P169.3 billion in December 2015) due to the P10.8 billion or 9% increase in stockholder’s equity. The P8.1 billion increase is mainly due to higher long-term debt balances following the $200 million 10-year term loan obtained by First Gen in September 2015, BGI’s P5.0 billion term-loan secured on September 9, 2015, FNPC’s additional drawdown on its Export Credit Facility amounting to $99.2 million for 2015 and EDC’s P291.2 million loan for its solar project.
Current ratio showed an upward movement from 1.95:1 in 2014 to 2.04:1 this year primarily due to the P3.9 million decline in balance of current liabilities (from P54.3 billion in December 2014 to P50.4 billion in December 2015) . Decline in current liabilities was driven by (a) lower accrued project costs and current portion of customers’ deposits of Rockwell (b) lower expense accruals of FBI and First Philec (3) lower payables to SPEX of First Gen and (4) decline in current portion of long-term debt.
Quick ratio declined from 1.53:1 in 2014 to 1.45:1 this year as a result of the P11.2 billion combined decrease in cash and short-term investments and trade and other receivables. The lower cash balances were mainly attributable to Rockwell’s payment of property acquisitions and other capital expenditures for ongoing projects, First Balfour’s equipment purchases during the period, and scheduled principal and interest payments made by the Group for various loans. Trade and other receivables declined primarily on account of the lower trade receivable balances of First Gen’s FGP and FGPC, EDC, and Rockwell.
Book value per common share grew from P135.45 in 2014 to P147.43 this year. The increase was brought about by the P6.7 billion or 9% increase (from P75.0 billion* in December 2014 to P81.7 billion* December 2015) in equity attributable to equity holders of the parent for the current period, which mostly reflects the net income generated during the period.
18 Financial Condition
In 2015, Lopez Holdings paid a total of P463 million in cash dividends and received P800 million in cash dividends from FPH (P511 million) and ABS-CBN (P289 million). Proceeds from the sale of Bayan shares held by the Parent were used to settle a short-term loan in the amount of P1.1 billion, redeem US$13.1 million in restructured notes, redeem all outstanding Perpetual Convertible Bonds at 100% of the principal amount of US$193,700, purchase FPH common shares from the market, and fund a special separation package that reduced the workforce by a quarter.
Investments in and advances to associates/PDRs increased by 3% as the solid performance of ABS- CBN in 2015 increased its net carrying value in the Parent’s books.
Movements in: Cash and cash equivalents (13%), short-term investments (+23%), trade and other receivables (-16%), inventories (+10%), other current assets (+87%), assets of discontinued operations held for sale (-29%), investments in equity and debt securities (+29%), property, plant and equipment (+12%), investment properties (+6%), goodwill and intangible assets (-2%), deferred tax assets (+15%), other noncurrent assets (+28%), trade payables and other current liabilities (-7%), loans payable (-43%), income tax payable (-44%), current portion of long-term debts (-7%), liabilities related to assets of discontinued operations held for sale (+2%), long-term debts-net of current portion (+6%), derivative liabilities (-16%), deferred tax liabilities (+3%), retirement and other long-term employee benefits liability (+14%), asset retirement and preservation obligations (+28%), and other noncurrent liabilities (+43%) are FPH accounts.
Changes in common stock of P5 million, capital in excess of par value (+54%), and share-based payment plans (-14%) represent the exercise of Employee Stock Option and full payment of Employee Stock Purchase Plans. Unrealized fair value gains on investment in equity securities (+96%), cumulative translation adjustments (+44%), and equity reserve (-3%) represent the Parent’s equitized share in the equivalent accounts of both FPH and ABS-CBN. The increase in retained earnings (+9%) represents the company’s net income attributable to Parent in 2015, net of dividends paid.
There are no any known trends, demands, commitments, events or uncertainties that will have material impact on the Group’s liquidity or sales; there are no material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the Group with unconsolidated entities or other persons created during the reporting period; and, there are no events that will trigger direct or contingent financial obligation that is material to the company, including any default or acceleration of an obligation, other than those disclosed above and in the notes to consolidated financial statements herein attached. Also, the Group has no material commitments for capital expenditures.
Financial Statements The consolidated financial statements of the group are incorporated herein by reference. The schedules listed in the accompanying Index to Supplementary Schedules are filed as part of this Form 17-A.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There are no changes in and disagreements with the external auditors on accounting and financial disclosures.
Compliance with Leading Practice on Corporate Governance Lopez Holdings has a Manual on Corporate Governance (the “Manual”), the provisions of which are complaint with the Securities and Exchange Commission’s (SEC) Revised Code of Corporate Governance. There were no deviations from the Manual of Corporate Governance reported during the year. Lopez Holdings pursues initiatives to improve corporate governance of the Corporation. Amendments are made to the Manual to further strengthen corporate governance practices within Lopez Holdings and to elevate them to best practices standards. Lopez Holdings also has a Corporate Code of Conduct which sets out the principles and guidelines for the conduct of the business of the Company and in dealing with its stakeholders. The Company, its directors, officers 19 and employees are compliant with the provisions of the Manual and the Corporate Code of Conduct. Lopez Holdings’ vision, mission and corporate objectives are reviewed on an annual basis. One of its corporate objectives is to lead in quality management practices and adhere to good corporate governance in the conduct of all business.
To ensure independent, impartial and fair discussions, three (3) out of seven (7) board directors are independent directors. In 2016, the Board held eleven (11) meetings, the schedules of which were determined at the start of the year. The Board of Directors has formed the following committees: Audit Committee, Nomination, Election and Governance Committee, Compensation and Remuneration Committee, and Risk Management Committee. All the members of the Audit Committee and Risk Management Committee are independent directors while a majority of the members of the Nomination, Election and Governance Committee and the Compensation and Remuneration Committee are independent directors. The Board of Directors has adopted policies on related party transactions, whistle-blowing, conflict of interest and insider trading. The internal audit group of its parent Lopez, Inc. serves as Lopez Holdings’ Internal Audit Group. The Internal Audit Group reports to the Board through the Audit Committee. The Audit Committee checks all financial reports against its compliance with both the internal financial management handbook and pertinent accounting standards, including regulatory requirements. It performs oversight financial management functions specifically in the areas of managing credit, market, liquidity, operational, legal and other risks of the Corporation, and crisis management. It consists of three Board members, all of whom are independent directors. The internal audit group of an affiliate serves as internal auditor of Lopez Holdings.
Lopez Holdings complies with governance regulatory requirements. In 2016, it filed the required disclosures with the SEC and the Philippine Stock Exchange (PSE), which are all available for viewing on its website. It also uploaded to its website its 2015 Consolidated Changes in the Annual Corporate Governance Report on January 10, 2016. Lopez Holdings accomplished and submitted to the PSE for 2016 the Disclosure Template on Corporate Governance Guidelines for Listed Companies.
In 2016, its directors and officers attended corporate governance seminars, among them one conducted by the Institute of Corporate Directors (ICD) on September 16, 2016. Officers and other representatives attended the PSE’s 2016 Annual Disclosure Rules Seminar, and other ICD programs.
Lopez Holdings strives to keep communications open with all its stakeholders and encourages stockholders to participate in shareholders’ meetings either in person or by proxy. Minority stockholders can submit nominations for directors to the Nomination, Election and Governance Committee. Stakeholders are free to write, call in or email any concern which they may have. Lopez Holdings makes the effort to communicate with its stakeholders through person-to-person meetings, e-mails, mailed/couriered notices, stockholders’ meetings, disclosures, press briefings, and press releases.
Lopez Holdings continues to be certified compliant with the ISO 9001:2008 standard, and is accredited for the Sixth Generation Investors in People (IiP) standard.
20 PART lll – CONTROL AND COMPENSATION INFORMATION
Directors and Executive Officers of the registrant
DIRECTORS Mr. Oscar M. Lopez, Mr. Manuel M. Lopez Mr. Eugenio Lopez, III Mr. Salvador G. Tirona Mr. Washington Z. SyCip (independent) Mr. Cesar E.A. Virata (independent) Mr. Monico V. Jacob (independent)
EXECUTIVE & CORPORATE OFFICERS
Oscar M. Lopez Chairman Emeritus Manuel M. Lopez Chairman and Chief Executive Officer Eugenio Lopez III Vice-Chairman Salvador G. Tirona President, Chief Operating Officer and Chief Finance Officer Federico R. Lopez Treasurer Miguel L. Lopez Senior Vice President, Corporate Affairs Enrique I. Quiason Corporate Secretary Maria Amina O. Amado Vice President, Legal, Assistant Secretary and Compliance Officer
Oscar M. Lopez (aged 86), Filipino, chaired the company's board since June 8, 1993 until June 2010, and served as president from 1999 until 2004. He was chief executive officer of Lopez Holdings from 1999 to June 2010. He received a Bachelor of Arts degree from Harvard College and a Master’s degree in Public Administration from Harvard University. He is chairman of Lopez, Inc. He is chairman emeritus of First Philippine Holdings Corporation (FPH), First Gen Corporation (FGEN), and Energy Development Corporation (EDC) and is a director of Rockwell Land Corporation (Rockwell), ABS- CBN Corporation (ABS-CBN) and ABS-CBN Holdings Corporation, all publicly listed companies. The SEC has granted Mr. Lopez permanent exemption from the annual corporate governance training requirement under SEC Memorandum Circular No. 20 Series of 2013. He owns 11,632,408 Lopez Holdings shares. He has been nominated for re-election.
Manuel M. Lopez (aged 74), Filipino, has been a director of the company since June 8, 1993, and was vice chairman from 2001 to June 2010. He was the Philippine Ambassador to Japan from December 2, 2010 up to June 30, 2016. He is a holder of a Bachelor of Science degree in Business Administration from the University of the East and attended the Program for Management Development at the Harvard Business School. He served Manila Electric Company (Meralco) (publicly listed) as president from 1986 to June 2001 and as chairman from 2001 until May 2012. He is chairman of Rockwell, and is a director of FPH and ABS-CBN, publicly listed companies. He is vice chairman of Lopez, Inc. He last attended corporate governance training on September 16, 2016. He owns 25,617,897 Lopez Holdings shares. He has been nominated for re-election.
Eugenio Lopez III (aged 64) Filipino, has been a director of the company since June 8, 1993, and was treasurer from said date until June 2010. He received a Bachelor of Arts degree in Political Science from Bowdoin College and a Master’s degree in Business Administration from the Harvard Business School. He has been chairman of ABS-CBN (publicly listed) since 1997. He was the chief executive officer of ABS-CBN (publicly listed) from 1997 to 2012, and was its president from 1993 to 1997. He is chairman of Sky Cable Corporation (SkyCable), and president of Lopez, Inc., among others. He is a director of FPH, FGEN ABS-CBN Holdings Corporation and Rockwell Land, all publicly listed. He last attended corporate governance training on September 16, 2016. He owns 3,807,823 Lopez Holdings shares. He has been nominated for re-election.
Salvador G. Tirona (aged 62), Filipino, has been a director, the president and chief operating officer since June 10, 2010. He joined the company as chief finance officer (CFO) in September 2005. He was formerly a director and the CFO of Bayan. In 2003, he played a critical and strategic role as CFO of Maynilad Water Services, Inc., particularly in implementing its rehabilitation plan. He holds a Bachelor’s degree in Economics from the Ateneo de Manila University and a Master of Business Administration from the same university. He is a director of ABS-CBN (publicly listed) and the
21 comptroller of ABS-CBN Holdings Corporation. He attended the five-day Professional Directors' Program of the Institute of Corporate Directors and last attended corporate governance training on October 7, 2016. He owns 405,905 Lopez Holdings share. He has been nominated for re-election.
Washington Z. SyCip (aged 95), Independent Director, Filipino, has been a director of the company since April 30, 1997. He is an independent director. He received a Bachelor of Science degree in Commerce from the University of Santo Tomas and a Master of Science degree in Commerce from Columbia University. He is the founder of SyCip Gorres Velayo & Co. (SGV). He retired from SGV in 1996. He is chairman of Cityland Development Corp. (since 1997) and MacroAsia Corp. (since 1996), both publicly listed. He is an independent director of the following publicly listed companies: FPH (since 1997), Belle Corporation (since 1996), Century Properties Group, Inc. (since 2011), Highlands Prime, Inc. (since 2002), The PHINMA Group (since 1996), and Metro Pacific Investments Corp. (since 2012). He is a director of publicly listed Philippine National Bank (since 1999) and Philippine Airlines, Inc. (since 1997). He is an adviser to the Board of the following publicly listed companies: Asian Terminals, Inc. (since 2010), BDO Unibank, Inc. (since 2009), JG Summit Holdings, Inc. (since 2001), Jollibee Foods Corporation (since 2011), Metropolitan Bank & Trust Co. (since 1996), and Philippine Long Distance Telephone Co. (since 2011). He underwent the Mandatory Accreditation Programme of the Research Institute of Investment Analysts Malaysia. He has been granted by the Securities and Exchange Commission exemption from the continuing Corporate Governance training requirements for directors. He owns 1 Lopez Holdings share. He has been nominated for re-election.
Cesar E.A. Virata (aged 86) , Independent Director, Filipino, was elected director of the company on July 9, 2009. He is an independent director. He graduated in 1952 from the University of the Philippines with Bachelor of Science degrees in Mechanical Engineering and in Business Administration (cum laude). He received his Master’s degree in Business Administration major in Industrial Management in 1953 from the University of Pennsylvania. He is a former Prime Minister of the Philippines (1981-1986) and Chairman of the Committee on Finance of the Batasang Pambansa (1978-1986). Since 1986, he has been the chairman and president of C. Virata and Associates, Inc. He is also a director and corporate vice chairman of Rizal Commercial Banking Corporation (since 1995), chairman and director of RCBC Bankard Services Corporation (since 2013), and an independent director of Belle Corporation and City and Land Developers, Inc. (since 2009), all publicly listed companies. He concurrently serves as director and/or chairman of such organizations as RCBC Savings Bank, Inc.(since 1999), RCBC Realty Corporation (since 1998), Malayan Insurance Company, Inc. (since 2005), RCBC Forex Brokers Corporation (since 1999), ALTO-Pacific Company, Inc. (since 2013), Business World Publishing Corporation (since 1989), Malayan Colleges (since 1999), Luisita Industrial Park (since 1999), RCBC Land Inc. (since 1999) and AY Foundation, Inc. (since 1997), among others. He attended the seminar on Corporate Governance for Bank Directors, Bank Chairmen & CEOs of the Institute of Corporate Directors and the Bangko Sentral ng Pilipinas. He last attended corporate governance training on August 3, 2016. He owns 1 Lopez Holdings share. He has been nominated for re-election.
Monico V. Jacob (aged 71) , Independent Director, Filipino, was elected to the board of the company on May 30, 2013. He received his Bachelor of Laws degree from the Ateneo de Manila University in 1971. He has been the chairman of Total Consolidated Asset Management, Inc. since 1999, of Global Resource for Outsourced Workers, Inc. since 2000, of Republic Surety & Insurance Co., Inc. since 2008, and of Philplans First, Inc. and Philhealthcare, Inc. since 2013. He has been the president and CEO of STI Education Services Group, Inc. since 2003, of STI Education Systems Holdings, Inc. (publicly listed) since 2012, of Insurance Builders, Inc. since 2010, and of Philippine Life Finance Assurance Corp. since 2012. He has been an independent director of 2GO Group, Inc. (publicly listed) and Negros Navigation Co., Inc., both since 2009. He has been a director of De Los Santos-STI College and De Los Santos-STI Medical Center since 2004, of Jollibee Foods Corp. (publicly listed) since 2000, of Asian Terminals, Inc. (publicly listed) since 2010, of Phoenix Petroleum Philippines, Inc. (publicly listed) since 2010, and of Century Properties Group, Inc. (publicly listed) since 2012, among others. He was a director of Meralco Industrial Engineering Services Corporation and Clark Electric Distribution Corp. from 2007 to 2010. He was the chairman of Meralco Financial Services Corporation from 2007 to 2012. He last attended corporate governance training on March 18, 2016. He owns 1 Lopez Holdings share. He has been nominated for re-election.
Federico R. Lopez (aged 55), Filipino, has been treasurer since June 10, 2010. He was executive vice president for Regulatory Management from 2001 until June 2010. He is chairman and chief executive officer of FPH (since June 2010) and FGEN, as well as director of ABS-CBN and various
22 FPH and FGEN subsidiaries. He is a graduate of the University of Pennsylvania with a Bachelor of Arts degree in Economics and International Relations (cum laude, 1983). He last attended a seminar on Corporate Governance on September 16, 2016. He owns 2,004,857 Lopez Holdings shares.
Miguel L. Lopez (aged 48), Filipino, has been with the company since June 10, 2010. He is senior vice president and Head-Corporate Affairs. He joined Lopez Holdings from Meralco where he worked for eight years, occupying various positions, the last of which was vice president and head of Corporate Marketing. Prior to Meralco, from 1998 to 2002, he worked in Maynilad Water as vice president, Central Business Area and from 1994 to 1998 in Bayan as assistant vice president, Customer Service Division. He is a director of Rockwell, Philippine Commercial Capital, Inc. and Indra Corp. He graduated with a degree in Business Administration from Menlo College of California, USA and attended the Executive Development Program of the Asian Institute of Management. He last attended corporate governance training on September 16, 2016. He owns 863,517 Lopez Holdings shares.
Enrique I. Quiason (aged 56), Filipino, has been the corporate secretary of the company since June 8, 1993. He received his Bachelor of Science degree in Business Economics and Bachelor of Laws degree from the University of the Philippines, and Master of Laws degree in Securities Regulation from Georgetown University. He is a senior partner of the Quiason Makalintal Barot Torres & Ibarra Law Office. He is the corporate secretary of FPH, Rockwell, ABS-CBN Holdings Corporation, SkyCable and Lopez, Inc. He is also assistant corporate secretary of ABS-CBN. He last attended corporate governance training on September 16, 2016. He owns 191,960 Lopez Holdings shares.
Maria Amina O. Amado (aged 53), Filipino, has been the assistant corporate secretary since 1994 and is currently vice president for Legal and the compliance officer of the company. She is also the corporate secretary and assistant corporate secretary of various Lopez Holdings subsidiaries and affiliates. She is the corporate secretary of ABS-CBN Holdings Corporation. She graduated with an A.B. Political Science degree in 1984 and a Bachelor of Laws degree in 1989 from the University of the Philippines. She completed the academic requirements for the Executive Masters in Business Administration program of the Asian Institute Management in 2000. She last tattended corporate governance training on September 16, 2016. She owns 435,788 Lopez Holdings shares.
The Directors of the Company are elected at the Annual Stockholders' Meeting to hold office until the next succeeding annual meeting and until their respective successors have been elected and qualified.
The independent directors of the company are compliant with SEC Memorandum Circular No. 16, Series of 2002, which defines an independent director as “a person who, apart from his fees and shareholdings, is independent of management and free from any business or other relationship which could, or could reasonably be perceived to, materially interfere with his exercise of independent judgment in carrying out his responsibilities as a director in any corporation that meets the requirements of Section 17.2 of the Securities Regulation Code (SRC) and includes, among others, any person who:
i. is not a director or officer or substantial stockholder of the corporation or of its related companies or any of its substantial shareholders (other than as an independent director of any of the foregoing); ii. is not a relative of any director, officer or substantial shareholder of the corporation, any of its related companies or any of its substantial shareholders. For this purpose, relatives include spouse, parent, child, brother, sister, and the spouse of such child, brother or sister; iii. is not acting as a nominee or representative of a substantial shareholder of the corporation, any of its related companies or any of its substantial shareholders; iv. has not been employed in any executive capacity by that public company, any of its related companies or by any of its substantial shareholders within the last five (5) years; v. is not retained as professional adviser by that public company, any of its related companies or any of its substantial shareholders within the last five (5) years, either personally or through his firm;
23 vi. has not engaged and does not engage in any transaction with the corporation or with any of its related companies or with any of its substantial shareholders, whether by himself or with other persons or through a firm of which he is a partner or a company of which he is a director or substantial shareholder, other than transactions which are conducted at arms-length and are immaterial or insignificant.”
In compliance with Section 38 of the SRC, the independent directors of Lopez Holdings are not officers nor employees of the corporation, its parent or subsidiaries, and do not have a relationship with the corporation, which would interfere with their exercise of independent judgment in carrying out their responsibilities as directors.
Officers are appointed annually by the Board of Directors at its first meeting following the Annual Meeting of Stockholders, each to hold office until a successor shall have been appointed.
Family Relationships
There are no other family relationships among the directors and officers listed above except for the following: Mr. Oscar M. Lopez and Amb. Manuel M. Lopez are brothers; Mr. Eugenio Lopez III is a nephew of Mr. Oscar M. Lopez and Amb. Manuel M. Lopez; Mr. Federico R. Lopez is a son of Mr. Oscar M. Lopez and a nephew of Amb. Manuel M. Lopez; Mr. Miguel L. Lopez is a son of Amb. Manuel M. Lopez and a nephew of Mr. Oscar M. Lopez; and Messrs. Eugenio Lopez III, Federico R. Lopez and Miguel L. Lopez are cousins.
Significant Employees
The officers mentioned above make significant contribution to the business and all employees are expected by the Company to make their own contributions necessary to meet its organizational goals.
Involvement of Directors and Officers in Certain Legal Proceedings
The Company is not aware of any bankruptcy proceedings filed by or against any business of which a director, person nominated to become a director, executive officer, or control person of the Company is a party or of which any of their property is subject.
The Company is not aware of any conviction by final judgment in a criminal proceeding, domestic or foreign, or being subject to a pending criminal proceeding, domestic, or foreign, of any director, person nominated to become a director, executive officer, or control person.
The Company is not aware of any order, judgment, or decree not subsequently reversed, superseded, or vacated, by any court of competent jurisdiction, domestic, or foreign, permanently or temporarily enjoining, barring, suspending, or otherwise limiting the involvement of a director, person nominated to become a director, executive officer, or control person of the Company in any type of business, securities, commodities or banking activities.
The Company is not aware of any findings by a domestic or foreign court of competent jurisdiction (in a civil action), the SEC or comparable foreign body, or a domestic or foreign exchange or electronic marketplace or self-regulatory organization, that any director, person nominated to become a director, executive officer, or control person has violated a securities or commodities law.
24 Executive Compensation
Information as to the aggregate compensation paid or accrued during the last two fiscal years and to be paid in the ensuing fiscal year to the Company’s Chief Executive Officer and four other most highly compensated executive officers follows (in million Php): Year Salary Bonus Others Chief Executive Officer 2015 P33.81 12.67 – and four most highly 2016 44.98 36.02 – compensated executive officers: 2017E 49.48 36.02 – Salvador G. Tirona Manuel M. Lopez Oscar M. Lopez Miguel L. Lopez Maria Amina O. Amado Cielito R.A. Diokno (for 2015) Year Salary Bonus Others All officers and directors 2015 44.24 18.28 – as a group unnamed 2016 51.34 36.90 – 2017E 56.47 36.90 –
1) The directors received standard per diem of P10,000, net of applicable taxes, per board meeting and board committee meeting in 2016. Directors do not receive salaries nor allowances. Bonuses are given to directors based on the profitability of the company during the immediate preceding year. 2) There are no other arrangements or consulting contracts on which any director is compensated, whether directly or indirectly. 3) The directors do not have employment contracts. Their term of office is one year. The stockholders elect the members of the board of directors during the Annual Stockholders’ Meeting. 4) There is no compensatory plan or arrangement for the termination, resignation, or retirement of a member of the Board. 5) Since 2011, the Company’s executives have granted stock options. There were no warrants earned in 2016 and earlier years. 6) Details of any repricing of warrants and options - not applicable. 7) The Compensation and Remuneration Committee has established a formal and transparent procedure for developing a policy on executive remuneration and for fixing the remuneration packages of corporate officers and directors. It has three members, two of whom are independent directors, namely: Amb. Manuel M. Lopez (chairman), Cesar E. A. Virata and Washington Z. SyCip.
Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Record and Beneficial Owners as at December 31, 2016
As of December 31, 2016, the Company knows of no one who beneficially owns in excess of 5% of the Company’s common stock except as set forth in the table below:
(3) Amount and nature of (2) Name and address beneficial ownership (indicate (1) Title of Class Record/beneficial by “r” or “b”) (4) % of class owner Lopez, Inc. Common 5/F Benpres Building 2,430,603,242 r * 52.5% Meralco Avenue, Ortigas Center, Pasig City Common PCD Nominee Corp. 1,355,133,867 r 29.3% c/o PCD Nominee, Makati City Common PCD Nominee Corp. 636,364,360 r 13.8% PSE Center, Ayala Avenue, Makati City 25 * Lopez, Inc. is the holding company of the Lopez family. It is owned by the respective holding companies of the family of the late Eugenio Lopez, Jr., Oscar M. Lopez, Manuel M. Lopez and Presentacion L. Psinakis. * Lopez, Inc. issued Shares Purchase Rights (SPURs) to certain holders which give the holders thereof the right to delivery and/or sale of common shares of Lopez Holdings and other rights relating to certain rights (other than voting rights) benefits, distributions, payments, securities or any other property attributable to or derived from the shares.
(b) Security Ownership of Management as at December 31, 2016 (1) Name of beneficial (3) Amount and nature of (4) % owner (2) Position beneficial ownership ownership Manuel M. Lopez Chairman and CEO 25,617,897 r (sole voting) 0.55% Oscar M. Lopez Chairman Emeritus 11,632,408 r (sole voting) 0.25% Eugenio Lopez III Vice Chairman 3,807,823 r (sole voting) 0.08% Federico R. Lopez Treasurer 2,004,857 r (sole voting) 0.04% Salvador G. Tirona Director, President, 405,905 r (sole voting) 0.01% COO & CFO Monico V. Jacob Director 1 r (sole voting) 0.00% Cesar E.A. Virata Director 1 r (sole voting) 0.00% Washington Z. SyCip Director 1 r (sole voting) 0.00% Miguel L. Lopez SVP – Corporate Affairs 863,517 r (sole voting) 0.02% Enrique I. Quiason Corporate Secretary 191,960 r (sole voting) 0.00% Maria Amina O. Amado VP – Legal, Assistant 435,788 r (sole voting) 0.01% Corporate Secretary and Compliance Officer All directors and executive officers as a group 44,960,158 r (sole voting) 0.97%
There have not been any arrangements that have resulted in a change in control of the Company during the period covered by this report. The Company is not aware of the existence of any voting trust arrangement among the shareholders.
Certain Relationships and Related Transactions
Parent of the Registrant and the Voting Securities Owned Parent No. of Shares Held % to Total Lopez, Inc. 2,430,603,242 52.5%
* 8,840,670 shares representing 0.19% are covered by the SPURs issued by Lopez, Inc. to certain holders which give the holders thereof the right to delivery and/or sale of common shares of Lopez Holdings and other rights relating to certain rights (other than voting rights, distributions, payments, securities or any other property attributable to or derived from the shares.
The Company retains the law firm of Quiason Makalintal Barrot Torres Ibarra and Sison for legal services. During the last fiscal year, the Company paid Quiason Makalintal Barrot Torres Ibarra and Sison, of which Mr. Enrique I. Quiason is a senior partner, legal fees which the Company believes to be reasonable for the services rendered. During the last three years, Quiason Makalintal Barot Torres Ibarra and Sison rendered legal services in connection with the debt buy-back.
26 PART IV – EXHIBITS AND SCHEDULES
Exhibits and Reports on SEC Form 17-C
(a) Exhibits – There are no accompanying exhibits for Parts I and III except the list of the Subsidiaries and Direct Affiliates of the Registrant and the Annual Corporate Governance Report for 2015
(Exhibits are either not applicable to the Company or require no answer.)
As of December 31, 2016, Lopez Holdings Corporation has investment in shares of stock/PDRs of subsidiaries and associates with jurisdiction all in the Philippines, as follows:
Direct % of Principal Name ownership Activities
Bayan Telecommunications Holdings Corporation (BayanTel) 82.9%** Telecommunications ABS-CBN Corporation 56.6%* Television and Radio Broadcasting and Film Distribution First Philippine Holdings Corporation 46.47% Power Generations and Distribution First Batangas Hotel Corporation 40.5% Real Estate Developer Bauang Private Power Corporation 37.0% Power Distribution First Gen Northern Energy Corp. 33.0% Power Distribution
Panay Electric Company 30.0% Power Distribution MHE-Demag (P), Inc. 25.0% Manufacturer of Materials and Handling Equipment * Economic interest in the underlying ABS-CBN shares through Lopez Inc. PDRs. ** The Parent Company has 1% direct equity interest in Bayan Telecommunications, Inc., a subsidiary of BayanTel. This excludes the economic interest related to the voting rights assigned to Lopez, Inc.
(b) Reports on SEC Form 17C for the last six months of 2016
Subject of SEC Form 17-C Date Filed
Certification on Qualifications of Independent Directors June 8, 2016
Press Release in connection with the filing of Form 17-Q for the quarter ended June 30, 2016 August 15, 2016
Press Release in connection with the filing of Form 17-Q for the quarter ended September 30, 2016 November 15, 2016
Board of Directors Attendance for the year 2016 January 5, 2017
Date, Time and Place of Annual Stockholders’ Meeting March 16, 2017 for June 8, 2017
Approval of the audited financial statements as of and April 6, 2017 for the year ended December 31, 2016
27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 LOPEZ HOLDINGS CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES
FORM 17-A, Item 7
Page No. Consolidated Financial Statements
Statement of Management’s Responsibility for Financial Statements Report of Independent Auditors Consolidated Financial Position as of December 31, 2016 and 2015 Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014 Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014 Consolidated Statements of Changes in Equity for the years ended December 31, 2016, 2015 and 2014 Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014 Notes to Consolidated Financial Statements
Supplementary Schedules
Report of Independent Public Accountants on Supplementary Schedules
A. Financial Assets B. Amounts Receivable from Directors, Officers, Employees, Related Parties and Principal Stockholders (Other than Affiliates) * C. Amounts Receivable from Related Parties which are Eliminated during the Consolidation of Financial Statements D. Intangible Assets - Other Assets E. Long-term Debt F. Indebtedness to Affiliates and Related Parties (Long-term Loans from Related Companies) * G. Guarantees of Securities of Other Issuers * H. Capital Stock
Reconciliation of Retained Earnings Available for Dividend Declaration Schedule of Effective Standards and Interpretations Map of the Relationships of the Companies Within the Group Financial Ratios
* These schedules, which are required by SRC Rule 68, as amended have been omitted because they are either not required, not applicable or the information required to be presented is included in the Company’s consolidated financial statements or notes thereto.
Receivable from certain officers and employees were made in the ordinary course of business
Total indebtedness to Related Parties does not exceed 5% of total assets as shown in the balance sheet at either the end or beginning of the year.
The Parent Company is not a financial guarantor of obligations of any unconsolidated entity.
41 42 C O V E R S H E E T for AUDITED FINANCIAL STATEMENTS
SEC Registration Number A S 9 3 0 0 4 3 6 9
C O M P A N Y N A M E L O P E Z HOLDINGS CORPORATION AND
SUBSIDIARIES
PRINCIPAL OFFICE ( No. / Street / Barangay / City / Town / Province ) 4 t h Fl o o r , Benpr e s Bu i l d i ng , E
x chang e Road , Pas i g Ci t y 1605
Form Type Department requiring the report Secondary License Type, If Applicable AAFS CRMD NA
C O M P A N Y I N F O R M A T I O N Company’s Email Address Company’s Telephone Number Mobile Number www.lopez-holdings.ph 910-3040 N/A
No. of Stockholders Annual Meeting (Month / Day) Fiscal Year (Month / Day) 8,663 June 8 December 31
CONTACT PERSON INFORMATION The designated contact person MUST be an Officer of the Corporation Name of Contact Person Email Address Telephone Number/s Mobile Number Mr. Salvador G. Tirona [email protected] 910-3040 N/A
CONTACT PERSON’s ADDRESS
4/F Benpres Bldg., Exchange Road, Pasig City 1605
NOTE 1 : In case of death, resignation or cessation of office of the officer designated as contact person, such incident shall be reported to the Commission within thirty (30) calendar days from the occurrence thereof with information and complete contact details of the new contact person designated. 2 : All Boxes must be properly and completely filled-up. Failure to do so shall cause the delay in updating the corporation’s records with the Commission and/or non-receipt of Notice of Deficiencies. Further, non-receipt of Notice of Deficiencies shall not excuse the corporation from liability for its deficiencies.
*SGVFS024294* CONTENTS
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY CONSOLIDATED STATEMENTS OF CASH FLOWS
Abbreviations/Acronyms Used in the Notes to Consolidated Financial Statements
Notes to Financial Statements 1. Corporate Information………………………………………………………...…………………………………………………… 1 2. Summary of Significant Accounting Policies………………………………………………………………………………. 1 3. Significant Accounting Judgments and Estimates……………..………………...……………………………………. 29 4. Operating Segment Information………………………………………………...……………………….……………………. 40 5. Subsidiaries, Significant Acquisitions and Discontinued Operations…………..……………………….……… 44 6. Cash and Cash Equivalents and Short-term Investments………..…………………………………………………. 52 7. Trade and Other Receivables……………………………………...……………………………………..……………………… 53 8. Inventories……………………………………………………………………………………………….……………………………….. 54 9. Other Current Assets……………………………………………...……………………………………...………………………… 56 10. Investments Accounted for at Equity Method……………………...…………………………………………………… 56 11. Financial Assets………………………………..…………………………………………………...…………………………………. 63 12. Property, Plant and Equipment…………………………………………………………………………..…………………….. 66 13. Investment Properties…………………………………………………………………………………....………………………… 72 14. Goodwill and Intangible Assets………………………………………………………………………….………………………. 73 15. Other Noncurrent Assets………………………………………………………………………………....……………………….. 75 16. Loans Payable……………………………………………………………………………………………………………………………. 78 17. Trade Payables and Other Current Liabilities…………………………………………………………………………….. 78 18. Long-term Debts……………………………………………………………………………………………………………………….. 80 19. Asset Retirement and Preservation Obligations…………………………………………………………..……………. 91 20. Other Noncurrent Liabilities……………………………………………………………………………..………………………. 92 21. Equity…………………………………………………………………………………………………….…………………………………. 93 22. Executive Stock Option Plan and Employee Stock Purchase Plan………………………………………………. 97 23. Costs and Expenses……………………………………………………………………………………………………………………. 99 24. Finance Costs, Finance Income, Depreciation and Amortization, and Other Income 101 (Charges)……….…………………………………………………………………………………………………………………………. 25. Retirement Benefits……………………………………………………………………………………..………………………….. 102 26. Income Taxes…………………………………………………………………………………………….……………………………… 112 27. EPS Computation………………………………………………………………………………………..……………………………. 114 28. Related Party Disclosures……………………………………………………………………………...... ……………………… 115 29. Registration with the BOI and Philippine Economic Zone Authority (PEZA)………………………….….. 117 30. Financial Risk Management Objectives and Policies………………………………………………………………… 118 31. Financial Instruments…………………………………………………………………………………….………………………… 130 32. Significant Contracts, Franchise and Commitments……………………………………………………..…………… 136 33. Contingencies…………………………………………………………………………………………….……………………………… 147 34. Other Matters…………………………………………………………………………………………….……………………………… 149 35. Notes to Consolidated Statements of Cash Flows……………………………………………………….…………….. 150 36. Events after the Reporting Date………………………………………………………………………….…………………….. 150 37. Standards Issues but not yet Effective…………………………………………………………………...…………………. 151
*SGVFS024294* SyCip Gorres Velayo & Co. Tel: (632) 891 0307 BOA/PRC Reg. No. 0001, 6760 Ayala Avenue Fax: (632) 819 0872 December 14, 2015, valid until December 31, 2018 1226 Makati City ey.com/ph SEC Accreditation No. 0012-FR-4 (Group A), Philippines November 10, 2015, valid until November 9, 2018
INDEPENDENT AUDITOR’S REPORT
The Board of Directors and Stockholders Lopez Holdings Corporation 4th Floor, Benpres Building Exchange Road, Pasig City
Opinion
We have audited the consolidated financial statements of Lopez Holdings Corporation and its subsidiaries (the Group), which comprise the consolidated statements of financial position as at December 31, 2016 and 2015, and the consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for each of the three years in the period ended December 31, 2016, and notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2016 and 2015, and its consolidated financial performance and its consolidated cash flows for each of the three years in the period ended December 31, 2016 in accordance with Philippine Financial Reporting Standards (PFRSs).
Basis of Opinion
We conducted our audits in accordance with Philippine Standards on Auditing (PSAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the Code of Ethics for Professional Accountants in the Philippines (Code of Ethics) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in the Philippines, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements. *SGVFS024294*
A member firm of Ernst & Young Global Limited - 2 -
Recoverability of Goodwill Associated with the Acquisition of Energy Development Corporation (EDC)
Under PFRSs, the Group is required to test the recoverability of goodwill annually, or more frequently, if events or changes in circumstances indicate that the carrying value may be impaired. As at December 31, 2016, the Group has goodwill amounting to =48,254P million, of which P=45,217 million resulted from the Group’s acquisition of EDC in 2007. The Group’s recoverability test of goodwill is significant to our audit because the amount of goodwill is material to the consolidated financial statements. In addition, the assessment process involves significant management judgment about future market conditions and estimation based on assumptions such as gross margin, economic growth rate and discount rate. The related disclosures on the Group’s goodwill are included in Notes 3 and 14 to the consolidated financial statements.
Audit response
We obtained an understanding of the Group’s recoverability assessment process and related controls. We involved our internal specialist in evaluating the assumptions and methodology used. We compared the forecasted cash flow assumptions used in the recoverability testing such as budgeted gross margin to the historical performance of EDC. We also compared the estimated volume and price of electricity to be sold to the contracted customers and to the spot market with historical information. In addition, we compared the economic growth rate used by management with those reflected in the published economic forecast as well as relevant industry outlook. Likewise, we evaluated the discount rate used and assessed whether this is consistent with market participant assumptions for similar assets. We also reviewed the Group’s disclosures about those assumptions to which the outcome of the recoverability test is most sensitive, specifically those that have the most significant effect on the determination of the recoverable amount of goodwill.
Recoverability of Exploration and Evaluation Assets
The ability of the Group, through EDC, to recover its exploration and evaluation assets depends on the commercial viability of the geothermal reserves. The carrying value of exploration and evaluation assets as at December 31, 2016 amounted to =3,109P million which is considered material to the consolidated financial statements. This matter is important to our audit because of the substantial amount of exploration and evaluation assets and the significant management judgment involved in performing a recoverability review. The related disclosures on exploration and evaluation assets are included in Notes 3 and 12 to the consolidated financial statements.
Audit response
We obtained an understanding of the Group’s capitalization policy and tested whether the policy has been applied consistently. We obtained management’s assessment on the recoverability of the exploration and evaluation assets, and inquired into the status of these projects and their future plan of operation. We obtained the status of each exploration project as of December 31, 2016, as certified by EDC’s technical group head, and compared it with the disclosures submitted to regulatory agencies. We reviewed the terms of contracts and agreements, and the budget for exploration costs. We inspected the licenses and permits of each exploration project to determine that the period for which the Group has the right to explore in the specific area has not expired or is not expiring in the near future. We also inquired with management about the project areas that are expected to be abandoned or any exploration activities that are planned to be discontinued in those areas.
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Provisions and Contingencies
As discussed in Note 33 to the consolidated financial statements, several companies within the Group are involved in legal proceedings and assessments for national taxes. This matter is significant to our audit because the estimation of the potential liability resulting from these tax assessments requires significant judgment by management. The inherent uncertainty over the outcome of these tax matters is brought about by the differences in the interpretation and application of the laws and tax rulings. Any change on these assumptions and the estimates may have a material impact on the Group’s consolidated financial statements.
Audit response
We obtained the opinions of the Group’s external and internal tax counsels and correspondences with the relevant tax authorities. We discussed with management the status of the tax assessments and whether any provision for tax contingencies should be recognized. We involved our internal specialist in the evaluation of management’s assessment on whether any provision for tax contingencies should be recognized, and the estimation of such amount. We evaluated the tax position of the Group by considering the tax laws, rulings and jurisprudence.
Accounting for Revenue under Percentage of Completion Method
The Group applies the percentage of completion (POC) method in determining the real estate revenue and cost of Rockwell Land Corporation (Rockwell Land). Rockwell Land’s real estate revenue accounts for 10.43% of total consolidated revenues and cost of real estate accounts for 11.25% of the total consolidated costs and expenses. The assessment of the physical stage of completion and the total estimated costs requires technical determination by management’s project development engineers. In addition, the Group considers a percentage of collection over the total selling price (buyer’s equity), as one of the criteria in order to initiate revenue recognition. The percentage is representative of the buyer’s continuing commitment with the sales agreement and the level at which management has assessed the probability of inflow of economic benefits to the Group. The assessment of the stage of completion, total estimated costs and level of buyer’s equity involves significant management judgment as disclosed in Note 3 to the consolidated financial statements.
Audit response
We obtained an understanding of the Group’s processes for determining the POC, and for determining and updating the total estimated costs, and performed tests of the relevant controls of these processes. We obtained the certified POC reports prepared by the project development engineers and third party contractors and assessed their competence and objectivity by reference to their qualifications, experience and reporting responsibilities. For selected projects, we conducted ocular inspections, made relevant inquiries and obtained the supporting details of the POC reports showing the stage of completion of the major activities of the construction projects. We obtained the approved total estimated costs and any revisions thereto, including supporting documents such as project contract and contractor’s billings, and made relevant inquiries. We evaluated management’s basis of the buyer’s equity by comparing this to the historical analysis of sales collections from buyers.
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Investment in Philippine Depository Receipts (PDRs)
As discussed in Note 3, the Group has investments in PDRs with underlying interest in ABS-CBN Corporation (ABS-CBN) shares. These investments in PDRs are accounted for using the equity method. This matter is significant to our audit because the Group’s equity in net earnings of ABS-CBN for the year ended December 31, 2016 amounted to P2,196 million, representing 11% of consolidated net income. The Group’s share in the earnings of ABS-CBN is significantly affected by the revenue recognition of ABS-CBN. The revenue recognition process of ABS-CBN is highly-automated and the amounts recognized depend on the calculated rates using a pricing scheme where billings are based on the actual ratings when the advertisements were aired and, hence, results in variations in airtime billings. The Group’s share in the earnings of ABS-CBN is also significantly affected by the periodic examinations by tax authorities, which may result in taxation issues due to different interpretation of the tax laws. The determination of whether a provision should be recognized and the estimation of the potential liability resulting from the outcome of these tax examinations require significant judgment by management. Any change on these assumptions and the estimates may have a material impact on the Group’s consolidated financial statements.
Audit response
We obtained the consolidated financial information of ABS-CBN and recomputed the Group’s equity in net earnings of ABS-CBN and compared it with the amounts recognized in the books. We updated our understanding of the airtime revenue process of ABS-CBN and tested the relevant controls. We involved our specialist in our evaluation of the information technology general controls of the relevant systems. For selected sample billings, we tested the airtime rates by comparing the television ratings used against third-party television ratings reports and recomputed the billed amounts. With respect to taxation issues, our audit procedures focused on the evaluation of management’s assessment on whether any provision for tax contingencies should be recognized and the estimation of such amount. We involved our specialist in the evaluation of management’s tax position by considering the correspondences with the relevant tax authorities, opinions of the third party tax counsel and any relevant historical and recent judgments issued by the court/tax authorities. We also performed a review of subsequent events for any developments that may impact management’s tax position.
Other Information Management is responsible for the other information. The other information comprises the SEC Form 17-A for the year ended December 31, 2016 but does not include the consolidated financial statements and our auditor’s report thereon, which we obtained prior to the date of this auditor’s report, and the SEC Form 20‑IS (Definitive Information Statement) and Annual Report for the year ended December 31, 2016, which are expected to be made available to us after that date.
Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.
In connection with our audits of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audits, or otherwise appears to be materially misstated.
If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. *SGVFS024294*
A member firm of Ernst & Young Global Limited - 5 -
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with PFRSs, 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.
In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with PSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with PSAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
· Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
· Obtain an understanding of internal control relevant to the audit 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 Group’s internal control.
· Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
· Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to
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the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
· Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
· Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is Editha V. Estacio.
SYCIP GORRES VELAYO & CO.
Editha V. Estacio Partner CPA Certificate No. 91269 SEC Accreditation No. 1136-AR-1 (Group A), September 2, 2014, valid until September 1, 2017 Tax Identification No. 178-486-845 BIR Accreditation No. 08-001998-94-2016, January 3, 2017, valid until January 2, 2020 PTR No. 5908695, January 3, 2017, Makati City
April 6, 2017
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A member firm of Ernst & Young Global Limited LOPEZ HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Amounts in Millions)
December 31 2016 2015
ASSETS
Current Assets Cash and cash equivalents (Notes 6, 30 and 31) P=31,531 P=40,577 Short-term investments (Notes 6, 30 and 31) 5,936 6,577 Trade and other receivables (Notes 7, 15, 28, 30 and 31) 30,704 26,804 Inventories (Note 8) 17,432 16,726 Other current financial assets (Notes 11, 18, 30 and 31) 2,991 3,223 Prepayments and other current assets (Notes 9 and 15) 10,993 8,916 99,587 102,823 Assets of discontinued operations held for sale (Note 5) – 720 Total Current Assets 99,587 103,543
Noncurrent Assets Property, plant and equipment (Notes 12 and 18) 141,205 133,022 Goodwill and intangible assets (Note 14) 52,406 53,183 Investments accounted for at equity method (Notes 10 and 28) 21,034 19,461 Investment properties (Notes 13 and 18) 16,378 13,661 Available-for-sale financial assets (Notes 11, 30 and 31) 12,940 14,727 Deferred tax assets - net (Note 26) 2,582 2,380 Other noncurrent financial assets (Notes 11, 30 and 31) 1,495 1,347 Other noncurrent assets (Notes 15, 30 and 31) 18,623 17,260 Total Noncurrent Assets 266,663 255,041
TOTAL ASSETS P=366,250 P=358,584
LIABILITIES AND EQUITY
Current Liabilities Trade payables and other current liabilities (Notes 17, 28, 30, 31 and 33) P=31,324 P=29,379 Loans payable (Notes 16, 30 and 31) 812 1,183 Current portion of long-term debts (Notes 18, 30 and 31) 18,293 17,752 Income tax payable 739 516 51,168 48,830 Liabilities related to assets of discontinued operations held for sale (Note 5) – 2,069 Total Current Liabilities 51,168 50,899
Noncurrent Liabilities Long-term debts - net of current portion (Notes 18, 30 and 31) 144,654 152,067 Deferred tax liabilities - net (Note 26) 3,951 3,279 Retirement and other long-term employee benefits liability (Note 25) 2,617 3,450 Asset retirement and preservation obligations (Notes 12, 19 and 24) 1,867 1,863 Other noncurrent liabilities (Notes 8, 17, 20, 30, 31 and 33) 1,651 1,610 Derivative liabilities (Note 31) 817 1,247 Total Noncurrent Liabilities 155,557 163,516 Total Liabilities (Carried Forward) 206,725 214,415 *SGVFS024294* - 2 -
December 31 2016 2015 Total Liabilities (Brought Forward) P=206,725 P=214,415
Equity Common stock (Note 21a) 4,626 4,598 Capital in excess of par value (Note 21a) 229 83 Unrealized fair value gains on investments in available-for-sale financial assets (Note 11) 1,628 2,771 Cumulative translation adjustments (Note 31e) (3,030) (3,562) Equity reserve (Notes 5 and 21c) (5,473) (5,366) Share-based payment plans (Note 22) 7 54 Retained earnings (Note 21b) 55,412 49,922
Equity Attributable to Equity Holders of the Parent 53,399 48,500
Non-controlling Interests (Notes 5 and 21d) 106,126 95,669 Total Equity 159,525 144,169
TOTAL LIABILITIES AND EQUITY P=366,250 P=358,584
See accompanying Notes to Consolidated Financial Statements.
*SGVFS024294* LOPEZ HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in Millions, Except Per Share Data)
Years Ended December 31 2016 2015 2014 REVENUES Sale of electricity (Notes 4, 5, 12 and 32) P=74,284 P=83,407 P=84,384 Real estate 10,668 7,547 7,777 Contracts and services 4,931 3,595 5,255 Sale of merchandise 2,027 1,961 1,885 91,910 96,510 99,301 COSTS AND EXPENSES Sale of electricity (Note 23) 41,267 52,051 52,268 Real estate (Notes 8 and 23) 8,578 5,275 5,441 Contracts and services (Note 23) 3,127 2,013 4,568 Merchandise sold (Notes 8 and 23) 1,643 1,325 1,602 General and administrative expenses (Note 23) 12,793 14,006 13,809 67,408 74,670 77,688 OTHER INCOME (EXPENSES) Earnings from investments accounted for at equity method (Note 10) 2,328 1,789 1,463 Finance costs (Note 24) (9,236) (9,035) (8,947) Finance income (Note 24) 1,888 1,602 1,616 Foreign exchange loss - net (706) (1,526) (115) Dividend income (Notes 10 and 11) 1,169 730 598 Recovery of impairment loss - net (Notes 8, 11, 12 and 15) – 2,600 2,059 Other income - net (Note 24) 6,610 2,217 1,851 2,053 (1,623) (1,475) INCOME BEFORE INCOME TAX 26,555 20,217 20,138 PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 26) Current 5,769 4,283 4,460 Deferred 42 (192) (82) 5,811 4,091 4,378 NET INCOME P=20,744 P= 16,126 P=15,760 Net Income Attributable to Equity holders of the Parent P=6,557 P=6,191 P=3,760 Non-controlling interests 14,187 9,935 12,000 P=20,744 P=16,126 P=15,760 Earnings per Share for Net Income Attributable to the Equity Holders of the Parent (Note 27) Basic P=1.4206 P=1.3496 P=0.8188 Diluted 1.4117 1.3418 0.8186
See accompanying Notes to Consolidated Financial Statements.
*SGVFS024294* LOPEZ HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Millions)
Years Ended December 31 2016 2015 2014
NET INCOME P=20,744 P=16,126 P=15,760
OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive gains (losses) to be reclassified to profit or loss in subsequent periods: Exchange gains (losses) on foreign currency translation - net of tax 1,168 (3,206) (1,967) Unrealized fair value gains (losses) on AFS investments - net of tax (Note 11) (2,442) 2,935 175 Net gains (losses) on cash flow hedge deferred in equity - net of tax (Note 31) 32 205 (17) (1,242) (66) (1,809) Other comprehensive gains (loss) not to be reclassified to profit or loss in subsequent periods: Remeasurement of retirement and other post- employment benefits - net of tax (Note 25) (314) (153) 205 (1,556) (219) (1,604) TOTAL COMPREHENSIVE INCOME P=19,188 P=15,907 P=14,156 Total Comprehensive Income Attributable to Equity holders of the Parent P=5,803 P=6,484 P=3,574 Non-controlling Interests 13,385 9,423 10,582 P=19,188 P=15,907 P=14,156
See accompanying Notes to Consolidated Financial Statements.
*SGVFS024294* LOPEZ HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 (Amounts in Millions)
Equity Attributable to Equity Holders of the Parent Company Unrealized Fair Value Gains on Capital in Share-based Investment Cumulative Equity Common Stock Excess of Payment Plans in Equity Translation Reserve Retained Non-controlling Total (Note 21) Par Value (Note 22) Securities Adjustments (Note 21) Earnings Total Interests Equity
Balance at January 1, 2016 P=4,598 P=83 P=54 P=2,771 (P=3,562) (P=5,366) P=49,922 P=48,500 P=95,669 P=144,169 Net income – – – – – – 6,557 6,557 14,187 20,744 Other comprehensive income (loss) – – – (1,143) 532 – (143) (754) (802) (1,556) Total comprehensive income (loss) – – – (1,143) 532 – 6,414 5,803 13,385 19,188 Cash dividends (Note 21) – – – – – – (924) (924) – (924) Cash dividends declared by subsidiaries – – – – – – – – (2,172) (2,172) Exercise of options (Note 21) 28 146 (47) – – – – 127 – 127 Transactions with non-controlling interests (Notes 5 and 21) – – – – – (107) – (107) (756) (863) Subtotal 28 146 (47) – – (107) (924) (904) (2,928) (3,832) Balance at December 31, 2016 P=4,626 P=229 P=7 P=1,628 (P=3,030) (P=5,473) P=55,412 P=53,399 P=106,126 P=159,525
Balance at January 1, 2015 P=4,593 P=54 P=63 P=1,415 (P=2,479) (P=5,529) P=44,174 P=42,291 P=87,276 P=129,567 Net income – – – – – – 6,191 6,191 9,935 16,126 Other comprehensive income (loss) – – – 1,356 (1,083) – 20 293 (512) (219) Total comprehensive income (loss) – – – 1,356 (1,083) – 6,211 6,484 9,423 15,907 Share-based payments – – 1 – – – – 1 – 1 Cash dividends (Note 21) – – – – – – (463) (463) – (463) Cash dividends declared by subsidiaries – – – – – – – – (2,346) (2,346) Transactions with non-controlling interests (Notes 5 and 21) – – – – – 163 – 163 (489) (326) Exercise of options (Note 21) 5 29 (10) – – – – 24 – 24 Issuances by a subsidiary – – – – – – – – 1,805 1,805 Subtotal 5 29 (9) – – 163 (463) (275) (1,030) (1,305) Balance at December 31, 2015 P=4,598 P=83 P=54 P=2,771 (P=3,562) (P=5,366) P=49,922 P=48,500 P=95,669 P=144,169
Balance at January 1, 2014 P=4,588 P=31 P=69 P=1,319 (P=1,563) (P=3,774) P=40,112 P=40,782 P=75,907 P=116,689 Net income – – – – – – 3,760 3,760 12,000 15,760 Other comprehensive income (loss) – – – 96 (1,119) – (187) (1,210) (606) (1,816) Total comprehensive income (loss) – – – 96 (1,119) – 3,573 2,550 11,394 13,944 Share-based payments – – (6) – – – – (6) – (6) Cash dividends (Note 23) – – – – – (463) (463) – (463) Cash dividends declared by subsidiaries – – – – – – – – (2,169) (2,169) Transactions with non-controlling interests (Notes 5 and 21) – – – – 203 (1,755) 952 (600) 304 (296) Exercise of options (Note 21) 5 23 – – – – – 28 – 28 Issuances by a subsidiary – – – – – – – – 1,840 1,840 Subtotal 5 23 (6) – 203 (1,755) 489 (1,041) (25) (1,066) Balance at December 31, 2014 P=4,593 P=54 P=63 P=1,415 (P=2,479) (P=5,529) P=44,174 P=42,291 P=87,276 P=129,567 See accompanying Notes to Consolidated Financial Statements. *SGVFS024294* LOPEZ HOLDINGS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Millions)
Years Ended December 31 2016 2015 2014 CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P=26,555 P=20,217 P=20,138 Adjustments to reconcile income before income tax to net cash flows: Depreciation and amortization (Note 24) 13,506 10,469 8,718 Finance costs (Note 24) 9,236 9,035 8,947 Earnings from investment accounted for under equity method (Note 10) (2,328) (1,789) (1,463) Finance income (Note 24) (1,888) (1,602) (1,616) Dividend income (Notes 10 and 11) (1,169) (730) (598) Unrealized foreign exchange loss (gain) - net 706 1,526 115 Movements in retirement benefit liability (Note 25) 694 403 205 Gain on sale of property, plant and equipment and investment properties (Note 24) (175) (131) – Excess of the carrying amount of obligation over buy- back price (Note 20) (115) (4) (118) Recovery from impairment loss - net (Notes 11, 12 and 15) – (2,600) (2,059) Unrealized fair value loss (gain) on fair value through profit or loss investments (Notes 9 and 24) – (1) (2) Share-based payment transaction expense – 1 1 Working capital changes: Decrease (increase) in: Trade and other receivables (3,576) 4,971 (5,608) Inventories (669) (1,508) (1,849) Other current assets (3,969) (5,355) (450) Increase (decrease) in: Trade payables and other current liabilities 983 (1,442) 5,539 Net cash generated from operations 37,791 31,460 29,900 Income taxes paid (5,545) (4,697) (3,749) Interest received 1,888 1,602 1,647 Net cash from operating activities 34,134 28,365 27,798 CASH FLOWS FROM INVESTING ACTIVITIES Additions to: Property, plant and equipment (Note 12) (16,998) (22,210) (30,632) Investment properties (Note 13) (3,011) (1,310) (1,632) AFS financial assets (Note 11) – (642) – Investment in associates and a joint venture (Note 10) – (183) (648) Investment in PDRs (Note 10) – (21) – Acquisition of a subsidiary - inclusive of cash acquired (Note 5) – – (134) (Forward)
*SGVFS024294* - 2 -
Years Ended December 31 2016 2015 2014 Decrease (increase) in: Short-term investments P=933 (P=1,242) (P=2,659) Other noncurrent assets (Note 15) (259) (767) (4,092) Dividends received from associates/PDRs and a joint venture (Note 10) 326 52 50 Dividends received from AFS financial assets (Note 11) 1,116 678 551 Proceeds from: Sale of property and equipment and investment properties (Notes 12 and 13) 474 207 1,170 Sale of AFS financial assets (Note 11) – 8 – Sale of investments in associates – 18 – Net cash used in investing activities (17,419) (25,412) (38,026) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from: Availment of long-term debts - net of debt issuance costs (Note 18) 8,383 28,046 24,780 Availment of short-term loans (Note 16) 812 275 1,100 Issuances of common shares (net of transaction costs) by a subsidiary to non-controlling shareholders (Note 21) 15 14 1,840 Payments of: Long-term debts (Notes 17 and 18) (20,219) (23,227) (7,815) Interest (9,101) (9,206) (9,901) Loans (Note 16) (1,167) (2,809) Cash dividends (Note 21) (924) (463) (463) Maturity of short-term loans (1,183) – – Dividends to non-controlling interests (2,172) (2,346) (2,164) Acquisition of non-controlling interests (Notes 5 and 21) (509) (88) (517) Increase (decrease) in other noncurrent liabilities (992) 57 62 Net cash from (used in) financing activities (25,890) (8,105) 4,113 NET DECREASE IN CASH AND CASH EQUIVALENTS (9,175) (5,152) (6,115) EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 129 (932) (613) CASH RELATED TO ASSETS HELD FOR SALE (Note 5) – (20) (24) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 40,577 46,681 53,433 CASH AND CASH EQUIVALENTS AT END OF YEAR P=31,531 P= 40,577 P=46,681
See accompanying Notes to Consolidated Financial Statements.
*SGVFS024294* ABBREVIATIONS/ACRONYMS USED IN THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ABS-CBN ABS-CBN Corporation FPIC First Philippine Industrial Corporation AFS Available-for-Sale FPH Ventures FPH Ventures Corporation APO Asset Preservation Obligation FPIP First Philippine Industrial Park, Inc. ASPA Ancillary Services Procurement Agreement FPNC First Philec Nexolon Corporation Avion Plant PMPC’s 97 MW Avion Open Cycle Natural FPPC First Philippine Properties Corporation Gas-Fired Power Plant FPPSI First Philippine Power Systems, Inc. BTHC Bayan Telecommunications Holdings FPRC First Philippine Realty Corporation Corporation BTI Bayan Telecommunications, Inc. FPSC First Philec Solar Corporation BEDC Bac-Man Energy Development Corporation FPUC First Philippine Utilities Corporation BGI Bac-Man Geothermal Inc. FRCN Floating Rate Corporate Notes BGMPP Bac-Man Geothermal Power Plant FSRI First Sumiden Realty, Inc. BIR Bureau of Internal Revenue FVPL Fair Value Through Profit or Loss Bluespark Bluespark Management Limited FWVB FWV Biofields Corp. BOC Bureau of Customs FXCN Fixed Rate Corporate Note BOD Board of Directors GCGI Green Core Geothermal Inc. BOI Board of InvestmentsBoard of Directors GCS Geothermal Service Contracts BPPC Bauang Private Power Corporation Globe Globe Telecom, Inc. CA Court of Appeals Goldsilk Goldsilk Holdings CEPALCO Cagayan Electric Power and Light Co., Inc. GRESC Geothermal Renewable Energy Service CGU Cash-Generating Units Contracts COC Certificate of Compliance GSPA Gas Sale and Purchase Agreements COE Certificate of Endorsement GWH Gigawatt hours
CTA Court of Tax Appeals Hot Rock Entities Hot Rock Peru BVI and Hot Rock Chile BVI CWA Completion Works Agreement HSC HydroPower Service Contract DENR Department of Environmental and Natural HTM Held to Maturity Resources DSRA Debt Service Reserve Account IAS International Accounting Standards Dualcore Dualcore Holdings, Inc. ICC International Chamber of Commerce EBWPC EDC Burgos Wind Power Corporation IFC International Finance Corp ECC Environmental Compliance Certificate ITH Income Tax Holiday EDC Energy Development Corporation LBAA Local Board of Assessment Appeals EDC HKL EDC Hong Kong Limited LIBOR London InterBank Offered Rate EHIL EDC Holdings International Limited LIRF Lopez Inc. Retirement Fund EIR Effective Interest Rate Lopez, Inc. Lopez EPBWPC EDC Pagali Burgos Wind Power Corporation Lopez Holdings/ Lopez Holdings Corporation Parent Company EPC Engineering, Procurement and Construction Maybank ATR Maybank ATR KimeEng Capital Partners, Inc. EPCo Energy Project Completion Ltd. MCIT Minimum Corporate Income Tax EPIRA Electric Power Industry Reform Act Meralco Manila Electric Company EPS Earnings per Share MOA Memorandum of Agreement ESOP Executive Stock Option Plan MTU BB MTU-BB Maintenance Berlin-Brandenburg GmbH ESPP Employee Stock Purchase Plan MW Megawatts FAN Final Assessment Notice Narra Venture Narra Venture Capital Management II, LLC FCRS Fluid Collection and Recycling System NDC Net Dependapble Capacity FG Bukidnon FG Bukidnon Power Corp. NDCC Non-deliverable cross-currency swap FG Hydro First Gen Hydro Power Corporation NEECO II Nueva Ecija II Electric Cooperative, Inc. FGEN Northern FGen Northern Power Corp. Nexolon Nexolon Co. Ltd Power NGCP National Grid Corporation of the Philippines FGES First Gen Energy Solutions, Inc. NIA National Irrigation Administration FGHC First Gas Holdings Corporation NNGP Northern Negros Geothermal Power Plant FGHC FGHC International Limited NOLCO Net Operating Loss Carryover International FGNEC First Gen Northern Energy Corp. Northern Terracotta Northern Terracotta Power Corporation FGP FGP Corp. NPC National Power Corporation FGPC First Gas Power Corporation NRV Net Realizable Value First Balfour First Balfour, Inc. O&M Operating and Maintenance First Gen First Gen Corporation OCI Other Comprehensive Income First Philec First Philippine Electric Corporation Onecore Onecore Holdings, Inc. First PV First PV Ventures Corporation PAHEP/MAHEP Pantabangan Hydroelectric Power FIT Feed-in Tariff Plant/Masiway Hydroelectric Power Plant FITI First Industrial Township Inc. PECO Panay Electric Company FITUI First Industrial Township Utilities Inc. PAS Philippine Accounting Standards FITWI First Industrial Township Water Inc. PDEx Philippine Dealing & Exchange Corp FLVI FPH Land Venture, Inc. PDRs Philippine Deposit Receipts FNPC First NatGas Power Corporation PDST Philippine Dealing System Treasury FPDC First Philippine Development Corp. PEMC Philippine Electricity Market Corporation FPH First Philippine Holdings Corporation PEZA Philippine Economic Zone Authority FPH Fund FPH Fund Corporation PFRS/PFRSs Philippine Financial Reporting Standards *SGVFS024294* ABBREVIATIONS/ACRONYMS USED IN THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PMPC Prime Meridian Powergen Corporation PPA Power Purchase Agreement Prime Terracotta Prime Terracota Holdings Corporation PSA Power Supply Agreement PSALM Power Sector Assets and Liabilities PSE Philippine Stock Exchange QRC Quialex Realty Corp. RBC Rockwell Business Center RE Law Renewable Energy Law Red Vulcan Red Vulcan Holdings Corporation REPA Renewable Energy Payment Agreement RNI Recurring Net Income Rockwell Land Rockwell Land Corporation Rockwell Primaries Rockwell Primaries Development Corporation RSC Retail Service Contract San Gabriel 414 MW San Gabriel Power Plant SBLC Stand-By Letters of Credit SEC Securities and Exchange Commission SESC Solar Energy Service Contract SGX-ST Singapore Exchange Securities Trading Limited SIA Substation Interconnection Agreement SPML SunPower Philippines Manufacturing Limited SPOI Siemens Power Operations, Inc. SSA Steam Sales Agreement TCC Tax Credit Certificates TEPO Temporary Environmental Protection Order TOPQ Take-Or-Pay Quantity TRA Trust and Retention Agreement TransCo National Transmission Corporation VAT Value Added Tax WESC Wind Energy Service Contract WESM Wholesale Electricity Spot Market
*SGVFS024294* LOPEZ HOLDINGS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate Information
Lopez Holdings Corporation (Lopez Holdings or the Parent Company) was incorporated and registered with the Philippine Securities and Exchange Commission (SEC) on June 8, 1993. The Parent Company is involved in the management and investment holdings of subsidiaries and associates. The Parent Company’s subsidiaries are involved in the power generation, manufacturing of electrical and electronic components, property development, and construction. The Parent Company’s associates are mainly involved in the business of broadcasting and entertainment.
The Parent Company is a 52.5%-owned subsidiary of Lopez, Inc. (Lopez), also a Philippine entity and its ultimate parent company.
The common shares of the Parent Company were listed in November 1993 and have since been traded in the Philippine Stock Exchange (PSE).
The registered office address of the Parent Company is 4th Floor, Benpres Building, Exchange Road, Pasig City 1605.
The consolidated financial statements were approved and authorized for issue by the Board of Directors (BOD) on April 6, 2017, as reviewed and recommended for approval by the Audit Committee on April 6, 2017.
2. Summary of Significant Accounting Policies
Basis of Preparation The consolidated financial statements are prepared in compliance with Philippine Financial Reporting Standards (PFRSs) as issued by the Philippine Financial Reporting Standards Council and adopted by the Philippine SEC.
The consolidated financial statements are prepared on a historical cost basis, except for derivative financial instruments, financial assets and financial liabilities at fair value through profit or loss (FVPL) and available-for-sale (AFS) financial assets which are measured at fair value. The consolidated financial statements are presented in Philippine peso, the Parent Company’s functional and presentation currency. All values are rounded to the nearest million peso, except when otherwise indicated.
Basis of Consolidation The consolidated financial statements include the financial statements of Lopez Holdings and its subsidiaries (“the Group”) as at December 31 each year and for the years then ended. The Group controls an investee if and only if the Group has:
▪ Power over an investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee); ▪ Exposure, or rights, to variable returns from its involvement with the investee; and ▪ The ability to use its power over the investee to affect its returns.
*SGVFS024294* - 2 -
Generally, there is a presumption that a majority of voting rights result in control. To support the presumption and when the Group has less than a majority of the voting rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over the investee, including:
▪ the contractual arrangements with the other vote holders of the investee ▪ rights arising from other contractual arrangements ▪ the Group’s voting rights and potential voting rights
The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control over the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the date the Group gains control until the date when the Group ceases to control the subsidiary.
Profit or loss and each component of other comprehensive income are attributed to the owners of the Parent Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group’s accounting policies. All intra-group asset, liabilities, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.
A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. Any excess or deficit of consideration paid over the carrying amount of the non-controlling interest is recognized as part of “Equity reserve” account in the equity attributable to the equity holders of the Parent Company.
If the Group loses control over a subsidiary, it derecognizes the related assets (including goodwill), liabilities, non-controlling interest and other components of equity while any resultant gain or loss is recognized in profit or loss. Any movement retained is recognized at fair value.
Non-controlling Interests Non-controlling interests represent the portion of profit or loss and net assets not held by the Group. Non-controlling interests are presented separately in the consolidated statement of income, consolidated statement of comprehensive income and within equity in the consolidated statement of financial position and consolidated statement of changes in equity, separate from equity attributable to equity holders of the Parent Company.
The acquisition of an additional ownership interest in a subsidiary without a change of control is accounted for as an equity transaction in accordance with PFRS 10, Consolidated Financial Statements. In transactions where the non- controlling interest is acquired or sold without loss of control, any excess or deficit of consideration paid over the carrying amount of the non- controlling interest is recognized as part of “Equity reserve” account in the equity attributable to the equity holders of the Parent Company.
Changes in Accounting Policies and Disclosures The accounting policies adopted are consistent with those of the previous financial year, except that the Group has adopted the following new accounting pronouncements starting January 1, 2016. Adoption of these pronouncements did not have any significant impact on the Group’s financial position or performance.
*SGVFS024294* - 3 -
§ Amendments to PFRS 10, PFRS 12, Disclosure of Interests in Other Entities, and PAS 28, Investment Entities: Applying the Consolidation Exception § Amendments to PFRS 11, Accounting for Acquisitions of Interests in Joint Operations § PFRS 14, Regulatory Deferral Accounts § Amendments to PAS 1, Disclosure Initiative § Amendments to PAS 16, Property, Plant and Equipments, and PAS 38, Clarification of Acceptable Methods of Depreciation and Amortization § Amendments to PAS 16 and PAS 41, Agriculture: Bearer Plants § Amendments to PAS 27, Equity Method in Separate Financial Statements § Annual Improvements to PFRSs 2012 - 2014 Cycle - Amendment to PFRS 5, Changes in Methods of Disposal - Amendment to PFRS 7, Servicing Contracts - Amendment to PFRS 7, Applicability of the Amendments to PFRS 7 to Condensed Interim Financial Statements - Amendment to PAS 19, Discount Rate: Regional Market Issue - Amendment to PAS 34, Disclosure of Information ‘Elsewhere in the Interim Financial Report’
Business Combination and Goodwill Business combinations are accounted for using the acquisition method. 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 Group elects whether to measure the non-controlling interest in the acquiree either at fair value or at the proportionate share of the fair value of the acquiree’s identifiable net assets. Transaction costs are expensed as incurred and included in general and administrative expenses.
When the Group acquires a business, it assesses the financial assets and financial 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.
If the business combination is achieved in stages, any previously held equity interest is re- measured at its acquisition date fair value and any resulting gain or loss is recognized in profit or loss.
Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of PAS 39, Financial Instruments: Recognition and Measurement, is measured at fair value with changes in fair value recognized either in the consolidated statement of income or as a change to other comprehensive income (OCI).
Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred, the amount recognized for non-controlling interest and any previous interest held over the net identifiable assets acquired and liabilities assumed). If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts recognized at the acquisition date. If the re-assessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognized in profit or loss.
*SGVFS024294* - 4 -
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 Group’s cash generating unit (CGU) or group of CGUs 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 has been allocated to a CGU 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. Goodwill disposed of in this circumstance is measured based on the relative values of the disposed operation and the portion of the CGU retained.
Investments Accounted for at Equity Method These consist of investments in Philippine Deposit Receipts (PDRs), a joint arrangement classified as a joint venture, and associates.
Investment in PDRs is initially recognized at cost. The carrying amount of the investment in PDR is adjusted to recognize the changes in the Group’s share in the net assets of the underlying ABS- CBN Corporation (ABS-CBN).
A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.
An associate is an entity in which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies.
The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries.
Under the equity method, the investment is initially recognized at cost. The carrying amount of the investment is adjusted to recognize changes in the Group’s share of net assets of the joint venture or associate since the acquisition date. Goodwill relating to PDRs, joint venture or associate is included in the carrying amount of the investment and is not tested for impairment separately.
The consolidated statement of income reflects the Group’s share of the results of operations of the joint venture or associate/PDRs. Any change in OCI of those investees is presented as part of the Group’s OCI. In addition, when there has been a change recognized directly in the equity of the joint venture or associate/PDRs, the Group recognizes its share of any changes, when applicable, in the consolidated statement of changes in equity. Unrealized gains and losses resulting from transactions between the Group and the joint venture or associate/PDRs are eliminated to the extent of the Group’s interest in PDRs, joint venture or associate.
The aggregate of the Group’s share of profit or loss of a joint venture or an associate/PDRs is computed based on profit or loss after tax and non-controlling interests in the subsidiaries of the joint venture or associate/PDRs. In the event that the Group’s share of losses of a joint venture or an associate/PDRs equals or exceeds the carrying amount of the investment, the Group discontinues its share of further losses. After the Group’s investment is reduced to zero, additional losses are provided for, and a liability is recognized, only to the extent that the Group has incurred *SGVFS024294* - 5 - legal or constructive obligations or made payments on behalf of the joint venture or associate/PDRs. If the joint venture and associates/PDRs subsequently reports profits, the Group resumes recognizing its share of those profits only after its share of the profits equals the share of net losses not recognized.
The financial statements of the joint venture or associates/PDRs are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group.
After application of the equity method, the Group determines whether it is necessary to recognize an impairment loss on its investment in the joint venture or associate/PDRs. At each financial reporting date, the Group determines whether there is objective evidence that the investment in the joint venture or associate/PDRs is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the joint venture or associate/PDRs and its carrying value, then recognizes the impairment loss in the consolidated statement of income.
Upon loss of joint control over the joint venture or significant influence over the associate/PDRs, the Group measures and recognizes any retained investment at its fair value. Any difference between the carrying amount of the joint venture or associate/PDRs upon loss of significant influence or joint control and the fair value of the retained investment and proceeds from disposal is recognized in the consolidated statement of income.
Joint operations. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries.
The Group recognizes in relation to its interest in a joint operation its: § Assets, including its share of any assets held jointly § Liabilities, including its share of any liabilities held jointly § Revenue from the sale of its share of the output arising from the joint operation § Share of the revenue from the sale of the output by the joint operation § Expenses, including its share of any expenses incurred jointly
Determination of Fair Value The Group measures financial instruments, such as, derivatives, and non-financial assets such as investment properties, at fair value at each balance sheet date. Also, the Group discloses the fair values of financial instruments measured at amortized cost.
Fair value is the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:
▪ In the principal market for the asset or liability, or ▪ In the absence of a principal market, in the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible to the Group.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. *SGVFS024294* - 6 -
A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
▪ Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities ▪ Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable ▪ Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable
For assets and liabilities that are recognized in the consolidated financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.
Current versus Noncurrent Classification The Group presents assets and liabilities in the consolidated statement of financial position based on current/noncurrent classification. An asset is current when:
▪ It is expected to be realized or intended to be sold or consumed in the normal operating cycle; ▪ It is held primarily for the purpose of trading; ▪ It is expected to be realized within twelve months after the financial reporting date; or ▪ It is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the financial reporting date.
All other assets are classified as noncurrent.
A liability is current when:
▪ It is expected to be settled in the normal operating cycle; ▪ It is held primarily for the purpose of trading; ▪ It is due to be settled within twelve months after the financial reporting date; or ▪ There is no unconditional right to defer the settlement of the liability for at least twelve months after the financial reporting date.
All other liabilities are classified as noncurrent.
Deferred tax assets and liabilities are classified as noncurrent assets and liabilities, respectively.
*SGVFS024294* - 7 -
Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible with remaining maturities of three months or less and that are subject to an insignificant risk of change in value.
Short-term Investments Short-term investments are short-term, highly liquid investments that are convertible to known amounts of cash with original remaining of more than three months but less than one year from dates of acquisition.
Financial Assets Initial Recognition and Measurement. Financial assets are classified, at initial recognition, as financial assets at FVPL, loans and receivables, held-to-maturity (HTM) investments, available- for-sale (AFS) financial assets or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial assets are recognized initially at fair value plus, in the case of financial assets not recorded at FVPL, transactions costs that are attributable to the acquisition of the financial asset.
Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the marketplace (regular way trades) are recognized on the trade date, i.e, the date the Group commits to purchase or sell the asset.
“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 Group 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 data which is not observable are used, 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 Group determines the appropriate method of recognizing the “Day 1” difference amount.
Subsequent Measurement. The subsequent measurement of financial assets depends on their classification as described below:
▪ Financial Assets at FVPL. Financial assets at FVPL include financial assets held for trading and financial assets designated upon initial recognition at FVPL. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments as defined by PAS 39.
Financial assets or liabilities may be designated by management on initial recognition as at FVPL 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, 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. *SGVFS024294* - 8 -
Financial assets at FVPL are carried in the consolidated statement of financial position at fair value with net changes in fair value presented as finance costs (negative net changes in fair value) or finance income (positive net changes in fair value) in the consolidated statement of income.
Classified under financial instruments at FVPL are EDC’s and First Gen’s foreign currency forward contracts, call spread swaps, and financial assets at FVPL as at December 31, 2016 and 2015. Changes in fair value are recognized in the profit or loss unless it qualifies under hedge accounting. This category also includes FVPL investments included under “Other current financial assets” and “other noncurrent financial assets” in the consolidated statement of financial position.
▪ Loans and Receivables. This category is the most relevant to the Group. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortized cost using the effective interest rate (EIR) method, less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included in finance income in the consolidated statement of income. The losses arising from impairment are recognized in the consolidated statement of income as impairment loss.
This category includes cash and cash equivalents, short-term investments, trade and other receivables and other deposits and funds.
▪ AFS Investments. AFS investments include equity investments and debt securities. Equity investments classified as AFS are those that are neither classified as held for trading nor designated at FVPL. Debt securities in this category are those that are intended to be held for an indefinite period of time and that may be sold in response to needs for liquidity or in response to changes in the market conditions.
After initial measurement, AFS investments are subsequently measured at fair value in the consolidated statement of financial position with unrealized gains or losses recognized in other comprehensive income and credited to the “Unrealized fair value gain or loss on investment in equity securities” account, net of applicale tax, until the investment is derecognized, or is determined to be impaired, at which time, the cumulative gain or loss is reclassified from unrealized fair value gain or losses on investment in equity securities to the consolidated statement of income. Interest earned while holding AFS investments is reported as finance income using the EIR method.
AFS investments also include unquoted equity investments, which are carried at cost, less any accumulated impairment in value. The fair value of these instruments is not reasonably determinable due to the unpredictable nature of future cash flows and the lack of other suitable methods for arriving at a fair value.
The Group evaluates whether the ability and intention to sell its AFS investments in the near term is still appropriate. When, in rare circumstances, the Group is unable to trade these investments due to inactive markets, the Group may elect to reclassify these AFS investments if the management has the ability and intention to hold the assets for the foreseeable future or until maturity.
For a financial asset reclassified from AFS category, the fair value carrying amount at the date of reclassification becomes its new amortized cost and any previous gain or loss on the asset *SGVFS024294* - 9 -
that has been recognized in equity is amortized to the consolidated statement of income over the remaining life of the investment using the EIR. Any difference between the new amortized cost and the maturity amount is also amortized over the remaining life of the asset using the EIR. If the asset is subsequently determined to be impaired, then the amount recorded in equity is reclassified to the consolidated statement of income.
Derecognition. 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 rights to receive cash flows from the asset have expired; or
▪ the Group 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 the Group (a) 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 Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group’s continuing involvement in the asset. In that case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.
Continuing involvement that takes the form of a guarantee over the transferred assets is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.
Impairment of Financial Assets. The Group assesses, at each financial reporting date, whether there is any objective evidence that a financial asset or group of financial assets is impaired. An impairment exists if one or more events that has occurred after the initial recognition of the asset (an incurred “loss event”), has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. 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 where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
▪ Financial Assets Carried at Amortized Cost. For financial assets carried at amortized cost, the Group first assesses whether impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them 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.
*SGVFS024294* - 10 -
The amount of any impairment 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). The present value of the estimated future cash flows is discounted at the financial asset’s original EIR. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss shall be recognized in the consolidated statement of income. Finance income continues to be accrued on the reduced carrying amount using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Loans, together with associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realized or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is recognized in the consolidated statement of income.
▪ AFS Investments. For AFS investments, the Group assesses at each financial reporting date whether there is objective evidence that an investment or a group of investments is impaired.
In the case of equity investments classified as AFS, objective evidence would include a significant or prolonged decline in fair value of the investments below its cost. “Significant” is evaluated against the original cost of the investment and “prolonged” against the period in which the fair value has been below its original cost. Where there is evidence of impairment, the cumulative loss (measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the consolidated statement of income) is removed from other comprehensive income and recognized in the consolidated statement of income. Impairment losses on equity investments are not reversed in the consolidated statement of income. Increases in fair value after impairment are recognized directly in other comprehensive income.
The determination of what is “significant” or “prolonged” requires judgment. In making the judgment, the Group evaluates, among other factors, the duration or extent to which the fair value of the investment is less than its cost.
In the case of unquoted equity instrument carried at cost, impairment is assessed based on the same criteria as financial assets carried at amortized cost. The amount of 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.
In the case of investment in debt instruments, impairment is assessed based on the same criteria as financial assets carried at amortized cost. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortized cost and the current fair value, less any impairment loss on that investment previously recognized in the consolidated statement of income.
Future finance income continues to be accrued based on the reduced carrying amount of the asset, using the rate of interest used to discount future cash flows for the purpose of measuring impairment loss. If, in subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in the consolidated statement of income, the impairment loss is reversed through the consolidated statement of income.
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Financial Liabilities Initial Recognition and Measurement. Financial liabilities are classified, at initial recognition, as financial liabilities at FVPL, loans and borrowings or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial liabilities are recognized initially at fair value and in case of loans and borrowings, net of directly attributable transaction costs. The Group’s financial liabilities include trade payables and other current liabilities (excluding local and other taxes and payable to government agencies), loans payable and long-term debts. Subsequent Measurement. After initial recognition, interest bearing loans and borrowings (which include accounts payable and other current liabilities, and long-term debts) are subsequently measured at amortized costs using the EIR method. Derecognition. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or has expired. Where an existing financial liability is replaced by another 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. The difference in the respective carrying amounts is recognized in the consolidated statement of income. Derivative Financial Instruments and Hedge Accounting The Group enters into derivative and hedging transactions, primarily interest rate swaps, cross currency swap and foreign currency forwards, as needed, for the sole purpose of managing the risks that are associated with the Group’s borrowing activities or as required by the lenders in certain cases. Derivative financial instruments (including bifurcated embedded derivatives) are initially recognized at fair value on the date on when the derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Any gain or loss arising from changes in fair value of derivatives that do not qualify for hedge accounting is taken directly to the consolidated statement of income for the current year under “Mark-to-market gain on derivatives and financial assets at FVPL” account included under “Finance costs” in the consolidated statement of income. For purposes of hedge accounting, derivatives can be designated either as cash flow hedges or fair value hedges depending on the type of risk exposure it hedges. At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group opts to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis that they actually have been highly effective throughout the financial reporting periods for which they were designated.
Cash Flow Hedges. Cash flow hedges are hedges of the exposure to variability in cash flows that are attributable to a particular risk associated with a recognized asset, liability or a highly probable forecast transaction and could affect the consolidated statement of income. The effective portion of the gain or loss on the hedging instrument is recognized directly as other comprehensive income (loss) under the “Cumulative translation adjustments” account in the consolidated *SGVFS024294* - 12 - statement of financial position while the ineffective portion is recognized as “Mark-to-market gain on derivatives and financial assets at FVPL” account in the consolidated statement of income.
Amounts recognized as other comprehensive income (loss) are transferred to the consolidated statement of income when the hedged transaction affects profit or loss, such as when hedged financial income or expense is recognized or when a forecast sale or purchase occurs. Where the hedged item is the cost of a non-financial asset or liability, the amounts recognized as other comprehensive income are transferred to the initial carrying amount of the non-financial asset or liability.
If the forecast transaction is no longer expected to occur, amounts previously recognized in other comprehensive income are transferred to the consolidated statement of income. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognized in other comprehensive income remain in equity until the forecast transaction occurs. If the related transaction is not expected to occur, the amount is recognized in the consolidated statement of income.
The Group accounts for interest rate swap agreements as cash flow hedges of the floating rate exposure of its long-term debts. The Group also entered into cross-currency swaps and foreign currency forwards accounted for as cash flow hedges for its Philippine-peso denominated loans and Euro-denominated liabilities, respectively.
Embedded Derivatives. An embedded derivative is a component of a hybrid (combined) instrument that also includes a non-derivative host contract with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivatives.
The Group assesses whether embedded derivatives are required to be separated from host contracts when the Group first becomes a party to the contract. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required.
Offsetting Financial Instruments Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. The Group assesses that it has a currently enforceable right of offset if the right is not contingent on a future event, and is legally enforceable in the normal course of business, event of default, and event of insolvency or bankruptcy of the Group and all of the counterparties.
*SGVFS024294* - 13 -
Inventories Inventories are valued at the lower of cost or net realizable value (NRV). Costs incurred in bringing each item of inventory to its present location and conditions are accounted for as follows:
Land and development costs and – Property acquired or being constructed for condominium units for sale sale in the ordinary course of business, rather than to be held for rental or capital appreciation, is held as inventory. Cost includes land cost, amounts paid to contractors for construction and borrowing costs, planning and design costs, costs of site preparation, professional fees, property transfer taxes, construction overheads and other related costs. Finished goods and work in-process - Determined on the weighted average basis; cost includes materials and labor and a proportion of manufacturing overhead costs based on normal operating capacity but excluding borrowing costs. Raw materials, spare parts, supplies – Cost includes the invoice amount, net of trade and fuel inventories and cash discounts. Costs are calculated using the weighted average method.
The NRV is determined as follows:
Finished goods – Estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale Work- in-process – Selling price in the ordinary course of the business, based on market prices at the reporting date, less estimated specifically identifiable costs of completion and the estimated costs of sale Raw materials, spare parts and supplies – Current replacement cost
Other Current Assets Advances to Contractors and Suppliers. Advances to contractors and suppliers represent advance payments on services to be incurred in connection with the Group’s operations and suppliers. These are capitalized to projects as land and development costs under the “Inventories” account in the consolidated statement of financial position, upon actual receipt of services which is normally within 12 months or within the normal operating cycle. These are considered as nonfinancial instruments as these will be applied against future billings from contractors and suppliers normally within one year.
Prepayments. Prepayments are expenses paid in advance and recorded as asset before these are utilized. These are apportioned over the period covered by the payment and charged to the appropriate accounts in the consolidated statement of income when incurred.
*SGVFS024294* - 14 -
Prepaid Taxes. Prepaid taxes are carried at cost less any impairment in value. Prepaid taxes consist mainly of tax credits that can be used by the Group in the future. Tax credits represent unapplied certificates for claims from input value-added tax (VAT), and credits received from the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC). Such tax credits may be used for payment of internal revenue taxes or customs duties.
Property, Plant and Equipment Property, plant and equipment, except land, are carried at cost less accumulated depreciation, amortization and any impairment in value. Land is carried at cost less any impairment in value.
The initial cost of property, plant and equipment, consist of its purchase price including import duties, borrowing costs (during the construction period) and other costs directly attributable in bringing the asset to its working condition and location for its intended use. Cost also includes the cost of replacing the part of such property, plant and equipment when the recognition criteria are met and the estimated present value of dismantling and removing the asset and restoring the site.
Property, plant and equipment also include the estimated rehabilitation and restoration costs of EDC’s steam fields and power plants located in the contract areas for which EDC is legally and constructively liable. Under their respective Environmental Compliance Certificate (ECCs), FGP Corp. (FGP) and First Gas Power Corporation (FGPC) have legal obligations to dismantle their respective power plant assets at the end of their useful lives. First Gen Bukidnon Power Corp. (FG Bukidnon), on the other hand, has contractual obligation under the lease agreement with Power Sector Assets and Liabilities Management Corporation (PSALM) to dismantle its power plant asset at the end of its useful life. EDC also has legal obligations to dismantle the steam fields and power plants located in the contract areas for which EDC is legally and constructively liable. It also includes the Asset Preservation Obligation (APO) of FPIC under “Exploration, machinery and equipment” account. The APOs recognized represent the best estimate of the expenditures required to preserve the pipeline at the end of their useful lives and to preserve the property and equipment of FPIC.
The income generated wholly and necessarily as a result of the process of bringing the asset into the location and condition for its intended use (e.g., net proceeds from selling any items produced while testing whether the asset is functioning properly) is credited to the cost of the asset up to the extent of cost of testing capitalized during the testing period. Any excess of net proceeds over costs is recognized in the consolidated statement of income and not against the cost of property, plant and equipment. When the incidental operations are not necessary to bring an item to the location and condition necessary for it to be capable of operating in the manner intended by management, the income and related expenses of incidental operations are not offset against the cost of the asset but are recognized in the consolidated statement of income and included in their respective classifications of income and expense.
Liquidated damages received from the breach of contract are deducted from the cost of the asset unless these can be directly linked to the amount of lost revenues. Liquidated damages are recognized only when receipt is virtually certain.
Expenditures incurred after the property, plant and equipment have been put into operation, such as repairs and maintenance, are normally charged to current operations in the period the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as additional costs of property, plant and equipment.
*SGVFS024294* - 15 -
Depreciation and amortization are computed using the straight-line method over the following estimated useful lives of the assets:
Asset Type Number of Years Power plants, buildings, other structures and 5 to 30 years or lease term, leasehold improvements whichever is shorter Production wells 10 to 40 years Fluid collection and recycling system (FCRS) 13 to 20 years Transportation equipment 3 to 10 years Exploration, machinery and equipment 2 to 25 years
The useful lives and depreciation and amortization method are reviewed at each financial reporting date to ensure that the useful lives and method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property, plant and equipment.
Depreciation of an item of property, plant and equipment begins when it becomes available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation ceases at the earlier of the date that the item is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations, and the date the asset is derecognized.
Construction-in-progress represents properties under construction and includes cost of construction, equipment and other direct costs. Construction-in-progress and major spares and surplus assets available for use are stated at cost and are not depreciated until such time that the assets are put into operational use.
An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the assets (calculated as the difference between the net disposal proceeds and carrying amount of the asset) is included in the consolidated statement of income in the year the asset is derecognized.
Exploration and Evaluation Assets The Group follows the full cost method of accounting for its exploration costs determined on the basis of each service contract area. Under this method, all exploration costs relating to each service contract are accumulated and deferred under the “Exploration and evaluation assets” account under “Other noncurrent assets” account in the consolidated statement of financial position pending the determination of whether the wells has proved reserves. Capitalized expenditures include costs of license acquisition, technical services and studies, exploration drilling and testing, and appropriate technical and administrative expenses. General overhead or costs incurred prior to having obtained the legal rights to explore an area are recognized as expense in the consolidated statement of income when incurred.
If tests conducted on the drilled exploratory wells reveal that these wells cannot produce proved reserves, the capitalized costs are charged to expense except when management decides to use the unproductive wells, for recycling or waste disposal. Once the technical feasibility and commercial viability of the project to produce proved reserves are established, the exploration and evaluation assets shall be reclassified to property, plant and equipment.
*SGVFS024294* - 16 -
Exploration and evaluation assets also include the estimated rehabilitation and restoration costs of EDC that are incurred as a consequence of having undertaken the exploration and evaluation of geothermal reserves.
Investment Properties Investment properties consist of properties (land or a building or part of a building or a combination) held to earn rentals or for capital appreciation or both, rather than for: § use in the production or supply of goods or services or for administrative purposes; or § sale in the ordinary course of business.
These, except land, are measured initially at cost, including transaction costs, less accumulated depreciation and any impairment in value. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met and excludes the costs of day-to-day servicing of an investment property. Land is carried at cost (initial purchase price and other costs directly attributable in bringing such assets to its working condition) less any impairment in value.
Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 35 years. The investment properties’ residual values, useful lives and depreciation methods are reviewed at each financial year-end and adjusted prospectively, if appropriate, end to ensure that the periods and method of depreciation are consistent with the expected pattern of economic benefits from the items of investment properties.
When each major inspection is performed, its cost is recognized in the carrying amount of the investment property as a replacement if the recognition criteria are satisfied.
Investment properties are derecognized either when they have been disposed of or when the investment properties are permanently withdrawn from use and no future economic benefit is expected from its disposal. The difference between the net disposal proceeds and the carrying amount of the asset is recognized in the consolidated statement of income in the period of derecognition.
Transfers are made to investment property when, and only when, there is a change in use, evidenced by ending of owner-occupation or commencement of an operating lease to another party. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sale. These transfers are recorded using the carrying amount of the investment property at the date of change in use.
Transfers between investment property, owner-occupied property and inventories do not change the carrying amount of the property transferred and they do not change the cost of that property for measurement or disclosure purposes.
Intangible Assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is the fair value as of the date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses. Internally-generated intangible assets, if any, excluding capitalized development costs, are not capitalized and expenditures are reflected in the consolidated statement of income in the year the expenditure is incurred.
*SGVFS024294* - 17 -
The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortized using the straight-line method over the estimated useful economic life, and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Amortization shall begin when the asset is available for use, i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. The amortization period and method for an intangible asset with a finite useful life are reviewed at least each financial reporting date. Changes in the expected useful life or the expected pattern of consumption of future economic benefits are considered to modify the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the consolidated statement of income in the expense category consistent with the function of the intangible asset.
Intangible assets with indefinite useful lives and intangible assets not yet available for use are not amortized but tested for impairment annually, either individually or at the CGU level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.
Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated statement of income in the year the asset is derecognized.
Water Rights. The water rights of FG Hydro are amortized using the straight-line method over 25 years, which is the term of the agreement with the National Irrigation Administration (NIA).
Pipeline Rights. Pipeline rights represent the construction cost of the natural gas pipeline facility connecting the natural gas supplier’s refinery to FGP’s power plant including incidental transfer costs incurred in connection with the transfer of ownership of the pipeline facility to the natural gas supplier. The cost of pipeline rights is amortized using the straight-line method over 22 years, which is the term of the Gas Sale and Purchase Agreement (GSPA).
Rights to Use Transmission Line. Rights to use transmission line pertain to the substation improvements donated to the National Transmission Corporation (TransCo) pursuant to the Substation Interconnection Agreement (SIA) dated September 2, 1997 entered into among FGPC, National Power Corporation (NPC) and Manila Electric Company (Meralco). The transferred substation improvements were accounted for as intangible assets since FGPC still maintains the right to use these assets under the provisions of the Power Purchase Agreements (PPA) with Meralco and the SIA. The cost of rights to use transmission line is amortized using the straight- line method over the remaining life of related power plant assets.
Computer Software and Licenses. The costs of acquisition of computer software and licenses are capitalized as intangible asset if such costs are not integral part of the related hardware.
These intangible assets are initially measured at cost. Subsequently, these are measured at cost less accumulated amortization and allowance for impairment losses, if any. Amortization of computer software is computed using the straight-line method of over 5 years.
Impairment of Non-financial Assets At each financial reporting date, the Group assesses whether there is any indication that its non- financial assets may be impaired. If any such exists or when an annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset or CGU’s fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate *SGVFS024294* - 18 - cash inflows that are largely independent from other assets or groups of assets. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset or CGU is considered impaired and is written down to its recoverable amount. 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 assessment of the time value of money and the risks specific to the asset or CGU. An impairment loss is recognized in the consolidated statement of income in the year in which it arises.
An assessment is made at each financial reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Group estimates the recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation or amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statement of income.
Goodwill. Goodwill is reviewed for impairment at least annually, or more frequently, regardless whether impairment indicators are present or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
Impairment is determined for goodwill by assessing the recoverable amount of the CGU (or group of CGUs) to which the goodwill relates. Where the recoverable amount of the CGU (or group of CGUs) is less than the carrying amount of the CGU (or group of CGUs) to which goodwill has been allocated, an impairment loss is recognized immediately in the consolidated statement of income.
Impairment loss relating to goodwill cannot be reversed for subsequent increases in its recoverable amount in future periods. The Group performs its annual impairment test of goodwill at December 31 of each year.
Investments in Associates/PDRs and a Joint Venture. The Group determines whether it is necessary to recognize an impairment loss on its investments in associates/PDRs and a joint venture. The Group determines at each financial reporting date whether there is any objective evidence that the investments are impaired. If this is the case, the Group calculates the amount of impairment as being the difference between the recoverable value of the associate/PDRs or joint venture and the carrying amount of investment and recognizes the amount of impairment loss in the consolidated statement of income.
Discontinued Operations The Group classifies disposal groups as discontinued operations if their carrying amounts will be recovered principally through a sale rather than through continuing use. Such disposal groups are measured at the lower of their carrying amount and fair value less costs to sell.
The criteria for discontinued operations is regarded as met only when the sale is highly probable and the disposal group is available for immediate sale in its present condition. Management must be committed to the sale expected within one year from the date of the classification.
A disposal group qualifies as discontinued operation if it is a component of an entity that either has been disposed of, or is classified as held for sale, and: § Represents a separate major line of business or geographical area of operations, *SGVFS024294* - 19 -
§ Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations, § Is a subsidiary acquired exclusively with a view to resale.
Property, plant and equipment are not depreciated once classified as part of discontinued operations.
Assets and liabilities classified as discontinued operations are presented separately as current items in the consolidated statement of financial position. Discontinued operations are excluded from net income from continuing operations and are presented as a single amount under “Net loss from discontinued operations” account in the consolidated statement of income.
When a disposal group or non-current asset that was classified as held for sale represented an entire subsidiary, and subsequently no longer qualifies as held for sale, the consolidated statements of income and cashflows are amended retrospectively as though the disposal group or non-current asset never qualified as held for sale.
Borrowing Costs Borrowing costs are capitalized if they are directly attributable to the acquisition, construction or production of qualifying assets until such time that the assets are substantially ready for their intended use or sale, which necessarily takes a substantial period of time. Income earned on temporary investment of specific borrowings, pending the expenditure on qualifying assets, is deducted from the borrowing costs eligible for capitalization. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs include interest charges and other costs incurred in connection with the borrowing of funds, as well as exchange differences arising from foreign currency borrowings used to finance the project to the extent that they are regarded as an adjustment to interest costs. All other borrowing costs are expensed in the year they occur and are recognized in the consolidated statement of income in the period in which they are incurred.
Provisions Provisions are recognized when the Group has a present obligation (legal or constructive): (a) as a result of a past event, (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of the provision to be reimbursed, for example, 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 recognized 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 assessment of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized under the “Finance costs” account in the consolidated statement of income.
The Group recognizes provisions arising from legal and/or constructive obligation associated with the cost of dismantling and removing an item of property, plant and equipment and restoring the site where it is located. In determining the amount of provisions for rehabilitation and restoration costs, assumptions and estimates are required in relation to the expected cost to rehabilitate and restore sites and infrastructure when such obligation exists. When the liability is initially recognized, the present value of the estimated costs is capitalized as part of the carrying amount of the related “FCRS and production wells” and “Power Plants” under “Property, plant and equipment” account in the consolidated statement of financial position. *SGVFS024294* - 20 -
The obligation occurs either when the asset is acquired or as a consequence of using the asset for the purpose of generating electricity during a particular year. Dismantling costs are provided at the present value of expected costs to settle the obligation using estimated cash flows. The cash flows are discounted at a current pre-tax rate that reflects the risks specific to the dismantling liability. The unwinding of the discount is expensed as incurred and recognized in the consolidated statement of income under the “Finance costs” account. The estimated future costs of dismantling are reviewed annually and adjusted, as appropriate. Changes in the estimated future costs or in the discount rate applied are added to or deducted from the cost of the asset.
Contingencies Contingent liabilities are not recognized in the consolidated financial statements but 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 but are disclosed in the notes to consolidated financial statements when an inflow of economic benefits is probable.
Common Stock and Capital in Excess of Par Value Common stock is measured at par value for all shares issued. When the Group issues more than one class of stock, a separate class of stock is maintained for each class of stock and the number of shares issued. Incremental costs incurred directly attributable to the issuance of new shares are shown in equity as deduction, net of tax, from proceeds when the stocks are sold at premium, otherwise such are expensed as incurred. Proceeds and/or fair value of considerations received in excess of par value, if any, are recognized as capital in excess of par value.
Retained Earnings The amount included in retained earnings includes net income attributable to the Group’s equity holders and reduced by dividends on capital stock. Dividends are recognized as a liability and deducted from retained earnings when they are declared. Dividends for the year that are approved after the financial reporting date are dealt with as an event after the financial reporting date.
Dividends on Common Stocks The Group may pay dividends in cash, property or by the issuance of shares of stock. Cash dividends are subject to the approval of the BOD, while property and stock dividends are subject to approval by the BOD, at least two-thirds of the outstanding capital stock of the shareholders at a shareholders’ meeting called for such purpose (for stock dividends only), and by the Philippine SEC. The Group may declare dividends only out of its unrestricted retained earnings.
Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be measured reliably, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. The Group has concluded that it is the principal in all of its revenue arrangements since it is the primary obligor in all the revenue arrangements, has pricing latitude and is also exposed to inventory and credit risks.
The following specific recognition criteria must also be met before revenue is recognized:
Sale of Electricity. Revenue from sale of electricity (in the case of FGP and FGPC) is based on the respective PPA of FGP and FGPC. The PPAs qualify as leases on the basis that FGP and FGPC sell all of its output to Meralco. These agreements call for take-or-pay arrangements where payment is made principally on the basis of the availability of the power plants and not on actual deliveries of electricity generated. These arrangements are determined to be operating leases
*SGVFS024294* - 21 - where a significant portion of the risks and benefits of ownership of the assets are retained by FGP and FGPC.
Revenue from sale of electricity is composed of fixed capacity fees, fixed and variable operating and maintenance fees, fuel, wheeling and pipeline charges, and supplemental fees. The portion related to the fixed capacity fees is considered as operating lease component and the same fees are recognized on a straight-line basis, based on the actual Net Dependable Capacity (NDC) tested or proven, over the terms of the respective PPAs. Variable operating and maintenance fees, fuel, wheeling and pipeline charges and supplemental fees are recognized monthly based on the actual energy delivered.
In the case of EDC, Green Core Geothermal Inc. (GCGI) and Bac-Man Geothermal Inc. (BGI), revenues from sale of electricity using geothermal energy is consummated whenever the electricity generated by these companies is transmitted through the transmission line designated by the buyer, for a consideration. Revenue from sale of electricity using hydroelectric and geothermal power is based on sales price and is composed of generation fees from spot sales to Wholesale Electricity Spot Market (WESM) and Power Supply Agreements (PSAs) with various electric companies. Revenue from sale of electricity using wind and solar power is based on the applicable Feed-in Tariff (FIT) rate as approved by the Energy Regulatory Commission (ERC). Revenue from sale of electricity is recognized monthly based on the actual energy delivered.
Meanwhile, revenue from sale of electricity through ancillary services to the National Grid Corporation of the Philippines (NGCP) is recognized monthly based on the capacity scheduled and/or dispatched and provided. For FGES, revenue from sale of electricity is composed of generation charge from monthly energy supply with various contestable customers through Retail Supply Contract (RSC) and is recognized monthly based on the actual energy delivered. The basic energy charges for each billing period are inclusive of generation charge and retail supply charge.
Sale of electricity also includes revenues from power distribution of FITUI which are recognized on an accrual basis based on monthly meter reading of the customers’ power consumption.
Insurance Proceeds. Proceeds from insurance claims are recognized as part of “Other income (expenses)” account in the consolidated statement of income when receipt is virtually certain.
Revenue from Real Estate. The Group assesses whether it is probable that the economic benefits will flow to the Group when the sales prices are collectible. Collectibility of the sales price is demonstrated by the buyer’s commitment to pay, which in turn is supported by substantial initial and continuing investments that give the buyer a stake in the property sufficient that the risk of loss through default motivates the buyer to honor its obligation to the seller. Collectibility is also assessed by considering factors such as the credit standing of the buyer, age and location of the property.
Revenue from sales of completed real estate projects is accounted for using the full accrual method.
For revenue from sale of uncompleted real estate projects, in accordance with Philippine Interpretation Committee Q&A No. 2006-01, the percentage-of-completion method is used to recognize income from sales of projects where the Group has material obligations under the sales contract to complete the project after the property is sold, the equitable interest has been transferred to the buyer, construction is beyond preliminary stage (i.e., engineering and design work, execution of construction contracts, site clearance and preparation, excavation, and *SGVFS024294* - 22 - completion of the building foundation are finished), and the costs incurred or to be incurred can be reliably measured. Under this method, revenue is recognized as the related obligations are fulfilled, measured principally on the basis of the estimated completion of a physical proportion of the contract work.
If any of the criteria under the full accrual or percentage-of-completion method is not met, the deposit method is applied until all the conditions for recording a sale are met. Pending recognition of sale, cash received from buyers is recognized as “Deposits from pre-selling of condominium units” accounted under “Trade payables and other current liabilities” account in the consolidated statement of financial position.
Any excess of collections over the recognized receivables are presented as part of “Trade payables and other current liabilities” account in the consolidated statement of financial position.
Revenue from Construction Contracts. Revenue is recognized based on the project’s percentage of completion method. Reliance is placed on surveys of work performed by an internal quantity surveyor to measure the stage of completion. Claims for additional contract revenues are recognized when negotiations have reached an advanced stage such that it is probable that the customer will accept the claim; and the amount that will be accepted by the customer can be measured reliably. Variation orders are included in contract revenue when it is probable that the customer will approve the variation and the amount of revenue arising from the variation can be measured reliably.
Advance payments from customers that are not yet applied to billings are recorded as “Advances from customers” account shown under “Trade payables and other current liabilities” in the consolidated statement of financial position.
Costs and estimated earnings in excess of amounts billed on uncompleted contracts accounted for under the percentage of completion method are classified as “Costs and estimated earnings in excess of billings on uncompleted contracts” under “Trade and other receivables” account in the consolidated statement of financial position.
Lease. Lease income arising from operating leases on investment properties is accounted for on a straight-line basis over the lease terms or based on the terms of the lease, as applicable.
Cinema, Mall and Other Revenues. Revenue is recognized when services are rendered.
Membership Dues. Membership dues are recognized as revenue in the applicable membership period. Membership dues received in advance are recorded as part of “Trade payables and other current liabilities” account in the consolidated statement of financial position.
Sale of Merchandise. Revenue from the sale of merchandise is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on delivery of the goods.
Interest Income. Interest income (shown under “Finance Income” in the consolidated statement of income) is recognized as the interest accrues (using the effective interest rate or EIR), which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset), taking into account the effective yield on the asset.
*SGVFS024294* - 23 -
Dividends. Dividend income is recognized when the Group’s right to receive the payment is established.
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, and are recognized when these are incurred.
Cost of Sale of Electricity. These include expenses incurred by the departments directly responsible for the generation of revenues from sale of electricity (i.e., Plant Operations, Production, Maintenance, Transmission and Dispatch, Wells Drilling and Maintenance Department) at operating project locations in the case of EDC. This account also includes the costs incurred by FGPC FGP, FNPC and PMPC, particularly fuel cost, power plant operations and maintenance, and depreciation and amortization, which are necessary expenses incurred to generate the revenues from sale of electricity. These are expensed when incurred.
Cost of Real Estate. Cost of real estate sold is recognized consistent with the revenue recognition method applied. Cost of condominium units sold before completion of the development is determined on the basis of the acquisition cost of the land plus its full development costs, which include estimated costs for future development works, as determined by in-house technical staff.
The cost of inventory recognized in profit or loss on disposal is determined with reference to the specific costs incurred on the property, allocated to saleable area based on relative size and takes into account the percentage of completion used for revenue recognition purposes.
Contract costs include all direct materials and labor costs and those direct costs related to contract performance. 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 changes are determined. Other costs incurred during the pre-selling stage to sell real estate are capitalized as prepaid costs, and shown as part of prepaid expenses under “Other current assets” account in the consolidated statement of financial position, if they are directly associated with and their recovery is reasonably expected from the sale of real estate that are initially being accounted for as deposits. Capitalized selling costs shall be charged to expense in the period in which the related revenue is recognized as earned. Cost of Merchandise Sold. Costs and 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 distribution to equity participants. These are recognized on an accrual basis. Under this basis, the effects of transactions and other events are recognized when they occur (and not as cash or its equivalent is paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate.
Cost of Contracts and Services. Contract costs include all direct materials, labor costs and indirect costs related to contract performance. Changes in job performance, job 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.
*SGVFS024294* - 24 -
Foreign Currency Translations The consolidated financial statements are presented in Philippine peso, which is Lopez Holdings’ functional and presentation currency. All subsidiaries and associates evaluate their primary economic and operating environment and, determine their functional currency and items included in the financial statements of each entity are initially measured using that functional currency.
Transactions and Balances. Transactions in foreign currencies are initially recorded in the functional currency rate prevailing on the period of the transaction. Monetary assets and liabilities denominated in foreign currency are re-translated at the functional currency spot rate of exchange prevailing at the financial reporting date.
All differences are recognized in the consolidated statement of income. Nonmonetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions.
Group Companies. The Philippine peso is the currency of the primary economic environment in which Lopez Holdings, FPH and all other subsidiaries and associates/PDRs operate, except for the following:
Subsidiary/ Associate Functional Currency First Gen United States dollar First Sumiden Realty Inc. - do - First Philippine Solar Corp. (FPSC) - do - FGHC International Limited (FGHC International) - do - FPH Fund Corporation (FPH Fund) - do - First Philippine Nexolon Corp. (FPNC) - do - EDC Hongkong Limited (EDC HKL) Hong Kong dollar EDC Chile Holdings SPA Chilean peso EDC Geotermica Chile - do - EDC Chile Limitada - do - EDC Peru Holdings S.A.C. Peruvian nuevo sol EDC Geotermica Peru S.A.C. - do - EDC Peru S.A.C. - do - EDC Geotérmica Del Sur S.A.C. - do - EDC Energía Azul S.A.C. - do - Geotermica Crucero Peru S.A.C. Peruvian nuevo sol EDC Energía Perú S.A.C. - do - Geotermica Tutupaca Norte Peru S.A.C. - do - EDC Energía Geotérmica S.A.C. - do - EDC Progreso Geotérmico Perú S.A.C. - do - Geotermica Loriscota Peru S.A.C. - do - EDC Energía Renovable Perú S.A.C. - do - EDC Soluciones Sostenibles Ltd - do - EDC Desarollo Sostenible Ltd - do - EDC Energia Verde Chile SpA - do - EDC Energia de la Tierra SpA - do - EDC Energia Verde Peru SAC - do - PT EDC Indonesia Indonesian rupiah PT EDC Panas Bumi Indonesia - do -
The financial statements of the consolidated subsidiaries and associates with functional currency other than the Philippine peso are translated to Philippine peso as follows: *SGVFS024294* - 25 -
▪ Assets and liabilities using the spot rate of exchange prevailing at the financial reporting date; ▪ Components of equity using historical exchange rates; and ▪ Income and expenses using the monthly weighted average exchange rate.
The exchange differences arising on the translation are recognized as other comprehensive income (loss). Upon disposal of any of these subsidiaries and associates, the deferred cumulative amount recognized in “Cumulative translation adjustments” relating to that particular subsidiary or associate will be recognized in the consolidated statement of income.
Leases The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.
Group as a lessee. A lease is classified at the inception date as a finance lease or an operating lease. A lease that does not transfer substantially all the risks and rewards incidental to ownership to the Group is classified as an operating lease. Operating lease payments are recognized as an operating expense in the consolidated statement of income on a straight-line basis over the lease term.
Group as a lessor. Leases in which the Group does not transfer substantially all the risks and rewards of ownership of an asset are classified as operating leases. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as rental income.
Retirement Costs Lopez Holdings, FPH and certain of FPH’s subsidiaries have distinct funded, noncontributory defined benefit retirement plans. The plans cover all permanent employees, each administered by their respective retirement committee.
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.
The cost of providing benefits under the defined benefit plans is actuarially determined using the projected unit credit method.
Net interest is calculated by applying the discount rate to the net defined liability or asset. The Group recognizes the following changes in the net defined benefit obligation under “general and administrative expenses” in the consolidated statement of income:
▪ Service costs comprising current service costs, past service costs, gains and losses on curtailments and non-routine settlements ▪ Net interest expense or income.
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 Group, nor can they be paid directly to the Group. Fair value of plan assets is based on market price information. When no market *SGVFS024294* - 26 - 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.
The Group’s right to be reimbursed of some or all of the expenditure required to settle a defined benefit obligation is recognized as a separate asset at fair value when and only when reimbursement is virtually certain.
Termination Benefit. Termination benefits are employee benefits provided in exchange for the termination of an employee’s employment as a result of either an entity’s decision to terminate an employee’s employment before the normal retirement date or an employee’s decision to accept an offer of benefits in exchange for the termination of employment.
A liability and expense for a termination benefit is recognized at the earlier of when the entity can no longer withdraw the offer of those benefits and when the entity recognizes related restructuring costs. Initial recognition and subsequent changes to termination benefits are measured in accordance with the nature of the employee benefit, as either post-employment benefits, short- term employee benefits, or other long-term employee benefits.
Employee Leave Entitlement. Employee entitlements to annual leave are recognized as a liability when they are accrued to the employees. The undiscounted liability for leave expected to be settled wholly before twelve months after the end of the annual reporting period is recognized for services rendered by employees up to the end of the reporting period.
Share-based Payment Transactions Certain employees (including senior executives) of the Group received remuneration in the form of share-based payment transactions. Under such circumstance, the employees rendered services in exchange for shares or rights over shares (“equity-settled transactions”).
The cost of equity-settled transactions with employees was measured by reference to the fair value of the stock options at the grant date. The fair value is determined using the Black-Scholes- Merton Option Pricing Model. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Lopez Holdings (“market conditions”), if applicable.
The cost of equity-settled transactions is recognized, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (“the vesting date”). The cumulative expense recognized for equity-settled transactions at each financial reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The charge or credit for a year represents the movement in cumulative expense recognized as of the beginning and end of that year.
No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.
*SGVFS024294* - 27 -
Where the terms of an equity-settled award are modified, as a minimum, is recognized as if the terms had not been modified. An additional expense is recognized for any increase in the total value of the transaction, as measured at the date of modification.
Where an equity-settled award is cancelled with payment, it is treated as if it had vested on the date of cancellation, and any expense not yet recognized for the award is recognized immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were modifications of the original award, as described in the foregoing.
The dilutive effect of outstanding options is reflected as additional share dilution in the computation of EPS attributable to the equity holders of the Group.
Income Tax Current Income Tax. Current income tax assets and liabilities for the current year 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 substantially enacted as at the financial reporting date.
Deferred Tax. Deferred tax is provided using the balance sheet liability method on temporary differences as at the financial reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred tax assets are recognized for all deductible temporary differences, carry-forward of unused tax credits from excess minimum corporate income tax (MCIT) over the regular income tax and unused net operating loss carryover (NOLCO), to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, the carry-forward of unused tax credits from MCIT and unused NOLCO can be utilized. Deferred income tax, however, is not recognized:
▪ where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
▪ in respect of deductible temporary differences associated with investments in subsidiaries and associates, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.
The carrying amount of deferred tax assets is reviewed at each financial 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 asset to be utilized. Unrecognized deferred tax assets are reassessed at each financial reporting date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.
Deferred tax relating to items recognized outside profit or loss is recognized outside of profit or loss. Deferred tax items are recognized in correlation to the underlying transaction either in other comprehensive income or directly in equity.
Deferred tax liabilities are recognized for all taxable temporary differences, except:
*SGVFS024294* - 28 -
▪ Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
▪ In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
VAT. 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 taxation authority, in which case, the VAT is recognized as part of the cost of acquisition of the asset or as part of the expense item, as applicable
▪ Where receivables and payables are stated with the amount of VAT included
The net amount of VAT recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the consolidated statement of financial position.
Earnings per Share (EPS) Basic EPS is calculated by dividing the net income (less preferred dividends, if any) for the year attributable to common shareholders by the weighted average number of common shares outstanding during the year, with retroactive adjustment for any stock dividends or stock splits declared during the year.
Diluted EPS is calculated in the same manner, adjusted for the effects of the outstanding stock options under Lopez Holdings’ ESOP. Outstanding stock options will have dilutive effect under the treasury stock method only when the average market price of the underlying common share during the period exceeds the exercise price of the option.
Where the EPS effect of the assumed exercise of outstanding options has anti-dilutive effect, diluted EPS is presented the same as basic EPS with a disclosure that the effect of the exercise of the instruments is anti-dilutive.
Segment Reporting For purposes of management reporting, the Group is organized and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit. Such business segments are the bases upon which the Group reports its primary segment information.
Financial information on business segments is presented in Note 4 to the consolidated financial statements. The Group has one geographical segment and derives substantially of its revenues from domestic operations.
Events After the Financial Reporting Period Post year-end events that provide additional information about the Group’s financial position at the financial reporting date (adjusting events) are reflected in the consolidated financial *SGVFS024294* - 29 -
statements. Post year-end events that are not adjusting events are disclosed in the notes to consolidated financial statements when material.
3. Significant Accounting Judgments and Estimates
The preparation of the consolidated financial statements requires the Group’s management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent assets and liabilities, at the financial reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that require material adjustments to the carrying amounts of the assets and liabilities affected in future years.
In the process of applying the Group’s accounting policies, management has made the following judgments, which have the most significant effect on the amounts recognized in the consolidated financial statements.
Judgments Determination of Whether Non-controlling Interest is Material for Purposes of PFRS 12. PFRS 12 requires an entity to disclose certain information, including summarized financial information, for each of its subsidiaries that have non-controlling interests that are material to the reporting entity. Management has determined First Philippine Holdings Corporation (FPH) as material partly-owned subsidiary. FPH group is material for purposes of providing the required disclosures under PFRS 12. FPH group is the primary reportable segments of the Group with significant assets and liabilities relative to the consolidated total assets and consolidated total liabilities. Also, dividends attributable to the non-controlling interests are considered significant relative to the total dividends declared by the Group in the current and prior years.
Determination of Functional Currency. Each entity within the Group determines its own functional currency. The respective functional currency of each entity is the currency of the primary economic environment in which each entity operates. It is the currency that mainly influences the sale of services and the costs of providing services.
The presentation currency of the Group is the Philippine peso, which is the Parent Company’s functional currency. The functional currency of each of the subsidiaries, as disclosed in Note 2 to the consolidated financial statements, is determined based on the economic substance of the underlying circumstances relevant to each subsidiary.
Deferred Revenue on Stored Energy. Under EDC’s addendum agreements with NPC, EDC has a commitment to NPC with respect to certain volume of stored energy that NPC may lift for a specified period, provided that EDC is able to generate such energy over and above the nominated energy for each given year in accordance with the related PPAs. EDC has made a judgment based on historical information that the probability of future liftings by NPC from the stored energy is not probable and accordingly, has not deferred any portion of the collected revenues. The stored energy commitments are, however, disclosed in Note 32 to the consolidated financial statements.
Operating Lease Commitments - the Group as Lessor. The respective PPAs of FGP and FGPC qualify as leases on the basis that FGP and FGPC sell all of their output to Meralco and these agreements call for take-or-pay arrangements where payment is made principally on the basis of the availability of the power plants and not on actual deliveries of electricity generated. These lease arrangements are determined to be operating leases where a significant portion of the risks and benefits of ownership of the assets are retained by FGP and FGPC. Accordingly, the power *SGVFS024294* - 30 - plant assets are recorded as part of property, plant and equipment and the fixed capacity fees billed to Meralco are recorded as operating revenues on straight-line basis over the applicable terms of the PPAs (see Note 32).
In the case of EDC, its PPAs and Steam Sale Agreements (SSAs) qualify as a lease on the basis that EDC sells majority of its outputs to NPC/PSALM and, in the case of the SSAs, the agreement calls for a take-or-pay arrangement where payment is made principally on the basis of the availability of the steam field facilities and not on actual steam deliveries. This type of arrangement is determined to be an operating lease where a significant portion of the risks and rewards of ownership of the assets are retained by EDC since it does not include transfer of EDC’s assets. Accordingly, the steam field facilities and power plant assets are recorded as part of the cost of property, plant and equipment and the capacity fees billed to NPC/PSALM are recorded as operating revenue based on the terms of the PPAs and SSAs.
In connection with the installation of Burgos Wind Project’s wind turbines and dedicated point-to- point limited facilities, EDC entered into uniform land lease agreements and contracts of easement of right of way, respectively, with various private landowners. The term of the land lease agreement starts from the execution date of the contract and ends after 25 years from the commercial operations of the Burgos Wind Project. The contract of easement of right of way on the other hand, creates a perpetual easement over the subject property. Both the land lease agreement and contracts of easement of right of way were classified as operating leases. All payments made in connection with the agreements as part of “Prepaid expenses”. Prepaid lease will be amortized on a straight-line basis over the lease term, whereas prepaid rights of way will be amortized on a straight-line basis over the term of the Wind Energy Service Contract (WESC), including the extension based on management’s judgment of probability of extension. Amortizations of both the prepaid lease and prepaid rights of way during the construction period were capitalized to “Construction in-progress” account, and expensed after it became available for use.
The Group has also entered into commercial property leases where it has determined that the lessor retains all significant risks and rewards of ownership of these properties, which are leased out under operating lease arrangements (see Note 32).
Applicability of IFRIC 12, Service Concession Arrangements on the GRESCs, WESCs and Solar Energy Service Contract (SESCs). An arrangement would fall under IFRIC 12 if the two (2) conditions below are met: a. the grantor controls or regulates the services that the operator must provide using the infrastructure, to whom it must provide them, and at what price; and b. the grantor controls any significant residual interest in the property at the end of the concession term through ownership, beneficial entitlement or otherwise. However, infrastructure used for its entire useful life (“whole of life assets”) is within the scope if the arrangement meets the conditions in (a).
Based on management’s judgment, the GRESCs, WESCs, and SESCs entered into by EDC are outside the scope of IFRIC 12 since EDC controls the significant residual interest in the properties (i.e., the estimated useful lives of the asset cession periods) at the end of the concession term through ownership.
Assessing Control and Significant Influence. Control is presumed to exist when an investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Parent Company has *SGVFS024294* - 31 - established that it has the ability to control its subsidiaries by virtue of either 100% or majority interest in the investee companies. a. Investment in FPH
Lopez Holdings has assessed that it has de facto control of FPH because of the widely dispersed interest of the non-controlling shareholders compared with its 46.47% and 46.50% interest in FPH as of December 31, 2016 and 2015, respectively. b. Investment in ABS-CBN
Lopez Holdings has determined that it does not control ABS-CBN. Lopez Holdings’ conversion rights related to the Convertible Notes which were then replaced by Lopez PDRs has been assessed to be not substantive as defined under PFRS 10 because of existing regulatory restrictions on its exercisability. However, the economic rights over ABS-CBN shares still remain with Lopez Holdings. Thus, the carrying amount of the investment in PDR is still adjusted to recognize the changes in Lopez Holdings’ share in the net assets of the underlying ABS-CBN shares by virtue of the “pass-through” arrangement under the PDR agreement.
Interest in a Joint Venture. The Group has assessed that it has joint control in its joint arrangements and has assessed whether parties have rights to the net assets of the arrangement or to the specific assets. Under the Joint Venture Agreement of Rockwell Land and Meralco, each party’s share in any proceeds, profits, losses, and other economic value derived under the Rockwell-Meralco BPO Venture as well as any economic benefits and losses derived from the utilization of the access ways and open spaces of the joint venture property shall be proportional to the respective financial contributions made by each party (see Notes 9, 10 and 17).
As at December 31, 2016 and 2015, the carrying value of the Group’s investment in joint venture amounted to =3,499P million and =3,650P million (see Note 10), respectively.
Discontinued Operations. In 2012, First PV and FPNC initiated arbitration proceedings against Nexolon Co. Ltd (Nexolon) with the International Court of Arbitration of the International Chamber of Commerce (ICC). The arbitral tribunal rendered the final award in October 2014 which required Nexolon to pay damages and pre-award interest to FPNC in the amount of =1.2P billion ($24.8 million) and a put option price to First PV in the amount of =2.09P billion. As at April 6, 2017, no payments have been made on the award by Nexolon which is reported to be in rehabilitation proceedings. First PV and FPNC have filed their appropriate claims in Korean rehabilitation courts. At the same time, to mitigate losses, FPNC has been seeking alternatives to realize value from the remaining assets of FPNC (see Note 33).
In 2012, First Philippine Electric Corporation (First Philec) and FPSC initiated arbitration proceedings against SunPower Philippines Manufacturing Limited (SPML) with the ICC. In July 2015, First Philec and FPSC received a Second Partial Award from the ICC where SPML was ordered to purchase First Philec's shares in FPSC for the price of US$23.2 million by August 13, 2015 and within 14 days of the completion of the share transfer, to pay FPSC the net sum of P=1.2 billion (US$25.2 million). However, SPML has filed several applications with the Hong Kong and Philippine courts which First Philec and FPSC have responded to. In July 2016, First Philec and FPSC settled their disputes with SPML and, as a result, they have together with SPML filed the appropriate Consent Order, motions or manifestation and agreed to all such things as are reasonably necessary in order to discontinue, terminate or dismiss (as the case may be) all the legal proceedings that are pending between them in Hong Kong and in the Philippines. Under the *SGVFS024294* - 32 -
terms of their settlement, SPML paid FPSC P=1.3 billion (US$25.2 million) (which is equal to the full amount that SPML was ordered to pay FPSC in the arbitration) and First Philec =1.2P billion (US$25.3 million). SPML also transferred all of its shares of stock in FPSC to First Philec.
In view of these favorable decisions by the arbitral tribunal which makes the sale of the ownership of FPH (through its subsidiaries) in FPSC and FPNC highly probable, the Group has considered that the assets, liabilities and results of operations of FPNC and FPSC as discontinued operations in 2014 and 2015. However, in 2016, based on management’s assessment, the assets, liabilities and results of operations of FPNC and FPSC were reverted to continuing operations due to the uncertainty in the collection of the awards for FPNC and the resulting full ownership of First Philec in FPSC after the settlement with SPML. As a result, the consolidated statements of income and cash flows are amended retrospectively as though the disposal group or non-current asset never qualified as held for sale.
Estimates The key assumptions concerning the future and other key sources of estimation uncertainty at the financial 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 described below. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments however, may change due to market changes or circumstances arising beyond the control of the Group. Such changes are reflected in the assumptions when they occur.
Recoverability of Goodwill. As at December 31, 2016 and 2015, the Group’s goodwill is allocated to the following CGUs:
Entity CGU 2016 2015 Red Vulcan EDC and subsidiaries P=45,217 P=45,217 GCGI* Palinpinon and Tongonan power 2,220 2,242 plant complex FGHC Sta. Rita power plant complex 397 397 Pantabangan- Masiway 293 293 FG Hydro hydroelectric plants EDC HKL* Hot Rock entities 127 109 P=48,254 P=48,258 *Changes in the carrying amount is due to the foreign exchange adjustments
Goodwill is tested for recoverability annually as at December 31 for Red Vulcan, FGHC, FG Hydro, and EDC HKL, and September 30 for GCGI or more frequently, if events or changes in circumstances indicate that the carrying value may be impaired.
This requires an estimation of the value-in-use of the CGUs to which goodwill is allocated. Estimating value-in-use requires First Gen Group to estimate the expected future cash flows from the CGUs and discounts such cash flows using weighted average cost of capital to calculate the present value of those future cash flows.
*SGVFS024294* - 33 -
The recoverable amounts have been determined based on value-in-use calculation using cash flow projections based on financial budgets approved by senior management covering a five-year period. The pre-tax discount rates applied in cash flow projections and the growth rates used to extrapolate the cash flows beyond the remaining term of the existing agreements for the years ended December 31, 2016 and 2015 are summarized as follows:
2016 2015 Pre-tax Growth Pre-tax Growth Entity discount rates rates discount rates rates Red Vulcan 8.5% 3.2% 10.8% 3.6% GCGI/EDC HKL 9.0% 4.0% 9.4% - 9.9% 4.0% FGHC 9.2% 1.9% 11.7% 2.4% FG Hydro 8.6% 2.9% 12.0% 3.6%
Key assumptions with respect to the calculation of value-in-use of the cash-generating units as of December 31, 2016 and 2015 on which management had based its cash flow projections to undertake impairment testing of goodwill are as follows:
§ Budgeted Gross Margins
The basis used to determine the value assigned to the budgeted gross margins is the average gross margins achieved in the year immediately before the budgeted year, increased for expected efficiency improvements.
§ Discount Rates
Discount rates reflect the current market assessment of the risk specific to each CGU. The discount rate is based on the average percentage of the entity’s weighted average cost of capital. This rate is further adjusted to reflect the market assessment of any risk specific to the CGU for which future estimates of cash flows have not been adjusted.
§ Growth Rates
Cash flows beyond the five-year period are extrapolated using a determined constant growth rate to arrive at the terminal value of each CGU.
No impairment loss on goodwill was recognized in the consolidated financial statements as at December 31, 2016 and 2015. The carrying value of goodwill as at December 31, 2016 and 2015 amounted to =48,254P million and =48,258P million, respectively (see Note 14).
Recoverability of Exploration and Evaluation Assets. Exploration and evaluation costs are recognized as assets in accordance with PFRS 6, Exploration for and Evaluation of Mineral Resources. Capitalization of these costs is based, to a certain extent, on management’s judgment of the degree to which the expenditure may be associated with finding specific geothermal reserve.
The application of the Group’s accounting policy for exploration and evaluation assets requires judgment and estimates in determining whether it is likely that the future economic benefits are certain, which may be based on assumptions about future events or circumstances. Estimates and assumptions may change if new information becomes available. If, after the exploration and evaluation assets are capitalized, information becomes available suggesting that the recovery of expenditure is unlikely, the amount capitalized is written-off in the consolidated statementsof income in the period when the new information becomes available. *SGVFS024294* - 34 -
The Group reviews the carrying values of its exploration and evaluation assets whenever events or changes in circumstances indicate that their carrying values may exceed their estimated net recoverable amounts. An impairment loss is recognized when the carrying values of these assets are not recoverable and exceeds their fair value.
The factors that the Group considers important which could trigger an impairment review of exploration and evaluation assets include the following:
§ the period for which the Group has the right to explore in the specific area has expired during the period or will expire in the near future, and is not expected to be renewed; § substantive expenditure on further exploration for and evaluation of geothermal reserve in the specific area is neither budgeted nor planned; § exploration for and evaluation of geothermal reserve in the specific area have not led to the discovery of commercially viable geothermal reserve and the Group decided to discontinue such activities in the specific area; and § sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale.
The Group determines impairment of projects based on the technical assessment of its resident scientists in various disciplines or based on management’s decision not to pursue any further commercial development of its exploration projects.
In 2015, the exploration and evaluation costs incurred for Mt. Labo and Mainit geothermal projects amounting to =7.0P million and =4.3P million, respectively, were assessed by management to be no longer recoverable. Hence, these were directly written-off. The write-off recognized in 2015 is equivalent to the book values of the related exploration and evaluation assets. No similar impairment loss was recognized in 2016 and 2014.
As at December 31, 2016 and 2015, the carrying amount of capitalized exploration and evaluation costs amounted to =3,109P million and =3,074P million, respectively (see Note 15).
Legal Contingencies and Regulatory Assessments. As discussed in Note 33, several companies within the Group are involved in legal proceedings and regulatory assessments for national taxes. The estimation of the potential liability resulting from these tax assessments requires significant judgment by management. The inherent uncertainty over the outcome of these tax matters is brought about by the differences in the interpretation and application of the laws and tax rulings.
The Group, in consultation with its external and internal legal and tax counsels, does not believe that these proceedings will have a material adverse effect on the consolidated financial statements. However, it is possible that future results of operations could be materially affected by changes in the estimates or the effectiveness of management’s strategies relating to these proceedings.
As at December 31, 2016 and 2015, provisions for these liabilities amounting to =1,659P million and P=1,546 million, respectively, are recorded under “Trade Payables and Other Current Liabilities” account (specifically under “Accruals for personnel and administrative expenses” and “Others”) (see Note 17) and “Noncurrent liabilities” account (presented as “Others” (see Note 20), respectively.
*SGVFS024294* - 35 -
Accounting for Revenue under Percentage of Completion Method. The Group’s revenue recognition policies require management to make use of estimates and assumptions that may affect the reported amounts of revenue and costs. This is generally driven by the buyer’s commitment to pay and percentage of completion.
The Group’s revenue from sale of real estate is recognized using the percentage-of-completion method. This is measured principally on the basis of the estimated completion of a physical proportion of the contract work, and by reference to the actual costs incurred to date over the estimated total costs of the project. There is no assurance that such use of estimates may not result to material adjustments in future periods.
The Group has set a certain percentage of collection over the total selling price in demonstrating the buyer’s commitment to pay. The percentage is representative of the buyer’s substantial investment that gives the buyer a stake in the project sufficient that the risk of loss through default motivates the buyer to honor its obligation to the Group. In addition, the Group’s project development costs used in the computation of the cost of real estate sold are based on estimated cost components determined by the Group’s project engineers.
Revenues and costs from real estate of Rockwell Land amounted to P=9,602 million and P=7,778 million, respectively, in 2016, P=6,337 million and P=4,640 million, respectively, in 2015, and P=6,413 million and P=4,743 million, respectively, in 2014.
Impairment of Non-financial Assets (i.e., Investments Accounted for at Equity Method, Property, Plant and Equipment, Investment Properties, Concession Rights for Contracts Acquired, Water Rights, Pipeline Rights, Rights to use Transmission Lines, Other Intangible Assets, Prepaid Major Spare Parts and Input VAT Claims/Tax Credits). The Group assesses impairment of non-financial assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The factors that the Group consider important, which could trigger an impairment review include the following:
§ Significant under-performance 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 and economic trends.
The Group recognizes an impairment loss whenever the carrying amount of an asset exceeds its recoverable amount, which is the higher of fair value less cost of disposal and value-in-use. The fair value less cost of disposal calculation is based on available data from binding sales transactions in an arm’s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model which requires use of estimates of a suitable discount rate and expected future cash inflows. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit to which the assets belong. In the case of Input VAT, where the collection of tax claims is uncertain, the Group provides an allowance for impairment based on the assessment of management and the Group’s legal counsel.
In 2011, EDC recognized full impairment on its NNGP assets amounting to P=8,737.6 million due to steam supply limitations. Subsequently, selected NNGP assets were transferred to and installed in Nasulo Power Plant located in Southern Negros. In light of the completion of the Nasulo Power Plant in July 2014, EDC has determined that the impairment loss previously recognized on assets transferred to and installed in Nasulo (from NNGP) must be reversed as the service potential of *SGVFS024294* - 36 - those assets has now been established (see Note 12). Accordingly, reversal of impairment loss amounting to P=2,051.9 million was recognized in 2014 representing the net book value of assets installed in Nasulo Power Plant had there been no impairment loss previously recognized on these assets. The corresponding deferred tax asset amounting to =205.2P million has likewise been reversed. No similar reversal was recognized in 2016 and 2015.
As discussed in Note 10, Globe Telecom, Inc. (Globe) purchased 70,046,372 BTI shares held by BTHC and 717,335 Bayantel shares held by the Parent Company for =1,811P million and P=19 million, respectively, in July 2015. As a result, Globe's equity interests in Bayantel increased from 56.87% to 98.57%.
The Parent Company recognized reversal of allowance for impairment loss of P=19 million and wrote off the remaining unrecovered investment in BTI amounting to P=557 million in 2015. As at December 31, 2016 and 2015, the Parent Company’s total investments, deposits in and advances to BTHC (before any allowance for impairment losses) amounted to P=3,963 million.
The carrying amounts of the non-financial assets as at December 31, 2016 and 2015 are as follows:
2016 2015 (In Millions) Property, plant and equipment (Note 12) P=141,199 P=133,002 Investments accounted for at equity method (Note 10) 21,034 19,461 Investment properties (Note 13) 16,378 13,661 Concession rights for contracts acquired (Note 14) 2,398 2,985 Investments in a joint venture (Note 10) 3,499 3,650 TCCs (Notes 9 and 15) 3,472 3,140 Prepaid major spare parts (Note 15) 3,257 3,273 Water rights (Note 14) 1,431 1,527 Pipeline rights (Note 14) 232 248 Rights to use transmission line (Note 14) 51 54 Other intangible assets (Note 14) 40 111
Estimating Useful Lives of Property, Plant and Equipment (except Land), Investment Properties, Concession Rights for Contracts Acquired, Water Rights and Pipeline Rights, Rights to Use Transmission Lines and Other Intangible Assets. The Group estimated the useful lives based on the periods over which the assets are expected to be available for use and on the collective assessment of industry practices, internal technical evaluation and experience with similar assets and arrangements.
The estimated useful lives are reviewed at each financial reporting date and updated, if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits in the use of these assets. However, it is possible that future results of operations could be materially affected by changes in the estimates brought about by changes in the aforementioned factors.
The amounts and timing of recording the depreciation and amortization for any year would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives would increase the depreciation and amortization and decrease the carrying value of the assets.
In June 2015, a reassessment was made by management and has resulted to a change in the *SGVFS024294* - 37 - estimated useful life of the Burgos Wind Power Plant from 20 years to 25 years. The effect of this change in estimate reduced 2015 depreciation expense and increased 2015 net income by P=84.2 million. Annual depreciation expense starting 2016 will be lower by =168.4P million because of the change in estimate. There were no other changes in the estimated useful lives of property, plant and equipment, investment properties, concession rights for contracts acquired, water rights and pipeline rights and other intangible assets in 2016 and 2014.
Impairment of AFS Investments. The Group considers investments in equity securities as impaired when there has been a significant or prolonged decline in the fair value of such investments below their cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires judgment. The Group treats “significant” generally as 20% or more and “prolonged” as greater than 12 months. In addition, the Group evaluates other factors, including normal volatility in share price for quoted equities and the future cash flows and the discount factors for unquoted equities.
The Group recognized impairment losses of nil, =20P million and P=39 million on its investment in Narra Venture Capital Management II, LLC (Narra Venture) in 2016, 2015 and 2014, respectively. The carrying values of AFS investments amounted to P=12,940 million and P=14,857 million as at December 31, 2016 and 2015, respectively (see Note 11).
Impairment of Loans and Receivables. The Group reviews its loans and receivables at each financial reporting date to assess whether an allowance for impairment should be recorded in the consolidated statements of income. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes in the allowance.
The Group maintains an allowance for impairment of receivables at a level that management considers adequate to provide for potential uncollectibility of its trade and other receivables. The Group evaluates specific balances where management has information that certain amounts may not be collectible. In these cases, the Group uses judgment, based on available facts and circumstances, and a review of the factors that affect the collectibility of the accounts including, but not limited to, the age and status of the receivables, collection experience, and past loss experience.
The review is made by management on a continuing basis to identify accounts to be provided with allowance. These specific reserves are re-evaluated and adjusted as additional information received affects the amount estimated.
In addition to specific allowance against individually significant receivables, the Group also makes a collective impairment allowance against exposures which, although not specifically identified as requiring a specific allowance, have a greater risk of default than when originally granted. Collective assessment of impairment is made on a portfolio or group basis after performing a regular review of age and status of the portfolio/group of accounts relative to historical collections, changes in payment terms, and other factors that may affect ability to collect payments.
Provision recognized in 2016, 2015 and 2014 amounted to P=42 million, =79P million and P=216 million, respectively (see Note 23).
Allowance for impairment loss on receivables amounted to P=424 million and P=416 million as at December 31, 2016 and 2015, respectively. The carrying amount of trade and other *SGVFS024294* - 38 - receivables amounted to P=30,704 million and P=26,804 million as at December 31, 2016 and 2015, respectively (see Note 7).
Estimating NRV of Inventories. Inventories are presented at the lower of cost or NRV. Estimates of NRV are based on the most reliable evidence available at the time the estimates are made, of the amount the inventories expected to be realized. A review of the items of inventories is performed at each financial reporting date to reflect the accurate valuation of inventories in the consolidated financial statements.
Inventories amounted to P=17,432 million and P=16,726 million as at December 31, 2016 and 2015, respectively (see Note 8). Write-down of inventories, net of reversals, amounted to P=93 million and P=65 million in 2016 and 2015, respectively.
Estimation of Retirement Benefit Liability. The cost of defined benefit pension plans and other post-employment medical 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 rates, future salary increases, mortality rates and future pension increases. 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 financial 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.
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.
The details of the assumptions used in the calculation are discussed in Note 25. As at December 31, 2016 and 2015, the present value of retirement benefit liability of the Group amounted to =8,077P million and =9,025P million, respectively. Carrying value of retirement benefit asset as at December 31, 2016 and 2015 amounted to =208P million and P=242 million, respectively (see Note 15). Carrying value of retirement and other long-term employee benefits liability as at December 31, 2016 and 2015 amounted to P=2,617 million and P=3,450 million, respectively (see Note 25). Estimation of Asset Retirement and Preservation Obligations. The asset retirement and preservation obligations of the Group require assumptions and estimates in relation to the expected cost to rehabilitate and restore sites and infrastructure when such obligation exists. Such cost estimates are discounted using pre-tax rates which management assessed as reflective of current market assessments of the time value of money and the risks specific to the liability. Each year, the provision is increased to reflect the accretion of discount and to accrue an estimate for the effects of inflation. These pertain to the following subsidiaries: a. FGP, FGPC, FG Bukidnon and EDC Under their respective ECCs issued by the DENR, FGP and FGPC have legal obligations to dismantle their power plant assets at the end of their useful lives. FG Bukidnon, on the other hand, has a contractual obligation under the lease agreement with PSALM to dismantle its power plant assets at the end of the useful lives. The asset retirement obligations recognized represent the best estimate of the expenditures required to dismantle the power plants at the *SGVFS024294* - 39 -
end of their useful lives. Such cost estimates are discounted using a pre-tax rate that reflects the current market assessment of the time value of money and the risks specific to the liability. Each year, the asset retirement obligations are increased to reflect the accretion of discount and to accrue an estimate for the effects of inflation, with the charges being recognized under the “Interest expense and financing charges” account in the consolidated statement of income. While it is believed that the assumptions used in the estimation of such costs are reasonable, significant changes in these assumptions may materially affect the recorded expense or obligations in future years. In 2009, with the conversion of its Geothermal Service Contracts (GSCs) to GRESCs, EDC has made a judgment that the GRESCs are subject to the provision for restoration costs. Similarly, under the WESC, EBWPC has made a judgment that it is responsible for the removal and the disposal of all materials, equipment and facilities installed in the contract area used for the wind energy project. In determining the amount of provisions for rehabilitation and restoration costs, assumptions and estimates are required in relation to the expected cost to rehabilitate and restore sites and infrastructure when such obligation exists (see Note 32). Asset retirement and preservation obligation amounted to P=99 million and P=399 million as at December 31, 2016 and 2015, respectively (see Note 19). c. FPIC The APO of FPIC represents the best estimate of the expenditures required to preserve the assets similar with the requirement of asset retirement obligation. Asset retirement and preservation obligations amounted to =1,867P million and =1,863P million as at December 31, 2016 and 2015, respectively (see Note 19). Recognition of Deferred Tax Assets. The carrying amounts of deferred tax assets at each financial reporting date are reviewed and reduced to the extent that there are no longer sufficient taxable profits available to allow all or part of the deferred tax assets to be utilized. The Group’s assessment of the recognition of deferred tax assets on deductible temporary differences, carry- forward benefits of MCIT and NOLCO is based on the forecasted taxable income of the following reporting period. This forecast is based on the Group’s past results and future expectations on revenues and expenses. As at December 31, 2016 and 2015, deferred tax assets recognized in the consolidated statements of financial position amounted to P=2,582 million and P=2,380 million, respectively. Deductible temporary differences and carry-forward benefits of NOLCO and MCIT for which no deferred tax asset has been recognized as at December 31, 2016 and 2015 amounted to =28,129P million and P=25,764 million, respectively (see Note 26). Fair Value of Financial Instruments. Certain financial assets and financial liabilities are required to be carried at fair value, which requires the use of accounting estimates and judgment. While significant components of fair value measurement are determined using verifiable objective evidence (i.e., foreign exchange rates, interest rates and volatility rates), the timing and amount of changes in fair value would differ with the valuation methodology used. Any changes in the fair value of these financial assets and financial liabilities would directly affect consolidated profit and loss and consolidated equity.
When the fair values of financial assets and financial liabilities recorded in the consolidated statements of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are taken from observable markets where possible, but when this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of *SGVFS024294* - 40 -
liquidity and model inputs such as correlation and volatility for longer dated financial instruments.
Fair values of the Group’s financial assets and liabilities are set out in Note 31 of the consolidated financial statements.
Shortfall Generation. EDC’s PPA with NPC requires the annual nomination of capacity that EDC shall deliver to NPC. EDC bills NPC based on the nominated capacity. At the end of the contract year, EDC’s fulfillment of the nominated capacity and the parties’ responsibilities for any shortfall shall be determined. The contract year for the Unified Leyte PPA is for fiscal period ending July 25 while the contract year for the Mindanao I and II PPAs is for fiscal period ending December 25 (see Note 32). Assessment is made at every financial reporting date whether the nominated capacity would be met based on management’s projection of electricity generation covering the entire contract year. If the occurrence of shortfall generation is determined to be probable, the amount of estimated reimbursement to NPC is accounted for as a deduction to revenue for the period and a corresponding liability is recognized. As at December 31, 2016 and 2015, EDC’s estimated liability arising from shortfall generation amounted to P=396 million and P=442 million, respectively, shown under the “Trade payables and other current liabilities” account (see Note 17). Moreover, the amount of estimations relating to the shortfall generation under the PPA’s covering Unified Leyte, Mindanao I and Mindanao II could be subsequently adjusted depending on the subsequent reconciliation by the Technical or Steering Committee established in accordance with the Unified Leyte PPA in view of the parties’ responsibilities in connection with the consequences of typhoons and similar events. As at April 6, 2017, the reconciliation with NPC for the contract year 2013-2014 is still ongoing.
4. Operating Segment Information
Operating segments are components of the Group (a) that engage in business activities from which they may earn revenues and incur expenses; (b) with operating results which are regularly reviewed by the Group’s chief operating decision-maker (the BOD) to make decisions about how resources are to be allocated to the segment and assess their performances; and (c) for which discrete financial information is available.
The Group’s operating businesses are organized and managed separately according to the nature of the products and services, with each segment representing a strategic business unit that offers different products and serves different markets.
The Group conducts majority of its business activities in the following areas:
§ Power generation – power generation subsidiaries under First Gen § Real estate development – residential and commercial real estate development and leasing of Rockwell Land and FPRC, and sale of industrial lots and leasing of ready-built factories by FPIP and FITI § Manufacturing – manufacturing subsidiaries under First Philec § Construction and other services – construction, geothermal well drilling, oil transporting, securities transfer services, investment holdings, financing and others. The financial statements of the Parent Company and subsidiaries are prepared in accordance with PFRSs. Except for the recurring net income (RNI), the segment information disclosed below are based on PFRSs.
*SGVFS024294* - 41 -
Segment revenue, segment expenses and segment performance include transfers between business segments. The transfers are accounted for at competitive market prices charged to unrelated customers for similar products. Such transfers are eliminated in consolidation.
The operations of these business segments are substantially in the Philippines. First Gen’s revenues are substantially generated from sale of electricity to Meralco, the sole customer of FGP and FGPC; while close to 37.7% in 2016 and 36.8% in 2015 of EDC’s total revenues are derived from existing long-term PPAs with NPC. Total revenues from sale of electricity to Meralco amounted to =51,137P million, P=48,765 million and P=53,452 million in 2016, 2015 and 2014, respectively, which account for more than 10% of the Group’s consolidated revenues.
Financial information about the business segments follows:
2016 Investment Holdings, Power Real Estate Construction Generation Development Manufacturing and Others Eliminations Consolidated (In Millions) Revenues: External sales P=74,284 P=11,459 P=2,041 P=4,126 P=– P=91,910 Inter-segment sales – – – 3,309 (3,309) – Earnings from investments accounted for under equity method – 253 – 2,075 – 2,328 Total revenues 74,284 11,712 2,041 9,510 (3,309) 94,238 Costs and expenses (41,360) (9,293) (1,700) (7,011) 5,462 (53,902) Depreciation and amortization (9,375) (576) (303) (1,006) (2,246) (13,506) Finance income 424 1,334 (7) 137 – 1,888 Finance costs (7,978) (393) (23) (765) (77) (9,236) Foreign exchange gain (loss) (802) 5 (18) 109 – (706) Other income (loss) 3,605 (210) 3,950 1,676 (1,242) 7,779 Income before income tax 18,798 2,579 3,940 2,650 (1,412) 26,555 Provision for income tax 4,997 698 45 156 (85) 5,811 Net income (loss) P=13,801 P=1,881 P=3,895 P=2,494 (P=1,327) P=20,744
2015 Investment Holdings, Power Real Estate Construction Generation Development Manufacturing and Others Eliminations Consolidated (In Millions) Revenues: External sales P=83,407 P=8,810 P=1,991 P=2,302 P=– P=96,510 Inter-segment sales – – – 4,676 (4,676) – Earnings from investments accounted for under equity method – 170 – 1,619 – 1,789 Total revenues 83,407 8,980 1,991 8,597 (4,676) 98,299 Costs and expenses (53,275) (6,467) (1,945) (6,986) 4,479 (64,194) Depreciation and amortization (8,520) (452) (45) (1,151) (308) (10,476) Finance income 456 1,012 1 133 – 1,602 Finance costs (7,579) (474) (55) (919) (8) (9,035) Foreign exchange gain (loss) (1,523) 7 (26) 16 – (1,526) Other income (loss) 1,420 136 50 10,813 (6,872) 5,547 Income before income tax 14,386 2,742 (29) 10,503 (7,385) 20,217 Provision for income tax 3,279 677 58 151 (74) 4,091 Net income (loss) P=11,107 P=2,065 (P=87) P=10,352 (P=7,311) P=16,126
*SGVFS024294* - 42 -
2014 Investment Holdings, Power Real Estate Construction, Generation Development Manufacturing and Others Eliminations Consolidated Revenues: External sales P=84,384 P=9,046 P=2,007 P=3,864 P=– P=99,301 Inter-segment sales – – – 3,912 (3,912) – Earnings from investments accounted for under equity method – 106 – 1,357 – 1,463 Total revenues 84,384 9,152 2,007 9,133 (3,912) 100,764 Costs and expenses (55,832) (6,880) (2,189) (7,697) 3,637 (68,961) Depreciation and amortization (7,269) (411) (30) (854) (163) (8,727) Finance income 287 1,135 100 94 – 1,616 Finance costs (7,428) (596) (160) (805) 42 (8,947) Foreign exchange gain (loss) (75) 1 (19) (22) – (115) Other income (loss) 3,501 413 (9) 8,311 (7,708) 4,508 Income before income tax 17,568 2,814 (300) 8,160 (8,104) 20,138 Provision for income tax 3,460 665 84 312 (143) 4,378 Net income (loss) P=14,108 P=2,149 (P=384) P=7,848 (P=7,961) P=15,760
Other financial information of the business segments are as follows:
As of December 31, 2016 Investment Holdings, Power Real Estate Construction Generation Development Manufacturing and Others Eliminations Consolidated (In Millions) Current assets P=55,329 P=27,963 P=3,327 P=15,927 (P=2,959) P=99,587 Noncurrent assets 207,655 17,596 650 166,492 (125,730) 266,663 Total assets P=262,984 P=45,559 P=3,977 P=182,419 (P=128,689) P=366,250
Current liabilities P=34,517 P=9,123 P=2,017 P=9,096 (P=3,585) P=51,168 Noncurrent liabilities 124,574 16,571 266 13,089 1,057 155,557 Total liabilities P=159,091 P=25,694 P=2,283 P=22,185 (P=2,528) P=206,725
Other segment information: Investments accounted for under equity method P=– P=3,499 P=– P=17,535 P=– P=21,034 Capital expenditures 15,691 657 684 375 (409) 16,998
As of December 31, 2015 Investment Holdings, Power Real Estate Construction Generation Development Manufacturing and Others Eliminations Consolidated (In Millions) Current assets P=61,141 P=26,366 P=2,497 P=16,897 (P=3,358) P=103,543 Noncurrent assets 198,552 14,246 967 154,332 (113,056) 255,041 Total assets P=259,693 P=40,612 P=3,464 P=171,229 (P=116,414) P=358,584
Current liabilities P=32,873 P=8,402 P=812 P=11,085 (P=2,273) P=50,899 Noncurrent liabilities 132,439 14,034 4,427 14,476 (1,860) 163,516 Total liabilities P=165,312 P=22,436 P=5,239 P=25,561 (P=4,133) P=214,415
Other segment information: Investments accounted for under equity method P=– P=3,650 P=– P=15,774 P=– P=19,424 Capital expenditures 21,253 548 90 854 (535) 22,210
Group and segment performance is evaluated based on net income. Net income is measured consistently with net income in the consolidated statements of income while RNI is measured as net income attributable to equity holders of the parent adjusted for the Parent Company’s share in gains or losses arising from unrealized foreign exchange translations, capital transactions, mark- to-market restatements, asset impairment or recovery and other non-recurring transactions.
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The following table shows the computation of RNI:
2016 2015 2014 (In Millions)
Net income attributable to equity holders of the parent P=6,557 P= 6,191 P=3,760 Add (deduct) share of equity holders of the parent in non-recurring items: Arbitration-related settlement (see Note 24) (1,110) – – Liquidated damages (522) – – Proceeds from insurance claims (235) (280) (266) Foreign exchange loss 104 249 8 Reversal of asset impairment - net – (2,600) (245) Other non-recurring transactions (213) (48) 28 RNI P=4,581 P=3,512 P=3,285
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5. Subsidiaries, Significant Acquisitions, Discontinued Operations and Material Non-controlling Interests
The accompanying consolidated financial statements comprise the financial statements of Lopez Holdings and the following subsidiaries.
Place of incorporation Percentage of Ownership Principal Activities and operation 2016 2015 Subsidiaries Bayan Telecommunications Holdings, Inc. (BTHC) Investment holdings Philippines 82.9 82.9 First Philippine Holdings Corporation (FPH) and subsidiaries (FPH Group)* Investment holdings Philippines 46.5 46.5 **The Parent Company has a de facto control of FPH because of the widely dispersed interest of the non-controlling shareholders compared with its 46.47% interest as at December 31, 2016 and 46.50% as at December 31, 2015.
The following are the subsidiaries of FPH and FPH’s percentage of ownership in the following entities as at December 31, 2016 and 2015:
2016 2015 Place of incorporation Percentage of ownership held by the Group Subsidiaries and operation Direct Indirect Direct Indirect Power Generation First Gen Corporation (First Gen) Philippines 66.24 – 66.24 – First Gen Renewables, Inc. Philippines – 100.00 – 100.00 FG Bukidnon Power Corp. (FG Bukidnon) Philippines – 100.00 – 100.00 Unified Holdings Corporation (Unified) Philippines – 100.00 – 100.00 FGP Corp. (FGP)5 Philippines – 100.00 – 100.00 AlliedGen Power Corporation Philippines – 100.00 – 100.00 First NatGas Power Corporation (FNPC) Philippines – 100.00 – 100.00 First Gen Luzon Power Corporation. Philippines – 100.00 – 100.00 First Gen Visayas Hydro Power Corporation (FG Visayas) Philippines – 100.00 – 100.00 First Gen Mindanao Hydro Power Corporation (FG Mindanao) Philippines – 100.00 – 100.00 FGen Northern Mindanao Holdings, Inc. (FNMHI) Philippines – 100.00 – 100.00 FGen Bubunawan Hydro Corporation (FG Bubunawan) Philippines – 100.00 – 100.00 FGen Cabadbaran Hydro Corporation (FG Cabadbaran) Philippines – 100.00 – 100.00 FGen Puyo Hydro Corporation (FG Puyo) Philippines – 100.00 – 100.00 FG Mindanao Renewables Corp. (FMRC) Philippines – 100.00 – 100.00 FGen Tagoloan Hydro Corporation (FG Tagoloan) Philippines – 100.00 – 100.00 FGen Tumalaong Hydro Corporation (FG Tumalaong) Philippines – 100.00 – 100.00
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2016 2015 Place of incorporation Percentage of ownership held by the Group Subsidiaries and operation Direct Indirect Direct Indirect First Gen Ecopower Solutions, Inc. Philippines – 100.00 – 100.00 First Gen Energy Solutions, Inc. (FGES) Philippines – 100.00 – 100.00 First Gen Premier Energy Corporation Philippines – 100.00 – 100.00 First Gen Prime Energy Corporation Philippines – 100.00 – 100.00 First Gen Visayas Energy Corporation Philippines – 100.00 – 100.00 Northern Terracotta Power Corporation (Northern Terracotta) Philippines – 100.00 – 100.00 Blue Vulcan Holdings Corporation Philippines – 100.00 – 100.00 Prime Meridian Powergen Corporation (PMPC) Philippines – 100.00 – 100.00 Goldsilk Holdings Corporation (Goldsilk) Philippines – 100.00 – 100.00 Dualcore Holdings, Inc. (Dualcore) Philippines – 100.00 – 100.00 Onecore Holdings, Inc. (Onecore) Philippines – 100.00 – 100.00 First Gas Holdings Corporation (FGHC) Philippines – 100.00 – 100.00 First Gas Power Corporation (FGPC) Philippines – 100.00 – 100.00 First Gas Pipeline Corporation Philippines – 100.00 – 100.00 FG Land Corporation Philippines – 100.00 – 100.00 FGEN LNG Corporation (FGEN LNG) Philippines – 100.00 – 100.00 First Gen LNG Holdings Corporation (LNG Holdings) Philippines – 100.00 – 100.00 First Gen Meridian Holdings, Inc. (FGEN Meridian) Philippines – 100.00 – 100.00 FGen Northern Power Corp. (FGEN Northern Power) Philippines – 100.00 – 100.00 FGen Power Ventures, Inc. (FGEN Power Ventures) Philippines – 100.00 – 100.00 FGen Casecnan Hydro Power Corp. (FGEN Casecnan) Philippines – 100.00 – 100.00 FGen Power Holdings, Inc. (Power Holdings) Philippines – 100.00 – 100.00 FGen Prime Holdings, Inc. (Prime Holdings) Philippines – 100.00 – 100.00 FGen Eco Solutions Holdings, Inc. (FGESHI) Philippines – 100.00 – 100.00 FGen Liquefied Natural Gas Holdings, Inc. (Liquefied Holdings) Philippines – 100.00 – 100.00 FGen Reliable Energy Holdings, Inc. (FG Reliable Energy) Philippines – 100.00 – 100.00 FGen Power Solutions, Inc. (FG Power Solutions) Philippines – 100.00 – 100.00 FGen Vibrant Blue Sky Holdings, Inc. (FGVBSHI) Philippines – 100.00 – 100.00 FGen Aqua Power Holdings, Inc. (Aqua Power) Philippines – 100.00 – 100.00 First Gen Hydro Power Corporation (FG Hydro) Philippines – 100.00 – 100.00 FGen Natural Gas Supply, Inc. (FGen NatGas Supply) Philippines – 100.00 – 100.00 FGen Power Operations, Inc. (FPOI) Philippines – 100.00 – 100.00 FGen Fuel Line Systems, Inc. (FGen Fuel Line) Philippines – 100.00 – 100.00
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2016 2015 Place of incorporation Percentage of ownership held by the Group Subsidiaries and operation Direct Indirect Direct Indirect Prime Terracota Holdings Corporation (Prime Terracota) Philippines – 73.00 – 73.00 Red Vulcan Holdings Corporation (Red Vulcan) Philippines – 100.00 – 100.00 Energy Development Corporation (EDC) Philippines – 60.00 – 60.00 EDC Drillco Corporation Philippines – 100.00 – 100.00 EDC Geothermal Corp. (EGC) Philippines – 100.00 – 100.00 Green Core Geothermal Inc. (GCGI) Philippines – 100.00 – 100.00 Bac-Man Geothermal Inc. (BGI) Philippines – 100.00 – 100.00 Unified Leyte Geothermal Energy Inc. (ULGEI) Philippines – 100.00 – 100.00 Southern Negros Geothermal, Inc. (SNGI) Philippines – 100.00 – 100.00 EDC Mindanao Geothermal, Inc. (EMGI) Philippines – 100.00 – 100.00 Bac-Man Energy Development Corporation (BEDC) Philippines – 100.00 – 100.00 Kayabon Geothermal Inc. (KGI) Philippines – 100.00 – 100.00 Mount Apo Renewable, Inc. (MAREI) Philippines – 100.00 – 100.00 EDC Wind Energy Holdings, Inc. (EWEHI) Philippines – 100.00 – 100.00 EDC Burgos Wind Power Corporation (EBWPC) Philippines – 100.00 – 100.00 EDC Pagudpud Wind Power Corporation (EPWPC) Philippines – 100.00 – 100.00 EDC Bayog Burgos Power Corporation (EBBPC) Philippines _ 60.00 _ 60.00 EDC Pagali Burgos Wind Power Corporation (EPBWPC) Philippines _ 60.00 _ 60.00 Matnog 1 Renewable Energy Corporation Philippines _ 60.00 _ _ Matnog 2 Renewable Energy Corporation Philippines _ 60.00 _ _ Matnog 3 Renewable Energy Corporation Philippines _ 60.00 _ _ Iloilo 1 Renewable Energy Corporation Philippines _ 60.00 _ _ Negros 1 Renewable Energy Corporation Philippines _ 60.00 _ _ EDC Corporation Chile Limitada Santiago, Chile – 100.00 – 100.00 EDC Holdings International Limited (EHIL) EDC Hong Kong Limited (EDC HKL) British Virgin Islands – 100.00 – 100.00 EDC Chile Holdings SpA Santiago, Chile – 100.00 – 100.00 EDC Geotermica Chile SpA Santiago, Chile – 100.00 – 100.00 EDC Peru Holdings S.A.C Lima, Peru – 100.00 – 100.00 EDC Geotermica Peru S.A.C Lima, Peru – 100.00 – 100.00 EDC Peru S. A. C. Lima, Peru – 70.00 – 70.00 EDC Geotermica Del Sur S.A.C. Lima, Peru – 100.00 – 100.00 EDC Energia Azul S.A.C. Lima, Peru – 100.00 – 100.00 Geothermica Crucero Peru S.A.C. Lima, Peru – 42.00 – 42.00 EDC Energía Perú S.A.C. Lima, Peru – 100.00 – 100.00 Geothermica Tutupaca Norte Peru S.A.C. Lima, Peru – 42.00 – 42.00 *SGVFS024294* - 47 -
2016 2015 Place of incorporation Percentage of ownership held by the Group Subsidiaries and operation Direct Indirect Direct Indirect EDC Energía Geotérmica S.A.C. Lima, Peru – 100.00 – 100.00 EDC Progreso Geotérmico Perú S.A.C. Lima, Peru – 100.00 – 100.00 Geothermica Loriscota Peru S.A.C. Lima, Peru – 42.00 – 42.00 EDC Energía Renovable Perú S.A.C. Lima, Peru – 100.00 – 100.00 PT EDC Indonesia Jakarta Pusat, Indonesia – 100.00 – 100.00 PT EDC Panas Bumi Indonesia Jakarta Pusat, Indonesia – 100.00 – 100.00 EDC Soluciones Sostenibles Ltd Philippines _ 60.00 _ 60.00 EDC Energia Verde Chile SpA Philippines _ 60.00 _ 60.00 EDC Energia de la Tierra SpA Philippines _ 60.00 _ 60.00 EDC Desarollo Sostenible Ltd Philippines _ 60.00 _ 60.00 EDC Energia Verde Peru SAC Philippines _ 60.00 _ 60.00 EDC Bright Solar Energy Holdings, Inc. (EBSEHI) Philippines _ 60.00 _ 60.00 EDC Bago Solar Power Corporation (EBSPC) Philippines _ 60.00 _ 60.00 EDC Burgos Solar Corporation (EBSC) Philippines _ 60.00 _ 60.00 EMGI Philippines _ 60.00 _ _ KGI Philippines _ 60.00 _ _ MAREI Philippines _ 60.00 _ _ PT EDC Indonesia Philippines _ 57.00 _ 57.00 PT EDC Panas Bumi Indonesia Philippines _ 57.00 _ 57.00 Batangas Cogeneration Corporation (Batangas Cogen) Philippines 60.00 – 60.00 – Manufacturing First Philec Philippines 100.00 – 100.00 – First Philec Inc. (FPI) (formerly FEDCOR) Philippines – 100.00 – 100.00 First Philippine Power Systems, Inc. (FPPSI) Philippines – 100.00 – 100.00 First Philec Manufacturing Technologies Corporation (FPMTC) Philippines – 100.00 – 100.00 First PV Ventures Corporation (First PV) Philippines – 100.00 – 100.00 First Philec Nexolon Corporation (FPNC) Philippines – 70.00 – 70.00 First Philec Solar Solutions Corporation Philippines – 100.00 – 100.00 Philippine Electric Corporation (PHILEC) Philippines – 99.20 – 99.20 First Philec Solar Corporation Philippines – 74.54 – 74.54 Cleantech Energy Holdings PTE, Ltd. Philippines – 100.00 – 100.00 First Philec Energy Solutions, Inc. Philippines – 100.00 – 100.00
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2016 2015 Place of incorporation Percentage of ownership held by the Group Subsidiaries and operation Direct Indirect Direct Indirect Real Estate Development First Philippine Realty Development Corporation (FPRDC) Philippines 100.00 – 100.00 – First Philippine Realty Corporation (FPRC) Philippines 100.00 – 100.00 – First Philippine Properties Corporation (FPPC) Philippines 100.00 – 100.00 – FPH Land Venture, Inc. (FLVI) Philippines – 100.00 – 100.00 Terraprime, Inc. (Terraprime) Philippines – 100.00 – 100.00 First Industrial Township, Inc. (FITI) Philippines – 100.00 – 100.00 First Industrial Township Water, Inc. (FITWI) Philippines – 100.00 – 100.00 First Industrial Township Utilities, Inc. (FITUI) Philippines – 100.00 – 100.00 First Philippine Development Corp. (FPDC) Philippines – 100.00 – 100.00 FWV Biofields Corp. (FWVB) Philippines – 100.00 – 100.00 First Sumiden Realty, Inc. (FSRI) Philippines – 60.00 – 60.00 FPHC Realty and Development Corporation (FPHC Realty) Philippines 98.00 – 98.00 – Rockwell Land Corporation (Rockwell Land) (see Note 10) Philippines 86.58 – 86.58 – Rockwell Integrated Property Services, Inc. Philippines – 100.00 – 100.00 Rockwell Primaries Development Corporation Philippines – 100.00 – 100.00 ATR KimEng Land, Inc. Philippines – 60.00 – 60.00 Rockwell Hotels & Leisure Management Corporation Philippines – 100.00 – 100.00 Stonewell Property Development Corporation Philippines – 100.00 – 100.00 Primaries Properties Sales Specialist Inc. Philippines – 100.00 – 100.00 Rockwell Leisure Club, Inc. (RLCI) (see Note 2) Philippines – 77.00 – 75.00 Rockwell Primaries South Development Corporaiton Philippines – 60.00 – 60.00 Retailscapes, Inc. Philippines – 100.00 – 100.00 First Philippine Industrial Park, Inc. (FPIP) Philippines 70.00 – 70.00 – FPIP Property Developers and Management Corporation Philippines – 100.00 – 100.00 FPIP Utilities, Inc. Philippines – 100.00 – 100.00 Grand Batangas Resort Development, Inc. Philippines – 85.00 – 85.00 Construction First Balfour, Inc. (First Balfour) Philippines 100.00 – 100.00 – Therma Prime Drilling Corporation (Therma Prime) Philippines – 100.00 – 100.00 Therma One Transport Corp. Philippines – 100.00 – 100.00 Torreverde Corp. Philippines – 100.00 – 100.00 First Balfour Management Technical Services, Inc. Philippines – 100.00 – 100.00
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2016 2015 Place of incorporation Percentage of ownership held by the Group Subsidiaries and operation Direct Indirect Direct Indirect Others First Philippine Utilities Corporation (FPUC) Philippines 100.00 – 100.00 – Securities Transfer Services, Inc. Philippines 100.00 – 100.00 – FPH Capital Resources, Inc. (FCRI) Philippines 100.00 – 100.00 – FGHC International Cayman Islands 100.00 – 100.00 – FPH Fund Cayman Islands 100.00 – 100.00 – FPH Ventures Cayman Islands – 100.00 – 100.00 FP Island Energy Corporation (FP Island) Philippines 100.00 – – – First Philippine Industrial Corporation (FPIC) Philippines 60.00 – 60.00 –
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First Gen’s acquisition of non-controlling interests in Prime Terracota On June 18, 2015, First Gen purchased 16.0 million and 13.0 million Series “B” voting preferred stocks of Prime Terracota owned by Quialex Realty Corp. (QRC) and the Employees Retirement Plan of Lopez, Inc. (Lopez, Inc. Retirement Fund) [LIRF], respectively, for a total consideration of P=52.0 million ($1.1 million). As at December 31, 2016 and 2015, First Gen has a 100% direct voting interest in Prime Terracota and a 67.0% effective voting interest in EDC through Prime Terracota. The amount of equity reserve pertaining to the acquisition of the noncontrolling stakes of QRC and LIRF in Prime Terracota amounted to P=9.9 million. The share of FPH in the equity reserve adjustment amounts to =6.6P million in 2016.
Northern Terracota’s acquisition of non-controlling interest in EDC In 2015, Northern Terracota acquired EDC shares for P=408 million resulting in equity reserve adjustment of =276P million. The share of FPH amounts to P=175 million.
Acquisition of Majority Interest in ATR KimEng Land, Inc. In 2014, Rockwell Primaries Development Corporation (Rockwell Primaries) acquired 60% ownership interest in Rockwell Primaries South Development Corporation (Rockwell Primaries South), formerly ATR KimEng Land, Inc. Management considered the substance of the assets and activities of the acquired entity and assessed that the acquisition of a subsidiary does not represent a business, but rather an acquisition of the undeveloped land, the remaining asset of the subsidiary at the date of acquisition. The cost of the acquisition is allocated to the assets and liabilities acquired based upon their relative fair values, and no goodwill or deferred tax is recognized.
The acquisition cost of 60% interest in Rockwell Primaries South substantially allocated to the land amounted to P=591.1 million. Discontinued Operations of FPSC and FPNC In 2012, First PV and FPNC initiated arbitration proceedings against Nexolon with the ICC while First Philec and FPSC initiated arbitration proceedings against SPML with the ICC. The companies received a favorable arbitration award in October 2014 for First PV and FPNC and a favorable partial award for First Philec and FPSC in January 2015. In view of these favorable decisions by the arbitral tribunal which made the sale of the ownership of FPH (through its subsidiaries) in FPSC and FPNC highly probable, the Group considered that the wafer slicing operations of both FPNC and FPSC met the definition of discontinued operations in 2015, and as such, the assets, liabilities and results of operations that can be clearly distinguished operationally and for financial reporting purposes from the rest of the Group had been terminated. In 2016, the assets, liabilities and results of operations of FPNC and FPSC were reverted to continuing operations due to the uncertainty in the collection of the awards of FPNC and the resulting full ownership of First Philec in FPSC after the settlement with SPML. The major classes of assets and liabilities of FPSC and FPNC as at December 31, 2015 are as follows (In Millions):
Assets of discontinued operations held for sale: Cash P=20 Trade and other receivables 323 Inventories 37 Property and equipment 303 Others 37 P=720
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Liabilities related to assets of discontinued operations held for sale - Payables and accrued liabilities P=2,069
Material Non-controlling Interest The financial information of FPH, a significant subsidiary of the Parent Company that has material non-controlling interests, is provided below.
As at December 31 2016 2015 Economic Voting Economic Voting Proportion of ownership interest and voting rights held by non-controlling interests 53.53% 53.53% 53.50% 53.50%
As at December 31 2016 2015 (Amounts in Millions) Accumulated balances of non-controlling interests P=106,333 P=95,669
For the Years Ended December 31 2016 2015 2014 (Amounts in Millions) Net income attributable to non-controlling interests P=14,187 P=9,935 P=12,000
Total comprehensive income attributable to non- controlling interests 13,357 9,423 10,582
The summarized financial information of FPH Group is provided below. This information is based on amounts before inter-company eliminations.
Summarized consolidated statements of financial position:
As at December 31 2016 2015 (Amounts in Millions) Current assets P=99,092 P=102,602 Noncurrent assets 248,162 238,289 Current liabilities (50,963) (50,413) Noncurrent liabilities (155,270) (163,023) P=141,021 P=127,455
Attributable to: Equity holders of the Parent company P=76,514 P=69,816 Non-controlling interests 64,507 57,639 P=141,021 P=127,455
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Summarized consolidated statements of comprehensive income:
For the Years Ended December 31 2016 2015 2014 (Amounts in Millions) Revenues P=91,910 P=96,510 P=99,301 Costs and expenses (67,225) (74,307) (77,490) Other income (expenses) (346) (5,931) (2,839) Income before income tax 24,339 16,272 18,972 Provision for income tax 5,801 4,095 4,396 Net income P=18,538 P=12,177 P=14,576
Total comprehensive income P=16,978 P=11,948 P=13,076
Attributable to: Equity holders of the Parent P=8,301 P=5,760 P=3,685 Non-controlling Interests 8,677 6,188 9,391 P=16,978 P=11,948 P=13,076
Summarized consolidated statements of cash flows:
For the Years Ended December 31 2016 2015 2014 (Amounts in Millions) Operating activities P=36,154 P=27,984 P=26,959 Investing activities (19,314) (27,263) (37,796) Financing activities (25,448) (6,008) 4,591 Net increase (decrease) in cash and cash equivalents (P=8,608) P=5,287 P=6,246
6. Cash and Cash Equivalents and Short-term Investments
2016 2015 (In Millions) Cash on hand and in banks P=9,746 P=8,538 Cash equivalents 21,785 32,039 P=31,531 P=40,577
Cash in banks earns interest at the prevailing bank deposit rates. Cash equivalents consist of short-term placements, which are made for varying periods of up to three months depending on the immediate cash requirements of the Group and earn interest at the prevailing short-term placement rates.
Cash deposits amounting to =5,936P million and =6,577P million as at December 31, 2016 and 2015, respectively, and with maturities of more than three months but less than one year are classified as short-term investments in the consolidated statements of financial position.
Interest earned on cash and cash equivalents and short-term investments of P=585 million, P=664 million and P=597 million in 2016, 2015 and 2014, respectively, is recorded under “Finance income” account in the consolidated statements of income (see Note 24).
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7. Trade and Other Receivables
2016 2015 (In Millions) Trade receivables from: Sale of electricity P=16,846 P=14,646 Real estate - net of noncurrent portion of P=118.2 million in 2016 and =10.8P million in 2015 (see Note 11) 9,253 8,704 Sale of merchandise 841 122 Contracts and services 397 124 Others 895 460 Costs and estimated earnings in excess of billings on uncompleted contracts 1,897 1,566 Due from related parties and advances to officers and employees (see Note 28) 177 68 Others 822 1,530 31,128 27,220 Less allowance for impairment loss 424 416 P=30,704 P=26,804
Sale of Electricity Trade receivables from sale of electricity are noninterest-bearing and are generally on 30 to 60- day credit term.
Real Estate Trade receivables from real estate are noninterest-bearing short-term and long-term receivables with terms ranging from 1 to 5 years.
Contracts and Services, Sale of Merchandise and Other Trade Receivables Trade receivables, consisting of contracts, retention and other trade receivables, are non-interest bearing and are generally on 30 to 90-day terms.
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts Information on costs and estimated earnings in excess of actual billings on uncompleted contracts is shown below:
2016 2015 (In Millions) Costs and estimated earnings on uncompleted contracts P=5,250 P=4,221 Less billings to date 3,206 2,655 Less allowance for impairment loss 147 – P=1,897 P=1,566
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Information about the Group’s contracts in-progress follows:
2016 2015 (In Millions) Total costs incurred to date on uncompleted contracts P=4,997 P=4,063 Retention receivable 432 383 Advances received 627 858 Recognized profit to date 246 158
Others Other receivables comprise mainly of installment receivables, interest and other receivables and are generally on 30-day credit term.
Allowance for impairment loss The rollforward analysis of allowance for impairment loss on trade receivables follows:
2016 2015 (In Millions) Balance at beginning of year P=416 P=492 Provisions for doubtful accounts (see Note 23) 42 79 Recovery (34) – Write-off – (155) Balance at end of year P=424 P=416
The allowance for impairment loss on receivables relates to individually significant accounts that were assessed as impaired.
8. Inventories
2016 2015 (In Millions) At cost: Land and development costs P=10,503 P=11,334 Spare parts and supplies 3,270 3,002 Fuel inventories 2,609 1,789 Condominium units held for sale 621 112 At net realizable values: Finished goods 100 111 Work in-process 56 78 Raw materials 238 269 Spare parts and supplies 35 31 P=17,432 P=16,726
Land and Development Costs Land and development costs consist mostly of various condominium projects of Rockwell Land that will be completed from 2017 until 2021. FPIP’s and FPPC’s various land developments are also presented under this account.
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Other land acquisitions for projects expected to be launched after 2016 are presented as “Land held for future development” under “Other noncurrent assets” account in the consolidated statements of financial position (see Note 15).
A summary of the movements in land and development costs is set out below:
2016 2015 (In Millions) Balance at beginning of year P=11,334 P=10,033 Costs of real estate sold (shown as part of Costs of real estate) (see Note 23) (8,220) (5,131) Construction and development costs incurred 6,947 4,405 Land acquired 1,793 2,093 Transfer to investment properties (see Note 13) (2,006) (392) Borrowing costs capitalized 346 255 Transfer from (to) property, plant and equipment (see Note 12) (92) 97 Disposals – (26) Reclassification from land held for future development 886 – Reclassification to condominium units for sale (485) – Balance at end of year P=10,503 P=11,334
Capitalization rate used was 5.06% and 4.9% in 2016 and 2015, respectively.
Fuel Inventories Fuel inventories of First Gen are valued at cost. The amounts of fuel inventories recognized as fuel costs under “Costs of sale of electricity” account amounted to P=113 million, P=5,744 million and P=2,147 million in 2016, 2015 and 2014, respectively (see Note 23).
Spare Parts and Supplies The amount of spare parts and supplies inventories charged to expense amounted to P=686 million ($14.5 million), =1.1P billion ($23.9 million) and P=1.3 billion ($29.2 million) in 2016, 2015 and 2014, respectively (see Note 19).
The costs of inventories carried at net realizable values as at December 31 are as follows:
2016 2015 (In Millions) Finished goods P=100 P=135 Work in-process 56 78 Raw materials 293 343 Spare parts and supplies 42 33 P=491 P=589
The Group has no inventories pledged as security for liabilities as at December 31, 2016 and 2015.
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9. Prepayments and Other Current Assets
2016 2015 (In Millions) Input VAT - net P=4,058 P=3,303 Advances to contractors and suppliers 2,778 1,766 Prepaid expenses 1,829 2,692 Current portion of TCCs (see Note 15) 661 386 Current assets of joint operations 592 285 Creditable withholding tax 380 129 Others 695 355 P=10,993 P=8,916
Input VAT is applied against output VAT. Any remaining balance will be applied against future output VAT. Advances to contractors and suppliers pertain mainly to advances related to the development of Rockwell Land and FPIP’s projects. Prepaid expenses consist mainly of capitalized selling costs, prepaid insurance and prepaid supplies. Capitalized selling costs are costs incurred during the pre-selling stage to sell real estate which will be charged to expense in the period in which the related revenue is recognized. Current assets of joint operations pertain to the right of First Balfour in the specific assets of its completed assets.
10. Investments Accounted for at Equity Method
2016 2015 (In Millions) Investment in PDRs P=17,480 P=15,770 Investment in a joint venture 3,499 3,650 Investments in associates 53 4,000 Deposits for future stock subscriptions in associates 2 4 21,034 23,424 Less allowance for impairment − 3,963 P=21,034 P=19,461
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Associates/PDRs The Group’s associates/PDRs, all incorporated in the Philippines, consist of the following:
Percentage of Ownership Associate/PDRs Principal Activity 2016 2015 Lopez PDRs with underlying Television and radio ABS-CBN shares broadcasting and film distribution 56.6* 56.6* First Batangas Hotel Corp. Real estate developer 40.5 40.5 First GEN Northern Power Power generation 40.0 40.0 Bauang Private Power Power generation 37.0 37.0 Corporation (BPPC) First Gen Northern Energy Power generation 33.0 33.0 Corp. (FGNEC) PECO Power distribution 30.0 30.0 MHE-Demag (P), Inc. Manufacturer of materials 25.0 25.0 and handling equipment Others Power generation, trading, various various aviation, telecommunications **Economic interest in the underlying ABS-CBN shares
Following are information about significant investees: a. ABS-CBN
ABS-CBN is incorporated in the Philippines. Its core business is television and radio broadcasting. Its subsidiaries and associates are involved in the following related businesses: cable and direct-to-home (DTH) television distribution and telecommunications services overseas, movie production, audio recording and distribution, video/audio post production, and film distribution. Other activities of the subsidiaries include merchandising, internet and mobile services, publishing, money remittance and theme parks.
Lopez Philippine Depositary Receipts (PDRs). As at December 31, 2016 and 2015, total PDRs issued by Lopez (“Lopez PDRs”), amounted to =5,745P million with underlying 480,933,747 ABS-CBN common shares and 987,130,246 ABS-CBN preferred shares.
The key features of the Lopez PDRs follow:
§ The Lopez PDRs are secured by a pledge of the shares transferred and all subsequent shares distributed to Lopez by reason of its holdings of ABS-CBN.
§ Upon exercise of the PDRs and payment of the exercise price, the ownership of the underlying ABS-CBN shares on each PDR shall be transferred to the Parent Company. Pending the exercise of the PDRs, the ownership on the underlying ABS-CBN shares on each PDR shall be registered under the name of Lopez. Thus, the Parent Company shall have no voting rights with respect to the underlying ABS-CBN shares until it actually exercise the PDRs.
§ Lopez retains its rights to receive cash flows from its investment in ABS-CBN and assumes a contractual obligation to pay those cash flows to the Parent Company (a ‘pass- through’ arrangement). Any cash dividends or other cash distributions paid in respect of
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underlying ABS-CBN shares shall be distributed to the Parent Company pro rata after such cash dividends are received by Lopez.
As at April 6, 2017, the common shares of stock in ABS-CBN are still under the name of Lopez. Consequently, Lopez has the power to vote over those shares.
Movements in the investment in PDRs follow: 2016 2015 (In Millions) Cost: Balance at beginning of year P=5,779 P=5,757 Additions (see Note 5) − 22 Balance at end of year 5,779 5,779 Accumulated equity share in PDRs: Balance at beginning of year 10,473 9,026 Equity share in PDR charged to profit or loss 2,196 1,656 Equity share in PDRs charged to OCI (related to actuarial losses on retirement benefits liability) and transferred to retained earnings (255) 80 Dividends received (361) (289) Balance at end of year 12,053 10,473 Accumulated equity share in PDRs charged to OCI and equity (352) (482) Carrying value P=17,480 P=15,770
Below is the summarized consolidated financial information of ABS-CBN and its subsidiaries:
December 31 2016 2015 (In Millions) Current assets P=29,793 P=30,238 Noncurrent assets 42,941 39,705 Current liabilities (14,720) (16,121) Noncurrent liabilities (27,282) (26,123) Net assets P=30,732 P=27,699
Years Ended December 31 2016 2015 2014 (In Millions) Revenues P=41,631 P=38,278 P=33,544 Expenses (36,950) (34,949) (30,757) Income before tax 4,681 3,329 2,787 Provision for income tax (1,156) (784) (757) Net income P=3,525 P=2,545 P=2,030 Total comprehensive income P=3,623 P=2,730 P=1,531
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The reconciliation of the above summarized financial information to the carrying amount of Investment in PDRs recognized in the consolidated statements of financial position follows:
2016 2015 (In Millions) Net assets of ABS-CBN P=30,732 P=27,699 Less: Preferred shares (200) (200) Share-based payment (5) (34) 30,527 27,465 Proportion of the Group’s ownership interest 56.6% 56.6% 17,278 15,539 Add: PDRs with underlying preferred shares 197 197 Share-based payment 5 34 P=17,480 P=15,770 b. BTHC and Bayan Telecommunications, Inc. (BTI)
On July 2, 2015, the National Telecommunications Commission (NTC) approved Globe Telecom, Inc. (Globe)’s conversion of BTI debts into equity. The conversion into equity resulted in Globe owning 56.87% of the outstanding capital stock of BTI.
On July 21, 2015, Globe purchased 70,046,372 BTI shares held by BTHC and 717,335 BTI shares held by the Parent Company for =1,811P million and =19P million, respectively. As a result, Globe’s equity interests in BTI increased from 56.87% to 98.57%.
The sale allowed the unlocking of the intrinsic value of BTI as a duly enfranchised entity whose performance was hindered by its significant debt load, and allowed Lopez Holdings to recover a portion of its investment in BTI. The Parent Company recognized reversal of allowance for impairment loss of =19P million and wrote off the remaining unrecovered investment in BTI amounting to P=557 million in 2015. Also, the Parent Company partially recovered from BTHC its advances with regard to Convertible Preferred Shares. As a result, the Parent Company recognized reversal of allowance for impairment loss amounted to P=1,854 million (inclusive of certain BTI properties amounting to P=85 million) which were subsequently sold to ABS-CBN group for =95P million, resulting to a gain on sale of =10P million.
As at December 31, 2015, the Parent Company’s total investments, deposits in and advances to BTHC (before any allowance for impairment losses) amounted to P=3,963 million.
Voting Trust Agreements (VTA) As at December 31, 2014, the Parent Company has an existing VTA with Lopez which was renewed on June 12, 2008 where the Parent Company assigned the voting rights in BTHC to Lopez. The voting rights assigned to Lopez is 21.92%. For financial reporting purposes, Lopez retained control of BTHC and consolidated BTHC in its 2014 consolidated financial statements.
In December 2015, the VTA was terminated. Following the termination and exercise of the option agreement (see Note 28), the Parent Company consolidates BTHC in its 2015 consolidated financial statements. *SGVFS024294* - 60 - c. Joint Venture
On March 25, 2008, Rockwell Land entered into a 25-year Joint Venture (JV) Agreement with Meralco to form an unincorporated and registered JV (70% ownership for Rockwell Land and 30% ownership for Meralco), wherein the parties to pool their allocated areas in the first two towers of the BPO Building, including the right to use the land, to operate and manage the combined properties for lease or any similar arrangements to third parties under a common property management and administration.
On December 6, 2013, Rockwell Land and Meralco entered into a Supplemental Agreement to the JV Agreement to include their respective additional rights and obligations, including the development and construction of the third tower of the BPO Building. Under the Supplemental Agreement, Meralco shall contribute the corresponding use of the land where the third tower of the BPO Building will be constructed while the Rockwell Land shall provide the additional funds necessary to cover the construction costs.
The carrying value of the Group’s investment in Rockwell Business Center (RBC) as at December 31 consists of:
2016 2015 (In Millions) Investment cost P=3,453 P=3,270 Additional investment – 183 3,453 3,453 Accumulated share in net income: Balance at beginning of year 197 84 Share in net earnings 132 118 Dividends received (283) (5) Balance at end of year 46 197 Carrying value P=3,499 P=3,650
The difference of share in net income recognized during the year from the Group’s proportionate share in RBC’s total comprehensive income pertains to rentals of tenants from the Group which are eliminated in the consolidated financial statements.
Summarized statements of financial position:
2016 2015 (In Millions) Current assets P=691 P=1,344 Noncurrent assets 3,859 3,321 Current liabilities (250) (221) Noncurrent liabilities (188) (195)
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The above amounts of assets and liabilities include the following:
2016 2015 (In Millions) Cash and cash equivalents P=553 P=781 Current financial liabilities (excluding trade and other payables and provisions) (67) (25) Noncurrent financial liabilities (excluding trade and other payables and provisions) (110) (147)
Summarized statements of comprehensive income:
2016 2015 2014 (In Millions) Revenues P=673 P=520 P=324 General and administrative expenses (25) (24) (89) Depreciation and amortization expense (179) (176) (122) Interest income 11 9 4 Interest expense (2) – (4) Provision for income tax (115) (85) (67) Net income 363 244 46 Other comprehensive income – – 67 Total comprehensive income P=363 P=244 P=113
The reconciliation of the above summarized financial information to the carrying amount of the interest in RBC recognized in the consolidated statements of financial position follows:
2016 2015 (In Millions) Net assets of RBC P=4,112 P=4,338 Proportion of the Group’s ownership interest 70% 70% 2,878 3,037 Fair value adjustments arising from business combination 491 491 Effect of the difference between Group’s percentage share in net income 130 122 Carrying amount of the investment in RBC P=3,499 P=3,650
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The details of the investments in associates are as follows:
2016 2015 (In Millions) Cost: Balance at beginning and end of year P=466 P=466 Accumulated equity in net losses: Balance at beginning of year (429) (430) Equity in net earnings 16 15 Dividends received – (14) Balance at end of year (413) (429) Carrying value P=53 P=37
The carrying values of the Group’s investments in PECO, FGNEC, BPPC and First Gen Northern Power amounted to nil as at December 31, 2016 and 2015. The carrying amount of the investments in associates as at December 31, 2016 and 2015 represents the aggregate carrying values of individually immaterial associates.
The Group’s share in the aggregate financial information of individually immaterial associates follows:
2016 2015 (In Millions) Current assets P=2,436 P=2,327 Noncurrent assets 846 843 Current liabilities 1,465 1,415 Noncurrent liabilities 434 472
2016 2015 2014 (In Millions) Revenues P=4,876 P=4,761 P=4,613 Expenses (4,582) (4,509) (4,264) Income before tax 294 252 349 Provision for income tax (87) (85) (100) Net income P=207 P=167 P=249
The dividends received from these immaterial associates follow:
2016 2015 2014 (In Millions) PECO P=43 P=41 P=40 Others – 14 24 P=43 P=55 P=64
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11. Other Financial Assets
Other Current Financial Assets
2016 2015 (In Millions) Current portion of FVPL investments (see Note 31) P=1,120 P=1,417 Debt service reserve account (DSRA) (see Note 18) 1,027 1,324 Current portion of derivative assets (see Note 31) 470 59 Restricted cash 190 98 Refundable deposits (see Note 30) 184 195 Current portion of quoted government debt securities – 130 P=2,991 P=3,223
AFS Financial Assets
2016 2015 (In Millions) Quoted equity securities P=11,941 P=14,482 Unquoted equity securities 748 129 Quoted government debt securities 128 130 Proprietary membership 123 116 12,940 14,857 Less current portion of quoted government debt securities – 130 P=12,940 P=14,727
Other Noncurrent Financial Assets
2016 2015 (In Millions) FVPL investments (see Note 31) P=850 P=786 Special deposits and funds 285 174 Long-term receivables (see Note 7) 192 59 Derivative assets (see Note 31) 168 328 P=1,495 P=1,347
FVPL Investments FPVL investments consist of funds invested through an investment management agreement (IMA) whereby EDC, First Gen and Lopez Holdings availed of the services of Security Bank, BDO and Morgan Stanley Asia International Limited, Singapore Branch relative to the management and investment of funds. The Group accounts for the entire investment as financial assets to be carried at FVPL. Mark-to-market gain (loss) on the FVPL investments is taken up in the consolidated statement of income amounting to P=65 million, =45P million and =10P million in 2016, 2015 and 2014, respectively.
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DSRA DSRA are restricted peso and dollar-denominated interest bearing accounts opened that will serve as a cash reserve or deposit to service the principal and/or interest payments due on the loans. These accounts were opened and established by EDC in 2015 (see Note 18). Total interest earned on DSRA, net of final tax amounted to P=9.4 million in 2016, P=4.7 million in 2015 and nil in 2014 (see Note 24). Restricted Cash Restricted cash represents Rockwell Land’s funds with an escrow agent in compliance with Presidential Decree No. 957, as amended, in connection with Rockwell Land’s application for a Certificate of Registration and a License to Sell (LTS) with the Housing and Land Use Regulatory Board (HLURB). The proceeds from the pre-selling of residential development projects, received from the date of issuance of the temporary LTS by HLURB, are temporarily restricted until receipt of its Certificate of Registration and permanent LTS.
Quoted Equity Securities The Group’s remaining interest in Meralco was 3.95% as at December 31, 2016 and 2015. As at December 31, 2016 and 2015, the carrying amount of the Group’s investment in Meralco amounted to =11,786P million (valued at P=265 a share) and P=14,202 million (valued at P=320 a share), respectively.
Dividend income from Meralco amounted to =1,115P million, =678P million and P=551 million in 2016, 2015 and 2014, respectively.
Unquoted Equity Securities FPH Fund, through FPH Ventures, has an investment in Narra Venture amounting to P=459 million (US$10 million). Narra Venture is a limited partnership established for the purpose of making equity investments in private companies which is expected to be terminated on March 31, 2017.
In August 2016, there was a return of investment from Narra Venture amounting to P=28 million (US$ 600 thousand). FPH Ventures recognized impairment loss of nil, P=20 million and P=39 million in 2016, 2015 and 2014, respectively, on its investment in Narra Venture due to significant or prolonged decline in fair value. The impairment loss is included as part of “Others” account in the consolidated statements of income (see Note 24).
In May 2016, FGHC International made an investment of P=149 million (US$3 million) in Acclima, a foreign-based technology corporation.
Investment in unquoted equity securities also consists of the investments made by EDC in 2016 in the BDO Institutional Cash Reserve Fund (ICRF), a money unit investment trust fund. As of December 31, 2016, the fair value of EDC’s investment in BDO ICRF amounted to P=303 million.
Quoted Government Debt Securities Quoted government debt securities consist of investments in Republic of the Philippines (ROP) bonds, Rizal Commercial Banking Corporation (RCBC) GT Capital Fixed Rate Bonds, BDO Private Bank Incorporated Fixed Rate Treasury Note, JP Morgan ROP bond and RCBC Retail Treasury Bond with maturities between 2023 and 2037 as of December 31, 2016, and between 2016 and 2037 as of December 31, 2015, and interest rates ranging from 5.1% to 8.0% for both years.
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Set out below are the movements in the accumulated unrealized fair value gains on all investments in equity securities recognized as part of equity as at December 31: 2016 2015 (In Millions) Balance at beginning of year P=6,184 P=3,271 Unrealized fair value gain (loss) recognized in other comprehensive income (2,429) 2,913 Balance at end of year P=3,755 P=6,184 Attributable to: Equity holders of the Parent P=1,744 P=2,668 Non-controlling Interests 2,011 3,516 P=3,755 P=6,184
Special Deposits and Funds The special deposits and funds mainly consist of security deposits for various operating lease agreements covering office spaces and certain equipment, escrow accounts in favor of terminated employees, and escrow accounts in favor of specified counterparties in certain transactions.
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12. Property, Plant and Equipment
2016 Power Plants, Buildings, Other Exploration, Structures FCRS and Machinery and Leasehold Production Transportation and Construction Land Improvements Wells Equipment Equipment in-progress Total (In Millions) Cost Balance at beginning of year P=4,393 P=83,132 P=31,423 P=1,584 P=56,443 P=29,434 P=206,409 Additions 320 211 – 112 3,295 13,060 16,998 Disposals – (55) – (118) (169) (28) (370) Reclassifications and adjustments (see Notes 8, 13, 14 and 15) (1,238) 6,209 4,331 (110) 27,152 (29,346) 6,998 Foreign currency translation adjustment 51 2,281 – 12 2,897 382 5,623 Balance at end of year 3,526 91,778 35,754 1,480 89,618 13,502 235,658 Accumulated Depreciation, Amortization and Impairment Losses Balance at beginning of year 19 25,082 8,117 652 39,494 23 73,387 Depreciation and amortization (see Note 24) – 4,810 1,136 177 6,215 – 12,338 Disposals – (41) – (104) (141) – (286) Reclassifications and adjustments – (245) – (24) 7,112 (5) 6,838 Foreign currency translation adjustment – 663 – 9 1,504 – 2,176 Balance at end of year 19 30,269 9,253 710 54,184 18 94,453 Net book value P=3,507 P=61,509 P=26,501 P=770 P=35,434 P=13,484 P=141,205
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2015 Power Plants, Buildings, Other Exploration, Structures FCRS and Machinery and Leasehold Production Transportation and Construction Land Improvements Wells Equipment Equipment in-progress Total (In Millions) Cost Balance at beginning of year P=4,483 P=61,423 P=44,602 P=1,510 P=53,784 P=16,294 P=182,096 Additions 112 1,675 192 114 1,050 19,067 22,210 Disposals – (178) – (54) (126) (13) (371) Reclassifications and adjustments (see Notes 8, 13, 14 and 15) (240) 2,988 2,876 4 (84) (5,824) (280) Foreign currency translation adjustment 38 17,224 (16,247) 10 1,819 (90) 2,754 Balance at end of year 4,393 83,132 31,423 1,584 56,443 29,434 206,409 Accumulated Depreciation, Amortization and Impairment Losses Balance at beginning of year 17 19,680 7,095 586 35,780 – 63,158 Depreciation and amortization (see Note 24) – 3,831 1,022 108 4,109 – 9,070 Disposals – (122) – (41) (377) – (540) Reclassifications and adjustments – 30 – (7) (43) – (20) Foreign currency translation adjustment 2 1,663 – 6 25 23 1,719 Balance at end of year 19 25,082 8,117 652 39,494 23 73,387 Net book value P=4,374 P=58,050 P=23,306 P=932 P=16,949 P=29,411 P=133,022
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The significant transactions and events affecting the Group’s property and equipment are as follows:
First Gen Burgos Wind Energy Project. On April 14, 2015, EBWPC received the Certificate of Compliance (COC) for its Burgos Wind Power Plant - Phases 1 and 2 granted by the ERC on April 13, 2015. The COC specifies that the project, having a total capacity of 150 MW, is entitled to the FIT rate of P=8.53 per kWh, subject to adjustments as may be approved by the ERC, from November 11, 2014 to November 10, 2034.
In June 2015, a reassessment was made by management which resulted to a change in the estimated useful life of the Burgos Wind Power Plant from 20 years to 25 years. The effect of this change in estimate reduced 2015 depreciation expense and increased 2015 net income by P=84.2 million. Annual depreciation expense starting 2016 will be lower by =168.4P million because of the change in estimate.
EDC entered into various financing arrangements to fund the project. Total borrowing costs capitalized to the project amounted to P=488.3 million using capitalization rates ranging from 1.5% to 4.5% (see Note 18).
Burgos Solar Project - Phase 1. On March 5, 2015, EDC has successfully commissioned its 4.16 MW Burgos Solar Power Plant, which is in the same vicinity with the EBWPC’s wind farm. Upon completion of the project, a total cost of P=351.9 million was reclassified from the “Construction-in-progress” to completed property, plant and equipment under the “Power Plants, Buildings and Other Structures” category. No borrowing cost was capitalized to the project.
On April 17, 2015, EDC received the COC for its Burgos Solar Power Plant granted by the ERC on April 6, 2015. The COC specifies that the project, having a total capacity of 4.16 MW, is entitled to the FIT rate of =9.68P per kWh, subject to adjustments as may be approved by the ERC, from March 5, 2015 to March 4, 2035.
Burgos Solar Project - Phase 2. On March 1, 2016, EDC has successfully commissioned its 2.66-MW Burgos Solar Project, which is in the same vicinity with EBWPC’s wind farm and Burgos Solar Project - Phase 1. On the same date, the ERC issued to EDC the FIT COC for the Burgos Solar Power Plant Phase 2. The COC specifies that the project, having a total capacity of 2.66 MW is entitled to the FIT rate of P=8.69/kWh, subject to adjustments as may be approved by the ERC, from January 19, 2016 to January 18, 2036.
Bago Solar Project. The Construction in-progress account includes the cost capitalized pertaining to the Bago Solar Project amounting to P=23.3 million. The Bago Solar Project was granted a Certificate of Confirmation of Commerciality by the DOE on March 5, 2015. However, EDC decided to put the development of the project on hold as the project economics are being evaluated on a post-FIT scenario. Accordingly, a provision for impairment loss equivalent to the carrying amount of the Bago Solar Project amounting to =23.3P million was recognized in 2015. No similar provision was recognized in 2016 and 2014.
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Collection of LDs from Weir Engineering Services Limited (Weir) by BGI. In June 2016, BGI and Weir have agreed to (i) settle all claims arising from the contract for Works - Completion of Works to Steam Turbine and Generator of Units 1, 2, and 3 dated March 29, 2012; and (ii) jointly take steps to cause the discontinuance of the arbitration case pending with the International Chamber of Commerce. As a result, BGI and Weir have entered into a settlement whereby BGI would receive a net reimbursement for the LDs amounting to P=122.0 million. The net reimbursement amounting to P=122.0 million was accounted for as a reduction from the “Property, plant and equipment” account under the “Power Plants, Buildings, Improvements and Other Structures” category.
Bac-Man 3 Engineering, Procurement and Construction (EPC) Contract. On September 5, 2015, EDC entered into a design and equipment supply contract with Hyundai Engineering Co., Ltd., and a construction services contract with Galing Power and Energy Construction Co. Inc. for the EPC of the 31 MW Bac-Man 3 Geothermal Power Plant in Sorsogon Province.
Impact of Typhoons Certain assets of EDC sustained damage due to the typhoons from 2011 to 2014. EDC received insurance proceeds relating to the property damaged caused by the typhoons amounting to P=1,512 million, P=1,174 million and P=351 million for the years ended December 31, 2016, 2015 and 2014, respectively. Proceeds from insurance received were presented as part of the “Other income (losses)” account in the consolidated statements of income (see Note 24).
PMPC’s 97 MW Avion Open Cycle Natural Gas-Fired Power Plant (Avion Plant). In 2014, PMPC undertook the construction of the Avion Plant which is adjacent to First Gen’s 1,000 MW Santa Rita and 500 MW San Lorenzo natural gas-fired power plants in Batangas City. It will use General Electric’s LM6000 PC Sprint aeroderivative gas turbines and have the capability to burn natural gas or liquid fuel.
§ On March 14, 2016, PMPC terminated the EPC (Offshore) Contract with IEG and an Onshore EPC (Onshore Contract) with Energy Project Completion Ltd. (EPCo), a Philippine Branch Office of IEG due to IEG and EPCo’s failure to comply with their obligations under the contracts, including, but not limited to, delay in completing the works. PMPC has likewise drawn against various performance securities issued by IEG and EPCo in the amount of $12.2 million and =146.8P million, respectively, both of which has been used to complete the outstanding works required to commission and operate the Avion Plant. The proceeds from these performance securities were deducted from the total cost of the Avion plant under “Property, plant and equipment” account.
§ On March 16, 2016, PMPC executed a Completion Works Agreement (CWA) with MTU-BB Maintenance Berlin-Brandenburg GmbH (MTU BB) for the completion of remaining commissioning works for the Avion Plant. MTU BB is a subsidiary of publicly-listed MTU Aero Engines AG.
In 2016 and 2015, total borrowing costs capitalized in connection with the Avion Plant amounted to =289P million and P=264 million, respectively. Capitalization rates used for the general borrowing cost in 2016 and 2015 were 6.4% and 6.5% per annum, respectively.
In 2016, net commissioning income amounting to =155.5P million ($3.3 million) was recognized and presented as part of “Other income (loss)” account in the consolidated statement of income. Net commissioning income represents the excess of the proceeds generated from selling the electricity generated during the commissioning phase against the costs incurred from the commissioning activities such as fuel, operations and maintenance, and any other direct costs *SGVFS024294* - 70 -
The commissioning of the Avion Plant was completed in September 2016, and started its commercial operations on September 26, 2016 upon receiving its COC from the ERC which enables it to sell power to the WESM.
Construction of the 414 MW San Gabriel Power Plant (San Gabriel Plant). On December 16, 2013, FNPC signed a Construction Services Contract with Siemens Inc. for the design, installation, testing and commissioning of an approximately 450 MW (nominal) net capacity combined-cycle gas-fired San Gabriel power plant to be located in Santa Rita, Batangas City. The San Gabriel Plant is intended to serve the mid-merit and, potentially, the base load requirements of the Luzon Grid.
On the same day, FNPC signed an Equipment Supply Contract with Siemens AG for the engineering, design and supply of equipment for the San Gabriel Plant.
On September 4, 2016, FNPC issued the Project Acceptance Certificates to Siemens Inc. and Siemens AG for the substantial completion of works specified in the contracts and passing the required tests on completion of the San Gabriel Plant, which started its commercial operations on November 7, 2016 upon receiving its COC from the ERC which likewise enables it to sell power to the WESM.
In 2016 and 2015, total specific and general borrowing costs capitalized in connection with the project amounted to P=800 million and P=913 million, respectively. Capitalization rates used for the general borrowing cost in 2016 and 2015 were 6.4% and 6.5% per annum, respectively.
In 2016, net commissioning loss of P=180.4 million was capitalized as part of “Property, plant and equipment” account in the consolidated statements of financial position.
Collection of Liquidated Damages (LDs) from Siemens Inc. and Siemens AG by FNPC. On April 4, 2016, FNPC issued a Notice of Default to Siemens Inc. and Siemens AG for their failure to complete the San Gabriel project within the Guaranteed Completion Date of March 31, 2016. In accordance with the signed Construction Service Contract with Siemens Inc. and Equipment Supply Contract with Siemens AG, FNPC received LDs totaling to =2,262P million for the year ended December 31, 2016. These LDs representing compensation for the loss profits were recognized and presented as part of “Other income (expenses)” account in the consolidated statement of income (see Note 24).
FGP Insurance Claims. On May 28, 2013, a fire occurred at the main transformer of Unit 60 of San Lorenzo which caused extensive damage to the transformer and rendered Unit 60 inoperative. The incident reduced the generation capacity of the San Lorenzo power plant by approximately 250 MW and resulted to a temporary reduction of revenues and earnings of FGP. In relation to the incident, FGP issued a notice of event of force majeure to Meralco.
In 2016, 2015 and 2014, FGP received insurance proceeds from various insurers for the business interruption and machinery breakdown totaling to nil, =385P million and P=661 million, respectively. Such amounts were recognized as part of “Proceeds on insurance claims” account in the consolidated statements of income (see Note 24).
Estimated Rehabilitation and Restoration Costs. Under their respective ECCs, FGP and FGPC have legal obligations to dismantle their respective power plant assets at the end of their useful lives. FG Bukidnon, on the other hand, has contractual obligation under the lease agreement with PSALM to dismantle its power plant asset at the end of its useful life. FGP, FGPC, and FG Bukidnon established their respective provisions to recognize their estimated liability for the *SGVFS024294* - 71 - dismantlement of the power plant assets.
Also, FCRS and production wells include the estimated rehabilitation and restoration costs of EDC’s steam fields and power plants’ contract areas at the end of the contract period. These were based on technical estimates of probable costs which may be incurred by EDC in the rehabilitation and restoration of the said steam fields and power plants’ contract areas from 2031 up to 2044, discounted using a risk-free discount rate and adjusting the cash flows to settle the provision. Similarly, EBWPC has recorded an estimated provision for asset retirement obligation relating to removal and disposal of all wind farm materials, equipment and facilities from the contract areas at the end of the contract period.
In 2016 and 2015, the Group adjusted its asset retirement obligation amounting to P=99 million decrease and P=339 million increase, respectively. The revision in estmate is attributable to changes in discount rates.
FPIC Following the issuance by the CA of a Resolution containing its Report and Recommendations to the Supreme Court (SC) in December 2012 about the conduct of hearings and the structural integrity of the white oil pipeline (WOPL), FPIC recognized an APO of P=567 million in 2013 in relation with the end-of-use of its pipelines. This is based on the results of engineering study and calculated using prices in 2005 to 2006 adjusted for inflation and discounted at 6%. Depreciation on the APO asset amounted to P=124 million in 2016 and 2015, and accretion on the APO liability amounted to =53P million and P=39 million (see Note 19) in 2016 and 2015, respectively.
Pledged Assets Property, plant and equipment with net book values of P=32,562 million and P=31,996 million as at December 31, 2016 and 2015, respectively, have been pledged as security for long-term debts (see Note 18).
Reclassifications and Adjustments The reclassifications and adjustments to the cost of property plant and equipment mainly include the following:
§ Additions:
- First Gen’s construction in progress account includes steam assets and other ongoing construction projects as of December 31, 2016. Steam assets are mainly composed of in- progress production wells and FCRS, while other construction projects include on-going rehabilitation activities in the plants, retrofitting projects and other construction projects.
- EDC’s capitalized depreciation amounting to P=32 million and =96P million in 2016 and 2015, respectively, pertaining to ongoing drilling of wells.
§ Deductions:
- The reclassifications in the accumulated depreciation of property, plant and equipment include the capitalized depreciation charges under construction in progress which primarily relates to ongoing drilling of production wells.
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13. Investment Properties
2016 2015 Buildings Buildings Land and Others Total Land and Others Total (In Millions) Cost Balance at beginning of year P=5,409 P=10,367 P=15,776 P=4,654 P=9,698 P=14,352 Additions 550 2,460 3,010 638 672 1,310 Disposals (209) (35) (244) – – – Reclassification from (to) inventories and property, plant and equipment (see Notes 8 and 12) 111 353 464 117 (3) 114 Balance at end of year 5,861 13,145 19,006 5,409 10,367 15,776 Accumulated Depreciation Balance at beginning of year – 2,115 2,115 – 1,480 1,480 Depreciation (see Note 24) – 376 376 – 641 641 Disposals – (30) (30) – (6) (6) Reclassification from property, plant and equipment (see Note 12) – 167 167 – – – Balance at end of year – 2,628 2,628 – 2,115 2,115 Net Book Value P=5,861 P=10,517 P=16,378 P=5,409 P=8,252 P=13,661
Investment properties consist mainly of Rockwell Land’s “Power Plant” Mall and other investment properties within the Rockwell Center, FPH and FPRC’s real properties, and FPIP’s and FPPC group’s parcels of land located in Tanauan, Batangas.
Specific borrowing costs capitalized as part of investment properties amounted to P=97 million and P=89 million in 2016 and 2015, respectively. As at December 31, 2016 and 2015, Rockwell Land’s unamortized borrowing costs capitalized as part of investment properties amounted to P=498 million and P=410 million, respectively.
The aggregate fair value of the Group’s investment properties amounted to P=27,767 million and P=18,192 million as at December 31, 2016 and 2015, respectively. Fair values have been determined based on valuations performed by independent professional appraisers.
The fair value disclosures of the investment properties are categorized under level 3 as these were based on unobserved inputs except for Rockwell Land’s investment properties held for lease within the Rockwell Center and land held for appreciation which are categorized under level 2 as these were arrived at based on sales and listings, which are adjusted for time of sale, location, and general characteristics of comparable lots in the neighborhood where the subject lot is situated. In conducting the appraisal, the independent professional appraisers used any of the following approaches:
a. Market Data or Comparative Approach
Under this approach, the value of the property is based on sales and listings of comparable property registered within the vicinity. This approach requires the establishment of a comparable property by reducing comparative sales and listings to a common denominator with the subject. This is done by adjusting the differences between the subject property and those actual sales and listings regarded as comparables.
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b. Income Capitalization Approach
The value was arrived at through the use of the “Income Approach,” particularly the “Discounted Cash Flow Analysis” which is a financial modelling technique based on explicit assumptions regarding the prospective cash flow to a property. This analysis involves the projection of a series of periodic cash flows to an operating property. To this projected cash flow series, an appropriate discount rate is applied to establish an indication of the present value of the income stream associated with the property being valued. In an operating property, periodic cash flow is typically estimated as gross revenue less operating expenses and other outgoings. The series of periodic net operating incomes, along with an estimate of the terminal value, anticipated at the end of the projection period, is then discounted at the discount rate, being a cost of capital or a rate of return used to convert a monetary sum, payable or receivable in the future, into present value.
c. Cost Approach
Method of valuation which considers the cost to reproduce or replace in new condition the assets appraised in accordance with current market prices for similar assets, with allowance for accrued depreciation based on physical wear and tear and obsolescence. The aggregate rental income from investment properties of Rockwell Land, FPIP, FPPC, FPRC and the Parent Company for the years ended December 31, 2016, 2015 and 2014 and the related aggregate direct operating expenses in 2016, 2015 and 2014 are shown below.
For the years ended December 31 2016 2015 2014 (In Millions) Rental income P=1,147 P=1,195 P=1,084 Direct operating expenses 465 492 413
14. Goodwill and Intangible Assets
2016 Concession Rights to Rights for Use Other Contracts Pipeline Transmission Intangible Goodwill Acquired Water Rights Rights Line Assets Total (In Millions) Cost Balance at beginning of year P=48,258 P=8,337 P=2,405 P=624 P=54 P=204 P=59,882 Addition – – – – – 4 4 Foreign currency translation adjustment (4) – – 35 3 – 34 Balance at end of year 48,254 8,337 2,405 659 57 208 59,920 Accumulated Amortization Balance at beginning of year – 5,352 878 376 – 93 6,699 Amortization (see Note 24) – 587 96 28 6 75 792 Foreign currency translation adjustment – – – 23 – – 23 Balance at end of year – 5,939 974 427 6 168 7,514 Net Book Value P=48,254 P=2,398 P=1,431 P=232 P=51 P=40 P=52,406
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2015 Concession Rights to Rights for Use Other Contracts Transmission Intangible Goodwill Acquired Water Rights Pipeline Rights Line Assets Total (In Millions) Cost Balance at beginning of year P=48,246 P=8,337 P=2,405 P=593 P=– P=313 P=59,894 Addition – – – – 54 14 68 Reclassification – – – – – (123) (123) Foreign currency translation adjustment 12 – – 31 – – 43 Balance at end of year 48,258 8,337 2,405 624 54 204 59,882 Accumulated Amortization Balance at beginning of year – 4,765 782 331 – 45 5,923 Amortization (see Note 24) – 587 96 27 – 48 758 Foreign currency translation adjustment – – – 18 – – 18 Balance at end of year – 5,352 878 376 – 93 6,699 Net Book Value P=48,258 P=2,985 P=1,527 P=248 P=54 P=111 P=53,183
Goodwill
Acquisition of EDC. Goodwill amounting to P=45,217.0 million resulted from the acquisition of EDC in 2007.
EDC’s Acquisition of Hot Rock Entities. On January 3, 2014, EDC Hong Kong Limited (EDC HKL), a wholly owned subsidiary of EDC acquired 100% Hot Rock Peru BVI and Hot Rock Chile BVI (collectively, the Hot Rock entities) with a total acquisition cost of =133.2P million and recognized Goodwill amounting to P=116.4 million. Also, upon acquisition, EDC Peru S.A.C became a wholly owned subsidiary of EDC HKL, which was 30%-owned by Hot Rock Peru S.A. and 70%-owned by EDC HKL. This acquisition was accounted for using PFRS 3, Business Combination. These Hot Rock entities are at initial phase of geothermal power business and have been granted with government concession license for exploration of geothermal energy in Chile and Peru.
Concession Rights for Contracts Acquired As a result of the purchase price allocation of Red Vulcan, an intangible asset was recognized pertaining to concession rights originating from contracts of EDC amounting to P=8,336.7 million ($204.3 million). Such intangible asset pertains to the SSAs and PPAs of EDC that were existing at the time of acquisition. The identified intangible asset is amortized using the straight-line method over the remaining term of the existing contracts ranging from 1 to 17 years. The concession rights for contracts acquired have been valued based on the expected future cash flows using the Multiple Excess Earnings Method (MEEM) as of the date of acquisition. MEEM is the most commonly used approach in valuing customer-related assets, although it may be used to value other intangible assets as well. The asset value is estimated as the sum of the discounted future excess earnings attributable to the asset over the remaining project period. The remaining amortization period of the intangible asset pertaining to the concession rights originating from contracts ranges from 2.0 years to 8.0 years as of December 31, 2016.
Water Rights Water rights pertain to FG Hydro’s right to use water from the Pantabangan reservoir for the generation of electricity. NPC, through a Certification issued to FG Hydro dated July 27, 2006, gave its consent to the transfer to FG Hydro, as the winning bidder of the PAHEP/MAHEP, the water permit for Pantabangan river issued by the National Water Resources Council on March 15, 1977.
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Water rights are amortized using the straight-line method over 25 years, which is the term of FG Hydro’s agreement with NIA. The remaining amortization period of water rights is 14.9 years as of December 31, 2016.
Pipeline Rights Pipeline rights represent the construction cost of the natural gas pipeline facility connecting the natural gas supplier’s refinery to FGP’s power plant including incidental transfer costs incurred in connection with the transfer of ownership of the pipeline facility to the natural gas supplier. The cost of pipeline rights is amortized using the straight-line method over 22 years, which is the term of the GSPA. The remaining amortization period of pipeline rights is 7.75 years as of December 31, 2016.
Rights to Use Transmission Line On July 15, 2015, FGPC has agreed to give, transfer and convey, by way of donation, the Substation Improvements to TransCo amounting to $1.2 million pursuant to the SIA dated September 2, 1997 entered into among FGPC, NPC and Meralco. The transferred substation improvements were accounted for as intangible assets since FGPC still maintains the right to use these assets under the provisions of the PPA with Meralco and the SIA. The cost of the rights to use the Substation Improvements is amortized using the straight-line method over 10 years, which is the remaining term of the PPA with Meralco. The remaining amortization period is 8.67 years as of December 31, 2016.
Other Intangible Assets This account includes the Group’s computer software and licenses.
15. Other Noncurrent Assets
2016 2015 (In Millions) Input VAT - net of allowance of P=346 million in 2016 and P= 339 million in 2015 P=4,587 P=4,650 Prepaid major spare parts (see Notes 12 and 32) 3,257 3,273 Exploration and evaluation assets 3,109 3,074 TCCs - net of current portion of P=661 million in 2016 and P=386 million in 2015 (see Note 9) 2,811 2,754 EDC Funding to Enerco 1,502 947 Land held for future development (see Note 8) 1,066 269 Prepaid expenses 683 535 Advances to contractors 469 548 Retirement benefit assets (see Note 25) 208 242 Deferred debt issuance costs on undrawn portion – 339 Others 931 629 P=18,623 P=17,260
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Input VAT Input VAT is broken down as follows:
2016 2015 (In Millions) EDC P=4,438 P=4,482 First Balfour 272 281 Rockwell Land 203 203 Others 20 23 4,933 4,989 Less allowance for impairment 346 339 P=4,587 P=4,650
EDC’s input VAT includes outstanding input VAT claims of =1,516P million and P=1,339 million as at December 31, 2016 and 2015, respectively.
Prepaid Major Spare Parts These pertain substantially to certain Operating and Maintenance (O&M) charges of First Gen, which relate to major spare parts that are expected to be replaced during the next scheduled major maintenance outage. In 2016, prepaid major spare parts amounting to P=1,516 million ($30.5 million) was reclassified to “Property, plant and equipment” account as a result of the completion of the scheduled maintenance outage of Santa Rita power plant.
Exploration and Evaluation Assets Details of exploration and evaluation assets per project as at December 31 are as follows:
2016 2015 (In Millions) Rangas/Kayabon P=1,722 P=1,696 Mindanao III 1,172 1,169 Dauin/Bacong 78 78 Others 137 131 P=3,109 P=3,074
The movements of exploration and evaluation assets follows:
2016 2015 (In Millions) Balance at beginning of year P=2,959 P=2,801 Additions 37 294 Write-off – (12) Foreign exchange adjustments 113 (9) Balance at end of year P=3,109 P=3,074
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Tax Credit Certificates (TCCs) EDC’s TCCs consist of the following:
December 31, 2016 Beginning of Entity the year Additions Utilization End of the year (In Millions) EDC P=2,682 P=747 (P=794) P=2,635 EBWPC 16 97 (5) 108 GCGI 13 105 (43) 75 BGI – 59 (46) 13 P=2,711 P=1,008 (P=888) P=2,831
December 31, 2015 Beginning of Entity the year Additions Utilization End of the year (In Millions) EDC P=2,470 P=843 (P=631) P=2,682 EBWPC – 16 – 16 GCGI 16 41 (44) 13 P=2,486 P=900 (P=675) P=2,711
As of December 31, 2016 and 2015, EDC classified a portion of their TCCs as current assets totaling to P=142.4 million and to P=279.7 million, respectively. These are expected to be utilized for payment of various taxes within twelve (12) months.
TCCs that remain unutilized after five (5) years from the date of original issuance are still valid provided that these are duly revalidated by the BIR within the period allowed by law.
EDC Funding to Enerco This represents capital expenditures funding made by EDC to Enerco for the Mariposa Project. EDC intends to capitalize these capital expenditures funding against the shares subscription once EDC decides to continue the Mariposa Project which is dependent on the results of the geological and other technical studies on the project.
Prepaid Expenses In connection with the installation of Burgos Wind Project’s wind turbines and related dedicated point-to-point limited facilities, EDC entered into uniform land lease agreements and contracts of easement of right of way with various private landowners. The term of land lease agreement starts from the execution date of the contract and ends after 25 years from the commercial operations of the Burgos Wind project.
Deferred Debt Issuance Cots Deferred debt issuance costs pertains to undrawn portion of First Gen which was written off during the year and is included in the “Other Income (expenses) - net” account in the consolidated statements of income.
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16. Loans Payable 2016 2015 (In Millions) First Balfour P=812 P=275 First Philec – 235 FPIC – 673 P=812 P=1,183
First Balfour Short-term borrowings are unsecured peso-denominated bank loans with interest rate of 2.80% to 2.95%. First Philec These pertain to various unsecured, short-term borrowings which bear annual interest ranging from 4.5% to 6.46%. These were all paid in February 2016. FPIC Various loans totaling =573P million were unsecured, short-term, Philippine peso-denominated and were drawn from local financing companies with annual interest of 5.06%. The outstanding loan as at December 31, 2015 also included the P=100 million unsecured, noninterest-bearing peso- denominated loan obtained from Pilipinas Shell Petroleum Corporation (see Note 28). These loans were alrady settled in 2016
Interest expense on the Group’s loans payable totaled P= 25 million in 2016 and P= 48 million in 2015 (see Note 24).
17. Trade Payables and Other Current Liabilities 2016 2015 (In Millions) Trade payables P=15,036 P=13,772 Output VAT 2,755 3,056 Accruals for: Construction costs 3,922 2,418 Interest and financing costs 1,852 2,167 Personnel and administrative expenses 1,145 1,000 Other taxes and licenses 327 242 Others 1,429 1,551 Dividends payable 702 1,148 Advances from customers 576 1,911 Deposits from pre-selling of condominium units (see Notes 8 and 20) 560 307 Current portion of: Retention payable (see Note 20) 543 252 Customers’ deposits (see Note 20) 239 185 Due to related parties (see Note 28) 519 144 Shortfall generation liability 396 442 Other employee benefits (see Note 25) 50 15 Others 1,273 769 P=31,324 P=29,379 *SGVFS024294* - 79 -
Trade Payables Trade payables are generally non-interest bearing and are settled on 30 to 60-day payment terms.
Accrued Expenses These represent accruals for construction costs of First Balfour and Rockwell, personnel and administrative expenses, interests and financing costs, and other taxes and licenses. Accrued expenses are generally settled within 12 months from end of reporting period.
Advances from Customers Advances from customers pertain to customer deposits for construction contracts. Such advances are applied against progress billings when work is completed. Thereafter, the net amount is billed to the customers.
Dividends Payable These pertain to the unpaid cash dividends on common stock of FPH and on preferred stocks of First Gen.
Shortfall Generation Liability Shortfall generation liability pertains to EDC’s estimated liability arising from shortfall generation after an assessment is made at every financial reporting date whether the annual nominated capacity that EDC shall deliver to NPC would be met based on management’s projection of electricity generation covering the contract year.
Deposits from Pre-selling of Condominium Units Deposits from pre-selling of condominium units represent cash received from buyers pending recognition of revenue which are expected to be applied against receivable from sale of condominium units the following year. Other Payables This includes liabilities on regulatory assessments and other contingencies, provisions for pipeline costs and advances from contractors and consultants.
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18. Long-term Debts
The current and noncurrent portions of the consolidated long-term debts (net of debt issuance costs) of the Group follow:
2016 2015 Current Noncurrent Current Noncurrent Portion Portion Total Portion Portion Total (In Millions) Lopez Holdings P=– P=235 P=235 P=26 P=451 P=477 FPH 1,538 9,988 11,526 1,536 11,526 13,062 Power Generation Companies 14,383 118,774 133,157 13,443 125,986 139,429 Manufacturing Companies 28 207 235 – 849 849 Real Estate Development 1,712 14,278 15,990 2,203 11,869 14,072 Others 632 1,172 1,804 544 1,386 1,930 P=18,293 P=144,654 P=162,947 P=17,752 P=152,067 P=169,819
Details of the Group’s long-term debts, net of debt issuance costs, follow:
2016 2015 US$ Php US$ Php Ref Description Maturities Interest Rates Balances Equivalent Balances Equivalent (In Millions) Lopez Holdings a Restructured Notes March 28, 2023 4.0% $5 P=235 $10 P=451 b LTCPs Defaulted 1-1/8% above the TB rate – – – 26 c FPH P=6,000 million Fixed Rate Note (FXCN) Aug 2014 - Aug 2021 5.25% – 5,364 – 5,656 P=5,000 million FXCN Apr 2013 - Apr 2020 5.00% – 4,101 – 4,342 P=4,800 million Floating Rate Corporate Notes (FRCNs) Oct 2011 - Oct 2018 1.50% + 6 months PDST-F – 2,061 – 3,064 (subject to floor rate of the BSP overnight borrowing rate) Power Generation First Gen d $300 million 10-year Notes Oct 2023 6.50% 297 14,784 298 13,979 *SGVFS024294* - 81 -
2016 2015 US$ Php US$ Php Ref Description Maturities Interest Rates Balances Equivalent Balances Equivalent e $200 million Term Loan Mar 2016 - Sept 2025 4.9% - 5.09% $193 P=9,586 $198 P=9,341 f FGP’s term loan facility with various local banks 2013 - 2022 6 month LIBOR floating benchmark 322 15,996 355 16,712 rate + 225 basis points g FGPC’s Term Loans US$312 million Covered Facility 2009-2021 6 month LIBOR, + 3.25% margin , 202 10,063 220 10,355 + political risk insurance premium US$188 million Uncovered Facility 2009 - 2018 6 month LIBOR , $18 P=876 $53 P=2,481 + 3.50%-3.90% margin h FNPC’s $265 million Export Credit Facility Jul 2014 - Feb 2028 3.12% + 25 basis points 200 9,948 176 8,287 i Red Vulcan’s Staple Financing Agreement for P=29.2 billion Nov 2017 PDST- F benchmark rate plus the – 2,072 – 3,763 applicable interest margin, whichever is higher j FG Hydro’s P=4.3 billion Loan Nov 2022 6-month PDST-F rate + 1.50% margin – 1,805 – 3,188 or BSP overnight rate + 1.0% margin EDC k US$300 Million Notes Jan 2021 6.5% 298 14,838 298 14,023 l EDC’s Peso Public Bonds (P=12.0 billion) Series 2 - P=3.5 billion Dec 2016 9.3327% – – – 3,491 m International Finance Corp (IFC) ▪ IFC - P=4.1 billion 2012 - 2033 7.4% per annum – 2,199 –` 2,535 for the first five years subject to repricing for another 5 to 10 years n ▪ IFC - P=3.3 billion 2013 - 2025 6.6570% – 2,227 – 2,472 o FXCN ▪ P=4.0 billion 2012 - 2022 6.6108%: April 4, 2012 - – 3,604 – 3,737 April 30, 2015 5.25%: April 30, 2015 until maturity ▪ P=3.0 billion 2012 - 2022 6.6173% : April 4, 2012 - April 30, – 2,702 – 2,802 2015 5.25%: April 30, 2015 until maturity p Peso Fixed Rate Bond (FXR) ▪ P=4.0 billion May 2023 4.7312% – 3,964 – 3,959 ▪ P=3.0 billion May 2020 4.1583% – 2,949 – 2,944 q US$175.0 million Refinanced Syndicated Term Loan 2013 - 2017 LIBOR plus 1.75% margin 87 4,343 104 4,917 r DBP P=291.2 Million Dec 2030 5.75% – 289 – 289 s US$80 Million Term Loan Jun 2018 LIBOR plus 1.8% margin 72 3,592 75 3,538 t GCGI P=8.5 Billion Term Loan Mar 2022 5.25% – 6,919 – 7,953 *SGVFS024294* - 82 -
2016 2015 US$ Php US$ Php Ref Description Maturities Interest Rates Balances Equivalent Balances Equivalent u EBWPC $315 million Project Financing $37.5 million Commercial Debt Facility Oct 2029 LIBOR plus 2.0% margin $34 P=1,692 $36 P=1,675 $150.0 million ECA Debt Facility Oct 2029 LIBOR plus 2.35% margin 135 6,711 141 6,639 P=5,600 million Commercial Debt Facility Oct 2029 PDST-F rate plus 2.0% margin – 5,151 – 5,398 v BGI Loan P=5.0 Billion Term Loan Sept 2025 5.25% – 4,362 – 4,951 w EDC Term Loans ▪ P=1.5 billion Dec 2026 5.25% – 1,493 – – ▪ P=1.0 billion Dec 2031 5.5788% 992 Real Estate Development Rockwell Land x P=10,000 million FXCN Oct 2014 - Oct 2020 4.9%, 4.6%, 4.5% fixed rates – 6,182 – 7,684 y P=5,000 million Peso Bonds Feb 2021 5.0932% – 4,970 – 4,963 z Installment Payable for an Acquisition of Land 2020 Discounted at 8% – 521 – 467 aa P=4,000 million Term Loan of Parent and Retailscapes 2021-2031 2.0% - 5.5% fixed rates – 3,981 – 500 Rockwell Primaries’ Note Payable Dec 2014 - Dec 2019 5% fixed rate – 336 – 458 Construction and Other Services First Balfour bb P=1,000 million Loan Agreement Oct 2013 - Oct 2018 Fixed or floating interest rate plus – 840 – 666 applicable margin cc Equipment Financing Loan 2012 - 2018 7%-7.75% – 23 – 2 ThermaPrime dd P=1,300 million Loan Facility Mar 2014 - Mar 2019 6.29% – 722 – 1,011 ee Equipment Financing Loan Mar 2014 - Mar 2019 6.% – 219 – 251
Manufacturing Company ff $20.6 million Long Term Loan Dec 2012 - Dec 2022 3 months LIBOR + 3.50% – – 18 849 P=235 million bank loan Jul 2016- Jul 2021 4% – 235 – – P=162,947 P=169,819
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2016 2015 (In Millions) Gross P=165,371 P=172,314 Less unamortized debt issuance costs 2,424 2,495 162,947 169,819 Less current portion 18,293 17,752 P=144,654 P=152,067
The rollforward analysis of unamortized debt issuance costs is as follows:
2016 2015 (In Millions) Balance at beginning of year P=2,495 P=2,078 Additions 317 866 Accretion charged to finance costs (see Note 24) (366) (331) Accretion charged to CIP (98) – Unamortized debt issuance cost – (135) Foreign exchange adjustments 76 17 Balance at end of year P=2,424 P=2,495
The scheduled maturities of the consolidated long-term debts (excluding debt issue costs) of the Group as at December 31, 2016 are as follows:
U.S. Dollar Debt Philippine Year In US$ In Php Peso Debt Total (In Millions) 2017 $194 P=9,667 P=9,006 P=18,673 2018 191 9,488 7,063 16,551 2019 153 7,622 7,511 15,133 2020 161 7,998 13,080 21,078 2021 and onwards 1,202 59,765 34,171 93,936 $1,901 P=94,540 P=70,831 P=165,371
Additional information on the loans follow:
Lopez Holdings a. Restructured Notes
In December 2010, the Parent Company entered into a Notes Issuance Agreement (the Agreement) whereby the Parent Company agreed to issue up to a maximum of =881P million Peso Tranche Notes and US$46 million Dollar Tranche Notes (the Restructured Notes), subject to the terms and conditions of the agreement. The Restructured Notes shall be issued in exchange for Series A-2 LTCPs and 7.875% Notes of the same amounts as offered by the Noteholders for repurchase and accepted by the Parent Company. Around US$23 million 7.875% Notes and P=1.1 million LTCPs, including related accrued interests, have been restructured.
The Dollar Tranche and Peso Tranche Restructured Notes shall bear interest at 4.0% (gross of tax) and 7.0% (gross of tax), respectively, based on the outstanding balances as at interest *SGVFS024294* - 84 -
payment date. The Restructured Notes shall mature at 12.5 years from the date of first issue or on March 28, 2023. The Parent Company has the option to redeem the Restructured Notes, without premium or penalty, subject to the conditions stated in the Agreement. Restructured Notes redeemed may not be re-borrowed.
The Agreement provides for a voluntary early redemption option subject to certain conditions. The redemption should be made at par value of the Notes, without premium or penalty. The early redemption option was assessed as not closely related to the Notes. The fair value of the option (derivative asset) amounted to P=10 million at initial recognition.
On December 1, 2016 and 2015, the Parent Company redeemed US$5.0 million and US$13.1 million worth of Restructured Notes, respectively. As at December 31, 2016 and 2015, the value of the derivative asset amounted to =1P million and P=4 million, respectively (shown as part of “Other Noncurrent Assets” account in the consolidated statements of financial position). The fair value changes in the value of the option amounted to a mark-to- market loss of P=3 million (inclusive of loss on prepayment of loans of =1P million), P=7 million (inclusive of loss on prepayment of loans of P=6 million) and P=10 million in 2016, 2015 and 2014, respectively (see Note 24).
The Restructured Notes are unsecured and provide certain restrictions with respect to, among others, loans to third parties, merger or consolidation, sales of assets, except in certain circumstances. b. LTCPs
This account pertains to the Series A-2 of LTCPs issued on August 9, 1996. It was supposed to be repaid in one lump sum on October 1, 2003 with interest at 1-1/8% above the 91-day Treasury Bill (TB) rate, also payable quarterly in arrears.
The Parent Company defaulted on its interest payments on the LTCPs in 2002 and on its principal in 2003. The terms of the LTCP provide for the payment of penalties should there be an event of default on interest and/or principal computed at 24% per annum from the date of default.
However, under the Balance Sheet Management Plan (BSMP) that was created by the Parent Company in June 2002, all the outstanding financial obligations of the Parent Company as at May 31, 2002 were proposed to be restructured. Since December 2002, the Parent Company made good faith semi-annual interest payments on its financial obligations based on a 6-month PDST-F note plus 1%.
On March 13, 2003, the stockholders granted full authority to the BOD to negotiate with the creditors without the need for prior approval from the stockholders. The BOD has the authority to take all actions and matters necessary and desirable for the restructuring of the Parent Company’s financial obligations under the BSMP.
Subject to availability of cash, the Parent Company’s standing offer to buy-back all or any part of its remaining LTCPs, under mutually acceptable terms, remain in place.
In 2016, the Parent Company redeemed the LTCPs with face value of =26P million at par. The excess of the carrying amount of the debt, including accrued interest, over the buy-back price amounted to =115P million in 2016. This is shown as part of the “Excess of the carrying amount of obligation over the buy-back price” in the consolidated statements of income. *SGVFS024294* - 85 -
Interest and other finance charges, including penalties, recognized by the Parent Company in the consolidated statements of income amounted to P=24 million and =71P million in 2016 and 2015, respectively.
FPH Group c. FPH
The terms of the FXCN and FRCN Facility Agreements require FPH to comply with certain restrictions and covenants, which include among others: (i) maintenance of certain debt service coverage ratio at given periods provided based on core group financial statements; (ii) maintenance of certain levels of financial ratio; (iii) maintenance of its listing on the Philippine Stock Exchange (PSE); (iv) no material changes in the nature of business; (v) incurrence of indebtedness secured by liens, unless evaluated to be necessary; (vi) granting of loans to third parties except to subsidiaries or others in the ordinary course of business; (vii) sale or lease of assets; (viii) mergers or consolidations; and (ix) declaration or payment of dividends other than stock dividends during an Event of Default (as defined in the Agreement) or if such payments will result in an Event of Default.
All credit facilities of the Parent Company are unsecured.
As at December 31, 2016 and 2015, FPH is in compliance with the restrictions and covenants.
Power Generation Companies d. First Gen’s $300.0 Million 10-year Notes
The Notes are direct, unconditional and unsecured obligations of First Gen, ranking pari passu among themselves and at least pari passu with all other present and future unsecured and unsubordinated obligations of First Gen, but in the event of insolvency, only to the extent permitted by applicable laws relating to creditors’ rights. As of December 31, 2016 and 2015, First Gen is in compliance with the terms of the Notes. e. First Gen’s $200.0 Million Term Facility
The facility imposes standard loan covenants on First Gen and requires First Gen to maintain a debt service coverage ratio of at least 1.2:1 and a debt-to-equity ratio of at most 2.5:1. The obligations of First Gen under this Term Loan Agreement are unsecured. As of December 31, 2016 and 2015, First Gen is in compliance with the terms of the Term Loan Agreement. f. FGP Term Loan Facility with Various Local Banks
The covenants in the term loan facility of FGP’s financing agreement are limited to restrictions with respect to: change in corporate business; amendment of constituent documents; incurrence of other loans; granting of guarantees or right of set-off; maintenance of good, legal and valid title to the critical assets of the site free from all liens and encumbrances other than permitted liens; transactions with affiliates; and maintenance of specified debt service coverage ratio and debt to equity ratio. FGP’s real and other properties and shares of stock are no longer mortgaged and pledged as part of security to the lenders. Instead, FGP covenants to its lenders that it shall not permit any indebtedness to be secured by or to benefit from any lien on the critical assets of the site except with the consent of the lenders. As at December 31, 2016 and 2015, FGP is in compliance with the terms of *SGVFS024294* - 86 -
the said agreement. g. FGPC’s Term Loans
The Common Terms Agreement of the FGPC secured financing facility contain covenants concerning restrictions with respect to, among others: maintenance of specified debt service coverage ratio; acquisition or disposition of major assets; pledging of present and future assets; change in ownership; any acts that would result in a material adverse effect on the operations of the Santa Rita power plant; and maintenance of good, legal and valid title to the site free from all liens and encumbrances other than permitted liens. As at December 31, 2016 and 2015, FGPC is in compliance with the terms of the said agreement.
FGPC has also entered into separate agreements in connection with its financing facilities as follows:
§ Mortgage, Assignment and Pledge Agreement whereby a first priority lien on most FGPC’s real and other properties, including revenues from the operations of the Santa Rita power plant, has been executed in favor of the lenders. In addition, the shares of stock of FGPC were pledged as part of security to the lenders.
§ Inter-Creditor Agreements, which describe the administration of the loans.
§ Trust and Retention Agreement (TRA) with the lenders’ designated trustees. Pursuant to the terms and conditions of the TRA, FGPC has established various security accounts with designated account banks, where inflows and outflows of proceeds from loans, equity contributions and project revenues are monitored. FGPC may withdraw or transfer moneys from these security accounts, subject to and in accordance with the terms and conditions of the TRA.
§ The balance of FGP and FGPC’s unrestricted security accounts, included as part of the “Cash and cash equivalents” account in the consolidated statement of financial position as of December 31, 2016 and 2015, amounted to P=2,466 million ($49.6 million) and P=3,288 million ($68.6 million), respectively. h. FNPC’s $265.0 million Export Credit Facility
This secured facility has an export credit guarantee provided by Euler Hermes, acting on behalf of the Federal Republic of Germany. FNPC (as the Borrower) and AlliedGen (as the Pledgor) also signed a Pledge Agreement wherein AlliedGen has pledged over 100% of the issued and outstanding capital stock of FNPC in favor of KfW. Furthermore, First Gen signed a Guarantee and Indemnity Agreement with KfW, guaranteeing FNPC’s punctual performance on all its payment obligations under the Export Credit Facility loan agreement.
As at December 31, 2016 and 2015, FNPC made a total drawdown on the Export Facility amounting to $229 million and $194 million, respectively. i. Red Vulcan’s Staple Financing Agreement for =29.2P billion
As was set forth in the secured Staple Financing Agreement, Red Vulcan is restricted to declare or pay dividends (other than stock dividend) to its stockholders or partners without the consent of all Staple Financing Lenders. Red Vulcan is also restricted, except for permitted borrowings, to incur any long-term debts, increase its borrowings, or re-avail of existing facilities with other banks or financial institutions. In addition, all of the shares of stock held *SGVFS024294* - 87 -
by Red Vulcan in EDC at that time, which represented 60% of EDC’s issued and outstanding capital stock, consisting of 6,000.0 million common stocks and 7,500.0 million preferred stocks (collectively, the “Pledged Shares”), were pledged as primary security for the due and prompt payment of the secured indebtedness. The Pledged Shares were adjusted to effect the 25% stock dividend to the shareholders of EDC declared in 2009.
Pursuant to Amendment No. 4 of the Staple Financing Agreement, the Lenders agreed to extend the term of the loan for another three years and six months from the original maturity date of May 15, 2014. The loan will mature on November 14, 2017. j. FG Hydro’s =4.3P billion Loan
The loan is secured by Real Estate and Chattel mortgages on all present and future mortgageable assets of FG Hydro. On May 7, 2015, the parties agreed to replace the six- month PDST-F rate with the six-month PDST-R2 rate as the floating benchmark rate going forward, while the floor rate for a floating loan was pegged at the BSP overnight rate. FG Hydro still has a one-time option to convert to a fixed interest rate for the remaining life of the loan at least five days before any interest setting date. The principal and the interest on the loan are payable on a semi-annual basis. On November 7, 2016, FG Hydro made a voluntary partial prepayment of the principal loan balance amounting to =1.0P billion.
FG Hydro is obligated to comply with certain covenants with respect to maintaining specified debt-to-equity and minimum debt service coverage ratios, as set forth in its loan covenant with creditors. As at December 31, 2016 and 2015, FG Hydro is in compliance with those covenants. k. EDC’s $300.0 Million Notes
The notes are unsecured listed and quoted on the SGX-ST. l. EDC’s Peso Public Bonds (P=12.0 billion)
The peso public bonds are unsecured and listed on Philippine Dealing and Exchange Corp. (PDEx). Effective November 14, 2013, certain covenants of the peso public bonds have been aligned with the 2013 peso fixed-rate bonds through consent solicitation exercise held by EDC. Upon securing the required consents, a Supplemental Indenture embodying the parties’ agreement on the proposed amendments was signed on November 7, 2013 between EDC and Rizal Commercial Banking Corporation – Trust and Investments Group in its capacity as trustee for the bondholders.
On December 5, 2016 and June 4, 2015, EDC fully settled the =3.5P billion and P=8.5 billion public bonds, respectively. m. EDC’s Loan Agreement with IFC (P=4.1 billion) Under the loan agreement, EDC is restricted from creating liens and is subject to certain financial covenants. As of December 31, 2016 and 2015, EDC is in compliance with those covenants. EDC’s loan agreement with IFC is unsecured. n. EDC’s Loan Agreement with IFC (P=3.3 billion)
The loan includes prepayment option which allows EDC to prepay all or part of the loan anytime starting from the date of the loan agreement until maturity. The prepayment amount *SGVFS024294* - 88 -
is equivalent to the sum of the principal amount of the loan to be prepaid, redeployment cost and prepayment premium. EDC’s loan agreement with IFC is unsecured. o. EDC’s FXCN (P=7.0 billion)
Debt issuance costs amounting to =P100.2 million was capitalized as part of the new FXCN.
On April 30, 2015, EDC and the noteholders have deemed it appropriate to amend the FXCN loan agreement to revise the interest rate levels and to effect other amendments in order to align the same with the other loan covenants of EDC. Transaction costs related to the amended FXCN amounting to =64.7P million were capitalized to the carrying amount of the FXCN loan. This credit facility is unsecured. p. EDC’s Peso Fixed-Rate Bonds (P=7.0 billion)
The bonds are unsecured and have been listed with the PDEx. Transaction costs incurred in connection with the issuance of the bonds amounted to =91.2P million. q. Refinanced Syndicate Term Loan ($175.0 million)
On June 17, 2011, EDC entered into an unsecured credit agreement for the $175.0 million (P= 7,630.0 million) transferable syndicated term loan facility with ANZ-Manila Branch, Bank of Tokyo-Mitsubishi UFJ (BTMU), Chinatrust (Philippines) Commercial Banking Corporation, ING Bank N.V.-Manila Branch, Maybank Group, Mizuho Bank, Ltd, and Standard Chartered Bank (SCB) as Mandated Lead Arrangers and Bookrunners. The purpose of this loan is to refinance the old $175.0 million syndicated term loan availed on June 30, 2010 with scheduled maturity of June 30, 2013. This loan carries an interest of LIBOR plus a margin of 175 basis points and has an installment repayment scheme which commenced on June 27, 2013 until June 27, 2017. r. EDC’s =P291.2 Million Term Loan
On December 8, 2015, EDC obtained a P= 291.2 million unsecured loan from Development Bank of the Philippines (DBP). The term loan carries an interest rate of 5.75% per annum and will mature on December 17, 2030. The proceeds were used to finance the Burgos Solar Phase 1 project. s. EDC’s US$80 Million Term Loan
On March 21, 2013, EDC entered into a credit agreement with certain banks to avail of an unsecured term loan facility of up to $80.0 million with availability period of 12 months from the date of the agreement. On December 6, 2013, EDC availed of the full amount of the term loan with maturity date of June 21, 2018. The proceeds are intended to be used by EDC for business expansion, capital expenditures, debt servicing, and for general corporate purposes. The term loan carries an interest rate of 1.8% margin plus LIBOR. Debt issuance costs related to the term loan amounted to $1.9 million, including front-end fees and commitment fee. The repayment of the term loan shall be made based on the following schedule: 4.0% and 5.0% of the principal amount on the 15th and 39th month from the date of the credit agreement, respectively; and 91.0% of the principal amount on maturity date.
*SGVFS024294* - 89 - t. EDC’s GCGI =P8.5 billion Term Loan
As part of the agreement, GCGI will provide a DRSA for the principal and interest payment of the loan amounting to =P466.5 million and =P478.9 million as at December 31, 2016 and 2015, respectively. GCGI’s term loan is unsecured. u. EBWPC’s $315 million Project Financing
Under the agreement of the EBWPC’s secured project financing, EBWPC’s debt service is guaranteed by EDC. In the last quarter of 2014, EBWPC entered into four (4) interest rate swap agreements with an aggregate notional amount of $150 million. This is to partially hedge the interest rate risks on its ECA and Commercial Debt Facility (Hedged Loan) that is benchmarked against six (6) months U.S. LIBOR. As part of the agreement, EBWPC will provide a DSRA which will cover the principal and interest payments of the loan due in next six (6) months amounting to P=346.9 million and P=306.3 million as at December 31, 2016 and 2015, respectively. v. EDC’s BGI =P5.0 Billion Term Loan
BGI may voluntarily prepay all or any part of the principal amount of the loan commencing on and from the 42nd month of the initial drawdown date with a prepayment penalty. As part of the agreement, BGI shall also provide a DSRA which will cover the principal and interest payments of the loan amounting to =P214.4 million and =P142.7 million as at December 31, 2016 and 2015, respectively. BGI’s term loan is unsecured. w. EDC’s =1.5P billion and =1P billion Term Loan
These unsecured loans were used to refinance the outstanding P=3.5 billion fixed rates bonds that matured last December 2016 and to fund other general corporate purposes.
Real Estate Companies x. Rockwell Land’s =10,000P million FXCN
These unsecured Corporate Notes contain a negative pledge. The loan contains, among others, covenants regarding incurring additional debt and dividend, to the extent that such will result in a breach of the required debt-to-equity ratio and current ratio. As at December 31, 2016 and 2015, Rockwell Land has complied with these covenants. y. Rockwell Land’s =P5,000 million Peso Bonds
The bonds shall be redeemed at par (or 100% of face value) on February 15, 2021, its maturity date, unless Rockwell Land exercises its early redemption option in accordance with certain conditions. The embedded early redemption is clearly and closely related to the host debt contract; thus, not required to be bifurcated and accounted for separately from the host contract. The bonds are unsecured.
The loan contains, among others, covenants regarding incurring additional long-term debts and paying-out dividends, to the extent that such will result in a breach of the required debt-to- equity ratio and current ratio. As at December 31, 2016 and 2015, Rockwell Land has complied with these covenants.
*SGVFS024294* - 90 - z. Rockwell Land’s Installment Payable for an Acquisition of Land
In November 2011, Rockwell Land entered into a Deed of Sale with Futura Realty, Inc. for the purchase of land for development adjacent to the Rockwell Center intended for its Proscenium projects (see Note 8).
Under the Deed of Sale, Rockwell Land will pay for the cost of the property in installment until year 2015 and a one-time payment in year 2020. The installment payable and the corresponding land held for development were recorded at present value using the discount rate of 8%.
Accretion of interest expense amounted to P=54 million and P=89 million in 2016 and 2015, respectively, was capitalized as part of land and development cost.
Installment payable is secured by Stand-By Letters of Credit (SBLC) from MBTC and FMIC totaling =2.4P billion, until year 2020. These SBLC provides for a cross default provision wherein the SBLC shall automatically be due and payable in the event the Company’s other obligation is not paid when due or a default in any other agreement shall have occurred, entitling the holder of the obligation to cause such obligation to become due prior to its stated maturity. As at December 31, 2016 and 2015, the Rockwell Land has not drawn from the facility. aa. Rockwell Land’s and Retailscapes’ =4,000P million Term Loans
This comprised of the =5,000P million credit facility entered into by Rockwell Land and the P=1,000 million term loan facility secured by Retailescapes. As at December 31, 2016, total of P=3,500 million and P=500 million were already availed by Rockwell Land and Retailscapes, respectively. The loan facilities contain, among others, covenants regarding incurring additional debt and dividend, to the extent that such will result in a breach of the required debt-to-equity ratio and current ratio. As at December 31, 2016, Rockwell Land has complied with these covenants. The obligations under this loan are unsecured.
Construction and Other Services bb. First Balfour’s =1,000P million Loan Agreement
The loan is secured by a chattel mortgage over First Balfour's existing machinery and equipment amounting to P=24.5 million. cc. First Balfour’s Equipment Financing Loan
The loan is secured by a chattel mortgage over the equipment purchased out of the proceeds of the loan (see Note 12). The carrying value of this financing loan amounted to =22.0P million and =35.7P million of December 31, 2016 and 2015, respectively. dd. ThermaPrime’s =1,300P million Loan Facility
The loan is secured by a chattel mortgage over the same machinery and equipment acquired (see Note 12) for the same amount.
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ee. ThermaPrime’s Equipment Financing Loan
In 2014, ThermaPrime sold eight (8) units of crane equipment and subsequently leased back. The assets held under finance lease are included as part of “Machinery and equipment” under “Property and equipment” account in the statement of financial position. The cost of these machinery and equipment amounted to =300.3P million with accumulated depreciation of P=80.1 million and =50.1P million, respectively, as at December 31, 2016 and 2015, respectively (see Note 12).
Interest expense recognized from the finance lease amounted to =14.2P million and P=17.5 million in 2016 and 2015 (see Note 24).
Under the loan agreements, First Balfour and Thermaprime shall maintain a Debt-to-Equity ratio of not greater than 2.0x until the payment of the loan, calculated on the basis of the annual audited financial statements. Further, they shall maintain a Debt Service Coverage ratio of not less than 1:1 beginning December 31, 2014.
The Agreement also provides that until payment in full of the principal amount, interest penalty and other amounts, First Balfour and Thermaprime is subject to negative covenants requiring prior approval of the creditor for specified corporate acts.
As at December 31, 2016 and 2015, First Balfour and Thermaprime are in compliance with all the requirements of its debt covenants.
Manufacturing Company ff. First Philec’s US$20.6 million Long Term Loan Among other covenants, First Philec is required to maintain a maximum debt to equity ratio of 3:1. First Philec is in compliance with the debt covenant as at December 31, 2015. The loan was completely settled in March 2016.
Payments made by the Group for the principal value of the loans amounted to P=19,928 million in 2016 and P=22,691 million in 2015. Interest payment amounted to P=9,101 million and P=9,172 million and 2016 and 2015, respectively. Total finance costs, including amortization of debt issue cost, amounted to =9,269P in 2016 and =9,010P million in 2015.
19. Asset Retirement and Preservation Obligations The Group’s asset retirement and preservation obligations consist of the following: First Gen and EDC This account consists of the asset retirement obligations of FGP, FGPC and FG Bukidnon. Under their respective ECCs, FGP and FGPC have legal obligations to dismantle their respective power plant assets at the end of their useful lives. FG Bukidnon, on the other hand, has a contractual obligation under the lease agreement with PSALM to dismantle its power plant asset at the end of its useful life. FGP, FGPC and FG Bukidnon have established provisions to recognize the estimated liability for the dismantlement of the power plant assets. This account also includes the provision for rehabilitation and restoration costs of EDC’s steam fields and power plants’ contract areas at the end of the contract period. These were based on technical estimates of probable costs which may be incurred by EDC in the rehabilitation and restoration of the said steam fields and power plants’ contract areas from 2031 up to 2044, *SGVFS024294* - 92 -
discounted using a risk-free discount rate and adjusting the cash flows to settle the provision. Similarly, EBWPC has recorded an estimated provision for asset retirement obligation relating to the removal and disposal of all wind farm materials, equipment and facilities from the contract areas at the end of contract period. When the liability is initially recognized, the present value of the estimated costs is capitalized as part of the carrying amount of the related FCRS and production wells (see Note 12). In 2016 and 2015, First Gen group adjusted its asset retirement obligation amounting to P=99 million and P=339 million, respectively. The revision in estimate is attributable to changes in discount rates. FPIC APO recognized by FPIC in 2013 represents the net present value of obligations associated with the preservation of property, plant and equipment that resulted from acquisition, construction or development and the normal operation of property, plant and equipment. Movements of the asset retirement and preservation obligations follow:
2016 2015 (In Millions) Balance at beginning of year P=1,863 P=1,452 Effect of revision of estimate (101) 339 Accretion of finance costs (see Note 24) 53 43 Foreign exchange adjustment 52 (29) Balance at end of year P=1,867 P=1,805
20. Other Noncurrent Liabilities
2016 2015 (In Millions) Retention payable - net of current portion (see Note 17) P=513 P=531 Customers’ deposits (see Notes 8 and 17) 233 253 Unearned revenue 57 57 Others 848 769 P=1,651 P=1,610
Retention payable is the portion of the amount billed by contractors that is being withheld as security in case Rockwell Land incurs costs during the defects and liability period, which is one year after a project’s completion. This is subsequently released to the contractors after the said period. Customers’ deposits pertain to cash received from pre-selling activities and security deposits of Rockwell Land and advance rental payments received by FPIP (see Notes 8 and 17). Unearned revenue consists of Rockwell Land’s deferred lease income pertaining to two months advance rent included in the initial billing to mall tenants, which shall be applied to the monthly rental at the end of the lease term.
Other noncurrent liabilities include the Group’s estimate of the probable costs for the resolution of pending assessments from various regulatory agencies and pending legal cases (see Note 33). *SGVFS024294* - 93 -
21. Equity
a. Common Stock Number of Shares 2016 2015 Authorized - =P1 par value 5,500,000,000 5,500,000,000 Issued: Balance at beginning of year 4,598,729,688 4,592,882,360 Issuances through exercise of options (see Note 22) 27,428,794 5,847,328 Balance at end of year 4,626,158,482 4,598,729,688
Below is a summary of the capital stock movement of the Parent Company: New Authorized Subscriptions/ Issue/ Date of Approval Capital Stock Issuances Offer Price October 18, 1993 4,000,000,000 October 18, 1993 Primary Offering 459,049,000 P=3.50 Shares Reserved for Convertible Bonds 297,620,000 4.20 Secondary Offering 328,571,000 3.50 July 4, 1995 28,098,000 4.20 February 18, 1998 1,500,000,000 1,306,805,756 5.45
The total number of shareholders, which includes PCD Nominee Corporation, as at December 31, 2016 and 2015, is 8,663 and 8,804, respectively.
b. Retained Earnings The retained earnings as of December 31, 2016 and 2015 include undistributed net earnings of subsidiaries and associates amounting to P=49,387 million and P=43,847 million as at December 31, 2016 and 2015, respectively. Such undistributed net earnings of subsidiaries and associates are not available for dividend distribution until such time that the Parent Company receives the dividends from these investee companies.
On May 30, 2016, the BOD of the Parent Company approved a dividend of P=0.20 per share to stockholders of record as at June 14, 2016 and paid an amount of P=924 million on June 01, 2016. On May 28, 2015, the BOD of the Parent Company approved a dividend of P=0.10 per share to stockholders of record as at June 15, 2015 and paid an amount of P=463 million on June 27, 2015.
c. Equity Reserve As at December 31, 2016 and 2015, Parent Company’s equity reserve amounting to (P=208 million) and (P=206 million), respectively, arises from additional acquisition of FPH shares from non-controlling shareholders, FPH’s acquisition of treasury stocks and FPH’s issuances of shares to non-controlling shareholders to reflect changes in equity attributable to the Parent Company and non-controlling shareholders, and the Parent Company’s share in the equity adjustments of ABS-CBN through its investment in PDRs amounted to =291P million as at December 31, 2016 and 2015. *SGVFS024294* - 94 -
Equity reserve includes equity reserve of FPH which consists of:
2016 2015 (In Millions) First Gen’s acquisition of 40% stake in the First Gas Group (P=7,170) (P=7,170) First Gen and Northern Terracota’s acquisition of EDC shares (4,431) (4,431) Parent Company’s acquisition of 40% stake in FPUC from Union Fenosa Internacional, S.A and Dilution of Interest in First Gen (2,405) (2,581) EDC’s acquisition of FG Hydro 1,286 1,286 Northern Terracota’s acquisition of EDC shares (357) (405) Rockwell Land’s equity adjustment 249 249 First Philec’s transactions with non-controlling shareholders in FPSC (201) 24 Parent Company’s purchase of Rockwell Land shares from San Miguel Corporation 86 86 FLVI's acquisition of TPI shares (53) – First Gen’s acquisition of Prime Terracota preferred shares (see Note 5) (9) (9) (P=13,005) (=P12,951)
Attributable to: Parent Company (P=5,556) (=P5,451) Non-controlling interests (7,449) (7,500) (P=13,005) (=P12,951)
▪ First Gen’s Acquisition of 40% stake in the First Gas Group
On May 30, 2012, First Gen, through its wholly owned subsidiary, Blue Vulcan, acquired from BG Asia Pacific Holdings Pte Limited (“BGAPH”) [a member of the BG Group] the entire outstanding capital stock of Bluespark. Bluespark’s wholly owned subsidiaries, namely: Goldsilk; Dualcore; and Onecore own 40% of the outstanding capital stock of FGHC and subsidiaries (collectively referred to First Gas Group). Following the acquisition of Bluespark, the Group now beneficially owns 100% of First Gas Group through its intermediate holding companies.
The total consideration was allocated to the other assets and liabilities of Bluespark based on the relative fair values of these assets and liabilities. The excess of the consideration paid over the relative fair values of assets and liabilities were then allocated to the acquisition of the 40% equity interest in First Gas Group. As a result of transaction, First Gen recognized an adjustment to equity reserve of P=10,788 million (US$248 million) in 2012. The amount attributable to FPH is P=7,170 million. ▪ Northern Terracota’s acquisition of non-controlling interest in EDC
In 2015 and 2014, First Gen through its subsidiary, Northern Terracotta, acquired EDC shares amounting to $9.0 million and $10.6 million, respectively. The amount of equity reserve pertaining to the acquisition of non-controlling interests amounted to P=289 million and P=306 million in 2015 and 2014, respectively. The transaction resulted in
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the proportion of equity interest held by non-controlling interest in EDC of 49.45% as at December 31, 2016 and 2015, respectively.
▪ FPH’s Acquisition of 40% stake in FPUC from Union Fenosa Internacional, S.A and Dilution of Interest in First Gen
The amount of =2,581P million represents the net effect of FPH’s acquisition of 40% of FPUC from Union Fenosa Internacional, S.A.’s on January 23, 2008 and of the dilution of FPH’s interest in First Gen as a result of the latter’s public offering of common shares in 2007. ▪ EDC’s acquisition of FG Hydro On October 16, 2008, EDC, whereby EDC shall own 60% of the outstanding equity of FG Hydro, which was then a wholly owned subsidiary of First Gen prior to the SPIA. FG Hydro and EDC were subsidiaries of First Gen at that time and were, therefore, under common control of First Gen. The acquisition was accounted for similar to a pooling-of interests method since First Gen controlled FG Hydro and EDC before and after the execution of the SPIA. EDC recognized equity reserve pertaining to the difference between the acquisition cost and EDC’s proportionate share in the paid-in capital of FG Hydro. ▪ Rockwell Land’s equity adjustment This account represents the difference between the consideration received from the sale of the proprietary shares and the carrying value of the related interest. ▪ First Philec’s transactions with non-controlling shareholders in FPSC In 2016, First Philec received all of SPML’s shares of stock in FPSC as part of their arbitration settlement. The transfer of shares resulted into an equity reserve adjustment of P=177 million. d. Non-controlling interests i. Acquisition of Majority Interest in ATR KimEng Land, Inc. On December 22, 2014, Rockwell Primaries acquired all of the outstanding common shares of Maybank ATR in ATRKE Land. Rockwell Primaries acquired 1,860,000 common shares, equivalent to 60% ownership interest (see Note 5). Carrying value of non-controlling interest in Maybank ATR amounted to P=303.1 million and P=251.9 million as at December 31, 2016 and 2015, respectively.
ii. First Gen’s issuance of Series “G” Perpetual Preferred Shares On March 13, 2012, First Gen issued 10.0 billion (Series “G”) Perpetual Preferred Shares with issue price of =100.0P a share, par value of P=10.0 a share and dividend rate of 7.8% on the issue price. The Series “G” Preferred Shares are peso-denominated, cumulative, non-voting, non-participating, non-convertible and redeemable at the option of First Gen.
iii. First Gen’s issuance of Series “F” Perpetual Preferred Shares On July 25, 2011, First Gen issued 10.0 billion Series “F” Perpetual Preferred Shares with issue price of P=100.0 a share, par value of P=10.0 a share and dividend rate of *SGVFS024294* - 96 -
8.0% on issue price. The Series “F” Perpetual Preferred Shares are peso- denominated, non-voting, cumulative, non-participating, non-convertible and redeemable at the option of First Gen. =5,627P million worth of said shares is held by non-controlling shareholders (see Note 5).
ηυ− EDC
In 2015 and 2014, the Parent Company through its subsidiary, Northern Terracotta Power Corp. (Northern Terracotta), acquired EDC shares amounting to $9.0 million and $10.6 million, respectively. The amount of equity reserve pertaining to the acquisition of non-controlling interests amounted to $6.1 million and $6.8 million in 2015 and 2014, respectively. The transaction resulted in the proportion of equity interest held by non-controlling interest in EDC of 49.45% and 49.71% in 2015 and 2014, respectively.
υ− Prime Terracota On June 18, 2015, First Gen purchased 16.0 million and 13.0 million Series “B” voting preferred stocks of Prime Terracota owned by QRC and the Employees LIRF, respectively, for a total consideration of $1.1 million. As of December 31, 2016 and 2015, First Gen has a 100% direct voting interest in Prime Terracota and a 67.0% effective voting interest in EDC through Prime Terracota. The amount of equity reserve pertaining to the acquisition of the non-controlling stakes of QRC and LIRF in Prime Terracota amounted to $0.2 million (see Note 5).
In 2016 and 2015, the Group’s subsidiaries declared and paid cash dividends to non- controlling shareholders amounting to P=2,172 million and =2,346P million, respectively. e. Cumulative Translation Adjustment
The details of cumulative translation adjustments (net of share of NCI) as of December 31 are as follows:
2016 2015 Foreign exchange adjustments (P=3,195) (=P3,568) Net losses on cash flow hedge - net of tax (see Note 32) 165 6 Balances at end of year (P=3,030) (=P3,562)
The movements in the “Cumulative translation adjustments” account (net of share of NCI) for the years ended December 31, 2016 and 2015 are as follows:
2016 2015 Balances at beginning of year (P=3,562) (=P2,479) Foreign exchange adjustments 517 (1,084) Net gains on cash flow hedge - net of tax (see Note 32) 15 1 Balances at end of year (P=3,030) (=P3,562)
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22. Executive Stock Option Plan and Employee Stock Purchase Plan
Lopez Holdings The Parent Company has an Executive Stock Option Plan (ESOP) and an Employee Stock Purchase Plan (ESPP) that was approved by the BOD and stockholders on November 8, 2010 and February 28, 2011, respectively. Under the ESOP and ESPP, an aggregate of 120,000,000 common shares has been allocated and may be issued upon the exercise by the eligible participants of the stock option and purchase plan. The terms of the ESOP, include among others, a limit as to the number of shares a qualified regular employee or qualified director of the Parent Company may purchase and the manner of payment is through cash or check over a period of five years. The stock options vest annually at a rate of 20%, making it fully vested after five years from the grant date. All qualified participants are given until 10th year of the grant date to exercise the stock option. The terms of ESPP, include among others, a limit as to the number of shares a qualified regular employee or officer or qualified director of the Parent Company and Lopez or a qualified officers of the Parent Company’s subsidiaries and associates may purchase and the manner of payment based on equal semi-monthly or monthly installments over a period of five years through salary deductions. The stock options vest after two years from the grant date. All qualified participants are given until 10th year of the grant date to exercise the stock option.
The primary terms of the grants follow:
ESOP ESPP Grant date March 2011 March 2011 Number of shares subscribed 4,268,191 43,631,200 Offer price per share P=4.573 P=4.573 Option value per share P=2.29 P=1.65
The fair value of equity-settled share options granted is estimated as at the date of grant using the Black-Scholes Option Model, taking into account the terms and conditions upon which the options were granted. The following table lists the inputs to the model used for the option grants:
ESOP ESPP Expected volatility (%) 44.0 42.6 Weighted average share price P=4.57 P=4.57 Risk-free interest rate (%) 5.4 4.3 Expected life of option (years) 5.0 2.0 Dividend yield (%) 2.5 2.5
The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which likewise, may not necessarily be the actual outcome. The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. No other features of options grant were incorporated into the measurement of the fair value of the options. No other features of options grant were incorporated into the measurement of the fair value of the options.
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The following table illustrates the number and weighted average exercise price (WAEP) of and movements in share options:
2016 2015 Number of Number of share options WAEP share options WAEP Balance at beginning of year 31,591,401 P=4.57 37,438,729 P=4.57 Exercised during the year (see Note 21) (27,428,794) 4.57 (5,847,328) 4.57 Shares granted during the year – – – – Expired during the year – – – – Forfeited during the year – – – – Cancelled during the year – – – – Balance at end of year 4,162,607 P=4.57 31,591,401 P=4.57
Exercisable at end of year 4,162,607 P=4.57 31,934,981 P=4.57
Total share-based payment expense recognized related to the Parent Company’s ESOP and ESPP amounted to =0.2P million and =1P million in 2016 and 2015, respectively, and is presented as part of “Personnel expenses” under “General and Administrative Expenses” account in the consolidated statements of income (see Note 23).
There were no additional grants since 2011. In 2016 and 2015, the average exercise price of the stock option per share under ESOP and ESPP is P=7.80 amd P=6.60, respectively.
FPH FPH has an ESOP that entitles the directors, and senior officers to purchase up to 10% of FPH’s authorized capital stock on the offering years at a preset purchase price with payment and other terms to be defined at the time of the offering. The purchase price per share shall not be less than the average of the last dealt price per share of FPH’s share of stock.
The terms of the Plan include, among others, a limit as to the number of shares an executive and employee may purchase and the manner of payment based on equal semi-monthly installments over a period of 5 or 10 years through salary deductions.
The primary terms of the grants follow:
Year 2005 Year 2006 Option Option Grant date March 2005 March 2006 Offer price per share P=58.6 P=41.65 Number of shares subscribed 1,801,816 3,002,307 Option value per share P=32.68 P=8.83
The option grants are offered within 30 days upon receipt of the agreement for new entitled officers. The said officers are given until the 10th year of the grant date to exercise the option. These options vest annually at a rate of 20%, making it fully vested after 5 years from the grant date. The fair value of equity-settled share options granted under the ESOP is estimated at the dates of grant using the Black-Scholes Option Pricing Model, taking into account the terms and conditions upon which the options were granted.
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The following table lists the inputs to the models used for each of the grants:
Year 2005 Year 2006 Option Option Expected volatility (%) 38.2 21.7 Weighted average share price (=P) 60.00 41 Risk-free interest rate (%) 10.88 8.50 Expected life of option (years) 5.5 5.5 Dividend yield (%) nil 5
The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which likewise, may not necessarily be the actual outcome. No other features of options grant were incorporated into the measurement of the fair value of the options.
Movements in the number of stock options outstanding are as follows:
2016 2015 Total shares allocated 40,570,714 40,570,714
Options exercisable: Balance at beginning of year 624,714 881,577 Exercised (384,735) (256,863) Balance at end of year 239,979 624,714
There were no additional grants since 2006.
In 2016 and 2015, the average exercise price of the stock option per share under the ESOP is P=41.65 and =53.77,P respectively. In 2016 and 2015, no expense is recognized for share-based payment as the employee’s rights to receive the benefits from the ESOP have fully vested in 2011.
23. Costs and Expenses
Costs of Sale of Electricity
2016 2015 2014 (In Millions) Fuel costs (see Note 8) P=22,493 P=32,877 P=38,000 Depreciation and amortization 9,543 8,711 6,796 Power plant operations and maintenance (see Note 8) 7,897 9,369 5,936 Others 1,334 1,094 1,536 P=41,267 P=52,051 P=52,268
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Real Estate
2016 2015 2014 (In Millions) Cost of real estate (see Note 8) P=8,220 P=5,131 P=5,213 Depreciation 358 144 228 P=8,578 P=5,275 P=5,441
Contracts and Services
2016 2015 2014 (In Millions) Outside services P=969 P=525 P=1,092 Materials, supplies and facilities 761 344 1,336 Depreciation 521 291 435 Salaries and employee benefits 456 338 964 Mobilization and demobilization costs 168 199 224 Permits, insurances and licenses 102 109 100 Utilities 83 105 254 Rental 5 9 65 Others 62 93 98 P=3,127 P=2,013 P=4,568
Merchandise Sold
2016 2015 2014 (In Millions) Manufacturing overhead costs P=970 P=782 P=1,001 Materials 476 159 184 Labor 197 384 417 P=1,643 P=1,325 P=1,602
General and Administrative Expenses
2016 2015 2014 (In Millions) Personnel expenses P=4,550 P=5,006 P=4,647 Professional fees 2,701 3,274 2,779 Insurance, taxes and licenses 2,098 2,542 2,480 Depreciation and amortization 1,035 1,073 1,371 Rent and subcontracted costs 374 316 256 Property repairs and maintenance 247 296 276 Parts and supplies issued 135 221 275 Provision for doubtful accounts - net of recovery (see Note 7) 42 79 216 Others 1,611 1,199 1,509 P=12,793 P=14,006 P=13,809
Other general and administrative expenses mainly consist of rent and subcontract costs, advertising and utilities. *SGVFS024294* - 101 -
24. Finance Costs, Finance Income, Depreciation and Amortization, and Other Income (Charges)
Finance Costs
2016 2015 2014 (In Millions) Interest Loans and bonds (see Notes 16 and 18) P=8,310 P=8,049 P=7,888 Swap fees (see Note 31) 438 564 587 Liability from litigation (see Note 17) 8 8 8 8,756 8,621 8,483 Accretion and Amortization Debt issuance costs (see Note 18) 366 331 363 Asset retirement/preservation obligations (see Note 19) 53 43 83 Bonds payable (see Note 18) 7 6 – 426 380 446 Others Loss on extinguishment/ pre-termination of long-term debts (see Note 18) – 17 – Mark-to-market loss on derivatives and financial assets at fair value through profit or loss - net (see Notes 11 and 31) 52 (37) 10 Others 2 54 8 54 34 18 P=9,236 P=9,035 P=8,947
Finance Income
2016 2015 2014 (In Millions) Interest income on trade receivables (see Note 7) P=1,285 P=933 P=1,014 Cash and cash equivalents and short-term investments (see Note 6) 585 664 597 Others (see Notes 11 and 31) 18 5 5 P=1,888 P=1,602 P=1,616
Depreciation and Amortization
2016 2015 2014 (In Millions) Property, plant and equipment (see Note 12) P=12,338 P=9,070 P=7,593 Investment properties (see Note 13) 376 641 398 Intangible assets (see Note 14) 792 758 727 P=13,506 P=10,469 P=8,718
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Other Income (Expenses)
2016 2015 2014 (In Millions) Arbitration related settlement (see Note 3) P=2,388 P=– P=– Income from liquidated damages from contractors (see Note 12) 2,262 – – Proceeds on insurance claims of EDC and FGP (see Note 12) 1,512 1,559 1,199 Income from final settlement of FPSC’s payables (see Note 3) 255 – – Gain on sale of property, plant and equipment and investment properties (see Notes 12 and 13) 175 131 – Commissioning expense (174) – Club membership fees 118 68 113 Excess of the carrying amount of obligation over the buy-back price (Note 20) 115 4 118 Revenues on serviced apartments and property management service fees 62 167 133 Rental income from property, plant and equipment and investment properties 36 258 198 Others - net (139) 30 90 P=6,610 P=2,217 P=1,851
25. Retirement Benefits Lopez Holdings and certain subsidiaries maintain qualified, noncontributory, defined benefit retirement plans covering substantially all their regular employees. Under the existing regulatory framework, Republic Act 7641, Retirement Pay Law, requires provision for retirement pay to qualified private sector employees in the absence of any retirement plan in the entity, provided however that the employee’s retirement benefits under any collective bargaining and other agreements shall not be less than those provided under the law. The law does not require minimum funding of the plan.
The succeeding tables summarize the components of net retirement benefit expense recognized in the consolidated statements of income and the funded status and amounts recognized in the consolidated statements of financial position.
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The net retirement assets and liabilities and other employee benefits liabilities are presented in the consolidated statements of financial position as follows:
2016 2015 (In Millions) Net retirement benefit liabilities P= 1,970 P= 2,623 Other employee benefits - net of current portion of P=50 million in 2016 and P=15 million in 2015 (see Note 17) 647 827 Retirement and other long-term employee benefits liability 2,617 3,450 Net retirement benefit assets (see Note 15) (208) (242) P= 2,409 P= 3,208
Retirement Benefits The amounts recognized in the consolidated statements of financial position are as follows:
As at December 31, 2016:
Lopez Holdings FPH First Gen Rockwell Others Total (In Millions) Present value of defined benefit obligation P=85 P=2,828 P=4,179 P=493 P=492 P=8,077 Fair value of plan assets (127) (2,429) (3,000) (347) (412) (6,315) Net retirement liabilities (assets) (P=42) P=399 P=1,179 P=146 P=80 P=1,762
As at December 31, 2015:
Lopez Holdings FPH First Gen Rockwell Others Total (In Millions) Present value of defined benefit obligation P=74 P=2,762 P=5,302 P=417 P=470 P=9,025 Fair value of plan assets (127) (2,307) (3,499) (284) (427) (6,644) Net retirement liabilities (assets) (P=53) P=455 P=1,803 P=133 P=43 P=2,381
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Movements in the present value of the defined benefit obligation are as follows:
For the year ended December 31, 2016:
Lopez Holdings FPH First Gen Rockwell Others Total (In Millions) Balance at beginning of year P=74 P=2,762 P=5,302 P=417 P=470 P=9,025 Recognized in profit or loss: Current service cost 7 132 359 48 24 570 Interest cost 4 138 249 22 9 422 Profit or loss 11 270 608 70 33 992 Settlement benefits payments – – (828) – – (828) Benefits paid – (121) (228) (3) (20) (372) Settlement gain – – (420) – – (420) Recognized in other comprehensive income: Actuarial losses (gains) due to: Experience adjustments – (83) (53) 50 22 (64) Changes in financial assumptions – – (202) (15) (13) (230) Changes in demographic assumptions – – – (26) – (26) Other comprehensive income – (83) (255) 9 9 (320) Balance at end of year P=85 P=2,828 P=4,179 P=493 P=492 P=8,077
For the year ended December 31, 2015:
Lopez Holdings FPH First Gen Rockwell Others Total (In Millions) Balance at beginning of year P=158 P=3,177 P=5,107 P=375 P=544 P=9,361 Recognized in profit or loss: Current service cost 7 157 363 33 34 594 Interest cost 8 143 219 16 15 401 Profit or loss 15 300 582 49 49 995 Benefits paid – (393) (245) (5) (30) (673) Recognized in other comprehensive income: Actuarial losses (gains) due to: – Experience adjustments (99) (14) 286 20 (66) 127 Changes in financial assumptions – (308) (356) (9) (25) (698) Changes in demographic assumptions – – (72) (13) (2) (87) Other comprehensive income (99) (322) (142) (2) (93) (658) Balance at end of year P=74 P=2,762 P=5,302 P=417 P=470 P=9,025
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Movements in the fair value of plan assets are as follows:
For the year ended December 31, 2016:
Lopez Holdings FPH First Gen Rockwell Others Total (In Millions) Balance at beginning of year P=127 P=2,307 P=3,499 P=284 P=427 P=6,644 Interest income – 115 164 10 9 298 Contributions paid – – 252 60 – 312 Benefits paid – (121) (1,056) (3) (20) (1,200) Recognized in other comprehensive income: Return on plan assets, excluding interest income – 128 141 (4) (4) 261 Balance at end of year P=127 P=2,429 P=3,000 P=347 P=412 P=6,315 Actual return on plan assets P=– P=243 P=305 P=6 P=5 P=559
For the year ended December 31, 2015:
Lopez Holdings FPH First Gen Rockwell Others Total (In Millions) Balance at beginning of year P=226 P=2,942 P=3,493 P=278 P=437 P=7,376 Interest income 11 133 153 13 18 328 Contributions paid – – 230 20 16 266 Benefits paid – (393) (246) (5) (25) (669) Recognized in other comprehensive income: Return on plan assets, excluding interest income (110) (375) (131) (22) (19) (657) Balance at end of year P=127 P=2,307 P=3,499 P=284 P=427 P=6,644 Actual return on plan assets P=– (P=242) P=22 (P=9) P=11 (P=218)
Except for Lopez Holdings, the Group expects to contribute P=582 million to its pension plans in 2017.
Parent Company The major categories of plan assets as a percentage of the fair value of total plan assets are as follows:
The Plan’s net assets available for plan benefits consist of the following:
2016 2015 (In Millions) Fixed income: Short-term P=3 P=6 Medium and long-term: Government securities 51 33 Corporate bonds 28 43 Mutual funds 44 44 Loans and receivables 1 1 P=127 P=127
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Short-term Fixed Income. Short-term fixed income investment includes time deposits and special savings deposits.
Medium and Long-term Fixed Income. Investments in medium and long-term fixed income which include Philippine peso-denominated bonds, such as government securities, corporate bonds and other securities and debt instruments:
§ Government securities’ maturities range from 2 to 25 years with interest rates ranging from 3.36% to 9.25%; § Investments in corporate bonds pertain to bonds in Ayala Land, Inc., ABS-CBN Corporation, an associate, and SM Prime Holdings, Inc. with terms of 4 to 6 years. The maturities range from 2019 to 2021 with interest rates ranging from 4.51% to 5.63%; § Investment in mutual fund pertains to investment in Sun Life Prosperity Balanced Fund, Inc. with net asset value per share of =andP P=3.5891 as at December 31, 2016 and 2015, respectively.
The overall expected rate of return on assets is determined based on the market prices prevailing on that date, applicable to the period over which the obligation is to be settled.
The principal actuarial assumptions at the financial reporting dates used for the Group’s actuarial valuations are as follows:
2016 2015 Discount rate 4-6% 4-6% Future salary increases 3-10% 3-10%
Information about the Group’s retirement plans are as follows:
FPH The Board of Trustees (BOT), which manages the retirement fund (the Plan) of FPH, is comprised of 5 executives of FPH. They are beneficiaries also of the retirement fund. The investing decisions of the retirement fund are exercised by the BOT.
The major categories of plan assets as a percentage of the fair value of total plan assets are as follows:
2016 2015 Cash and cash equivalents 5% 13% Investment in shares of stock 65% 62% Investments in government securities and corporate bonds 18% 23% Others 12% 2% 100% 100%
The retirement fund consists of the following:
▪ Cash and cash equivalents and short-term investments which include regular savings and time deposits amounting to =P 272 million and =55P million as at December 31, 2016 and 2015, respectively.
▪ AFS investments which are composed of investments in equity securities. Investments in equity securities as at December 31 consist of the following: *SGVFS024294* - 107 -
Relationship 2016 2015 (In Millions) Common Shares FPH Reporting entity P=689 P=660 Lopez Holdings Parent 503 598 Rockwell Land Subsidiary 253 227 Preferred Shares First Gen Subsidiary 82 80 Ayala Corporation Investee 54 55 P=1,581 P=1,620
The fair value of these investments that are actively traded in organized financial markets is determined by reference to quoted market bid prices at the close of business on the financial reporting dates.
▪ For the years ended December 31, 2016 and 2015, the Plan recognized unrealized mark-to- market losses and gains arising from investments in equity securities amounting to P=41 million and P=38 million, respectively.
▪ HTM investments amounting to =567P million and P=564 million as at December 31, 2016 and 2015, respectively, are composed of investments in bonds with certain financial institutions with fixed coupon rates and maturing in 5 to 10 years from the issue dates. HTM investments are carried based on its ultimate redemption value.
▪ Receivables amounting to =10P million and =68P million as at December 31, 2016 and 2015, respectively, include accrued interest receivable on cash and cash equivalents, short-term investments and HTM investments and dividends receivable from equity securities.
▪ Liabilities of the Plan amounting to P=0.1 million and nil as at December 31, 2016 and 2015, respectively, pertain to retirement benefits payable and other accruals for general and administrative expenses.
First Gen The retirement funds of First Gen, FGHC and FGP are maintained and managed by BDO Trust while the retirement fund of FGPC is maintained and managed by the BPI Asset Management. In addition, EDC’s retirement fund is maintained by the BPI Asset Management and BDO Trust, while GCGI and BGI’s retirement funds are maintained by BDO Trust. These trustee banks are also responsible for investment of the plan assets. The investing decisions of the Plan are made by the respective retirement committees of the said companies.
The plan assets’ carrying amount approximates its fair value, since these are either short-term in nature or marked-to-market.
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The plans’ assets and investments by each class as at December 31 are as follows:
2016 2015 (In Millions Investments quoted in active market: Quoted equity investments Holding firms P=650 P=523 Industrial - electricity, energy, 626 568 power and water Property 60 64 Industrial - food, beverage, and tobacco 39 30 Services - casinos and gaming 26 5 Services - telecommunications 22 41 Retail 10 10 Mining 8 11 Financials - banks 5 165 Golf and country club 5 4 Industrial - construction, infrastructure allied – 10 services Transportation services – 20 1,451 1,451 Investments in debt instruments: Government securities 529 926 Investments in corporate bonds 460 450 989 1,376 Investment in mutual funds 25 13 Unquoted investments: Cash and cash equivalents 513 603 Receivables and other assets 24 57 Liabilities (1) (1) 536 659 Fair value of plan assets P=3,001 P=3,499
· Cash and cash equivalents include regular savings and time deposits;
· Investments in corporate debt instruments, consisting of both short-term and long-term corporate loans, notes and bonds, which bear interest ranging from 4.73% to 4.89% and have maturities from 2017 to 2023;
· Investments in government securities, consisting of retail treasury bonds that bear interest ranging from 2.13% to 11.70% and have maturities from 2017 to 2040; and
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· Investment in equity securities pertain to listed shares in PSE and include investments in the following securities:
Relationship 2016 2015 (In Millions) Intermediate parent Lopez Holdings company P=549 P=252 FPH (Voting common stocks) Parent company 166 159 First Gen: Reporting entity Voting common stocks 229 130 Non-voting preferred stocks 330 327 ABS-CBN Holdings Corporation (ABS-CBN) Affiliate – 2 P=1,274 P=870
The carrying amounts of investments in equity securities also approximate their fair values since they are marked-to-market.
For the year ended December 31, 2016, unrealized gains arising from investments in Lopez Holdings and First Gen, amounted to P=57 million and P=94 million, respectively while unrealized loss arising from investment in FPH amounted to P=19 million.
For the year ended December 31, 2015, unrealized gains arising from investments in First Gen and ABS-CBN, amounted to P=5 million, and $4 million, respectively, while unrealized loss arising from investment in Lopez Holdings and FPH amounted to P=36 million and P=27 million, respectively.
The details of the realized gains for the year ended December 31, 2016 are as follows:
Type of security: First Gen FGPC FGP FGHC (In Millions) Investment in shares of stock P=16 P=– P=15 P=9 Investment in government securities 8 1 4 2 Investment in corporate debt instruments and others 1 – 1 1 P=25 P=1 P=20 P=12
The voting rights over these equity securities are exercised by the trustee banks.
· Other financial assets held by these plans are primarily accrued interest income on cash deposits and debt securities held by the plans; and dividend receivable from equity securities.
· Liabilities of the plans pertain to trust fee payable and retirement benefits payable.
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Rockwell Land The plan assets of Rockwell Land are maintained by the trustee banks, Banco de Oro (BDO) and MBTC.
The carrying values and fair values of the plan are as follows:
2016 2015 (In Millions) Cash in banks P=26 P=28 Receivables - net of payables 1 1 Investments held for trading (government securities, corporate bonds and stocks) 319 255 P=346 P=284
Sensitivity Analysis The sensitivity analysis below has been determined based on reasonably possible changes of each significant assumption on the defined benefit obligation as at December 31, 2016 and 2015, assuming if all other assumptions were held constant:
2016 Increase Lopez First Gen (Decrease) Holdings FPH Group Rockwell Others (In Millions) Discount rates +1% (P=7) (P=119) (P=357) (P=27) (P=173) -1% 8 (131) 415 50 216
Future salary increases +1% P=8 P=116 P=405 P=51 P=214 -1% (7) (108) (361) (29) (171)
2015 Increase Lopez First Gen (Decrease) Holdings FPH Group Rockwell Others (In Millions) Discount rates +1% (P=7) (P=274) (P=447) (P=37) (P=150) -1% 8 (360) 515 44 184
Future salary increases +1% P=8 P=126 P=501 P=43 P=177 -1% (7) (117) (447) (36) (145)
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Maturity Analysis Shown below is the maturity analysis of the undiscounted benefit payments.
As at December 31, 2016:
Lopez Holdings FPH First Gen Rockwell Others Total (In Millions) Less than 1 year P=– P=297 P=111 P=230 P=20 P=658 More than 1 year to 5 years 2 1,147 375 44 85 1,653 More than 5 years to 10 years 48 2,521 867 133 154 3,723 More than 10 years to 15 years 169 297 837 284 231 1,818 More than 15 years to 20 years 169 144 767 311 254 1,645 More than 20 years 169 347 965 1,604 1,424 4,509
As at December 31, 2015:
Lopez Holdings FPH First Gen Rockwell Others Total (In Millions) Less than 1 year P=– P=105 P=111 P=168 P=69 P=453 More than 1 year to 5 years 2 604 249 12 85 952 More than 5 years to 10 years 48 1,403 570 110 113 2,244 More than 10 years to 15 years 169 1,566 898 407 278 3,318 More than 15 years to 20 years 169 1,419 643 284 237 2,752 More than 20 years 169 4,203 771 1,413 1,194 7,750
As of December 31, 2016 and 2015, the average duration of defined benefit obligation at the end of the reporting period is 6 to 30 years and 7 to 27 years, respectively.
Other Employee Benefits Other employee benefits consist of accumulated employee sick and vacation leave entitlements of FPH, First Gen Group and Rockwell Land, First Balfour and FPIP.
The amounts recognized in the consolidated statements of income are as follows:
2016 2015 2014 (In Millions) Current service cost (P=115) P=72 P=63 Interest cost 41 35 17 Actuarial gain (loss) (82) (27) 45 Net benefit expense (P=156) P=80 P=125
Movements in the present value of the other long-term employee benefit obligation are as follows:
2016 2015 (In Millions) Balance at beginning of year P=827 P=775 Current service cost (115) 72 Interest cost 41 35 Benefits paid (24) (28) Actuarial gain (loss) (82) (27) Balance at end of year P=647 P=827 *SGVFS024294* - 112 -
The principal assumptions used in determining the other employee benefit obligation are shown below:
2016 2015 Discount rate 4–5% 4–5% Future salary rate increase 5–10% 5–10%
The sensitivity analysis below has been determined based on reasonably possible changes of discount rate on the other employee benefit obligation as at December 31, 2016 and 2015, assuming all other assumptions were held constant:
Increase (Decrease) in Employee Benefit Obligation 2016 2015 (In Millions) Discount rate: Increase by 1% (P=84) (101) Decrease by 1% 98 117
26. Income Taxes
The deferred tax assets and liabilities of the Group are presented in the consolidated statements of financial position as follows:
2016 2015 (In Millions) Deferred tax assets P=2,582 P=2,380 Deferred tax liabilities (3,951) (3,279) (P=1,369) (=P899)
The components of these deferred tax assets and liabilities as at December 31, 2016 and 2015 are as follows:
2016 2015 (In Millions) Deferred income tax items recognized in the consolidated statements of income: Deferred tax assets on: Unrealized foreign exchange loss P=876 P=797 Provisions 776 1,119 Advances from customers 409 59 Capitalized costs in service contracts between EDC and First Balfour group 253 190 Allowance for doubtful accounts 165 53 Revenue generated during testing period of BGI power plant 154 154 Asset retirement and preservation obligations 134 124 NOLCO 120 115
(Forward)
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2016 2015 (In Millions) Accrual of employee bonuses and other employee benefits P=41 P=70 Unrealized profits from intercompany sale of rights 38 81 Retirement benefit liability 36 14 Unamortized past service cost 31 38 Excess amortization of debt issuance costs under effective interest 29 26 Others 393 330 Deferred tax liabilities on: Excess of the carrying amounts of non- monetary assets over the tax base (2,175) (1,596) Effect of business combination (see Note 5) (1,496) (1,611) Unrealized gain on real estate (847) (769) Capitalized asset retirement, duties, taxes and interest (136) (128) Capitalized costs and losses during commissioning period of the power plants (113) (20) Prepaid major spare parts (61) (66) Retirement benefit asset (13) (18) Unrealized foreign exchange gains – – Others (117) (177) Subtotal total (1,503) (1,215) Changes recognized directly in other comprehensive income - Deferred tax asset on derivative liability 134 316 Total 134 316 (P=1,369) (P=899)
The deductible temporary differences of certain items in the consolidated statements of financial position and the carry-forward benefits of NOLCO and MCIT for which no deferred tax assets has been recognized in the consolidated statements of financial position are as follows:
2016 2015 (In Millions) NOLCO P=11,656 P=9,826 Share in earnings/losses from investments in and deposits to subsidiaries and associates 6,073 9,676 Accrual of personnel and administrative expenses 4,385 1,327 Allowance for impairment losses on investments, advances and deposits for stock options 3,965 3,965 Retirement benefit asset 1,772 466 Unrealized foreign exchange loss 123 85 MCIT 71 99 Unamortized past service cost – 214 Others 84 106 P=28,129 P=25,764
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The balances of NOLCO and MCIT, with their corresponding years of expiration, are as follows:
Incurred for the Year Ended Available Until December 31 December 31 NOLCO MCIT (In Millions) 2016 2019 P=3,238 P=34 2015 2018 4,655 28 2014 2017 4,163 9 2013 2016 1,391 62 13,447 133 Expired in 2016 (1,391) (62) P=12,056 P=71
As at December 31, 2016 and 2015, deferred tax liability on undistributed earnings of FGHC International, a foreign subsidiary, amounting to P= 27.3 million and P=18.1 million, respectively, has not been recognized since the Parent Company is able to control the reversal of the temporary difference and there is no regular dividend distribution.
The reconciliation between the statutory income tax rate and effective income tax rates as shown in the consolidated statements of income follows:
2016 2015 2014 Statutory income tax rate 30% 30% 30% Income tax effects of: Nondeductible expenses 11% 10% 8% Effect of RE law (12%) (12%) (14%) Expenses not deducted for MCIT 4% 3% 3% Income Tax Holiday (ITH) incentives (3%) (3%) (2%) Nontaxable income (2%) (2%) (2%) Others (6%) (5%) (1%) Effective income tax rates 22% 21% 22%
27. EPS Computation
2016 2015 2014 (Amounts in Millions, except Number of Shares) (a) Net income attributable to equity holders of the Parent Company P=6,557 P= 6,191 P= 3,760 Add interest on convertible bonds and amortization of bond issue cost – – 1 (b) Net income attributable to equity holders of the Parent Company - diluted P=6,557 P= 6,191 P=3,761 (c) Weighted average number of common shares - basic 4,615,692,836 4,596,635,538 4,592,059,787 Dilutive potential common shares under the: Conversion of bonds – – 551,814 ESOP and ESPP 1,551,669 11,776,128 7,030,686 Effect of issuance of shares during the year 27,428,794 5,847,328 4,563,164 (d) Adjusted weighted average common shares – diluted 4,644,673,299 4,614,258,994 4,604,205,451 Per share amounts: Basic (a/c) P=1.4206 P=1.3496 P=0.8188 Diluted (b/d) P=1.4117 P=1.3418 P=0.8186 *SGVFS024294* - 115 -
28. Related Party Disclosures
Enterprises and individuals that directly, or indirectly through one or more intermediaries, control, or are controlled by, or under common control with the Group, including holding companies, and fellow subsidiaries are related entities of the Group. Associates and individuals owning, directly or indirectly, an interest in the voting power of the Group that gives them significant influence over the enterprise, key management personnel, including directors and officers of the Group and close members of the family of these individuals and companies associated with these individuals also constitute related entities.
The following are the significant transactions with related parties:
a. Transactions with Lopez involve issuances of Lopez Notes and PDRs and voting trust agreement discussed in Note 10 and deposits for options to purchase shares of stock of BTHC and Sky Vision (both commonly controlled entities) at a pre-agreed price.
In December 2015, the Parent Company entered into agreements with Lopez for the P= 400 million reduction from the purchase price of the option agreement related to 22,169,607 BTHC common shares (proceeds received were recognized as part of “Reversal of impairment losses” account in the 2015 consolidated statement of income) and the acquisition of BTHC shares via application of the deposit. As a result, BTHC became a subsidiary of the Parent Company in 2015.
Also in December 2015, the Parent Company entered into a Deed of Assignment with ABS- CBN (a subsidiary of Lopez) whereby the Parent Company assigned all its rights, including all deposits made, under a Share Option Agreement (the Agreement) covering the purchase of 504,980,707 common shares of Sky Vision from Lopez. The consideration for the assignment of rights amounted to P=350 million (proceeds received were recognized as part of “Reversal of impairment losses” account in the 2015 consolidated statement of income). Thereafter, ABS- CBN entered into agreements with Lopez for the reduction of the purchase price and the acquisition of the subject common shares via application of the deposit. ABS-CBN’s economic interest in Sky Vision increased to 75% in 2015 as a result of the acquisition of the shares of stock of Sky Vision. ABS-CBN’s economic interest in Sky Cable also increased to 59.4% in 2015.
b. IFC is a shareholder of EDC that has approximately 1.36% economic ownership interest in EDC as of December 31, 2016 and 2015. On May 20, 2011, EDC signed a 15-year $75.0 million loan facility with IFC. The loan amounting to P=3,262.5 million was drawn in Peso on September 30, 2011.
On November 27, 2008, EDC entered into a loan agreement with IFC for $100.0 million (P=4.1 billion). On January 7, 2009, EDC opted to draw the loan in Peso and received the proceeds amounting to P=4,048.8 million, net of =51.3P million front-end fees. This loan is included under the “Long-term debts” account in the consolidated statements of financial position (see Note 18).
c. Intercompany Guarantees
EDC issued letters of credit amounting to $80.0 million in favor of its subsidiary, EDC Chile Limitada, as evidence of its financial support for EDC Chile Limitada’s participation in the bids for geothermal concession areas by the Chilean Government.
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EDC also issued letters of credit in favor of its subsidiaries in Peru, namely, EDC Peru S.A.C. and EDC Energia Verde Peru S.A.C. at $0.27 million each as evidence of EDC’s financial support for the geothermal authorizations related to the exploration drilling activities of the said entities. During the February 26, 2014 meeting, the BOD of First Gen approved the confirmation, ratification and approval of the authority of FPH, pursuant to Clause (i) of the Second Article of First Gen’s Amended Articles of Incorporation, to act as a guarantor or co-obligor or assume any obligation of any person, corporation or entity in which First Gen may have an interest, directly or indirectly, including but not limited to FNPC, which is the operating company of the 420 MW San Gabriel power plant and Prime Meridian, which is the operating company of the 100 MW Avion power plant, under such terms and conditions as FPH’s duly authorized representatives may deem necessary, proper or convenient in the best interest of FPH and its relevant subsidiary. On May 12, 2014, the stockholders of FPH ratified and confirmed such authority. On July 10, 2014, First Gen signed a Guarantee and Indemnity Agreement with KfW-IPEX, guaranteeing FNPC’s punctual performance on all its payment obligations under the Export Credit Facility loan agreement. As of December 31, 2016 and 2015, First Gen issued guarantees totaling to $8.0 million and $6.9 million, respectively, in favor of the BOI, to guarantee the payment of customs duties waived in the event that FNPC and/or PMPC does not comply with the terms and conditions of their respective Certificates of Authority specifically on the installation and permanent use of imported capital equipment, spare parts and accessories that will be installed in the San Gabriel and Avion power plants. On February 8, 2017, the BOI granted the respective requests of FNPC and Prime Meridian for the cancellation of First Gen guarantees in view of San Gabriel and Avion power plants’ compliance of its obligations under their respective Certificates of Authority. Trade related receivables from and payables to related parties, presented under “Trade and other receivables”, “Trade payables and other current liabilities”, “Loans payable” and “Other noncurrent liabilities” accounts in the consolidated statements of financial position, are as follows: Relationship Terms Conditions 2016 2015 (Amounts in Millions) Advances to officers and Officers and employees Noninterest-bearing; settled Unsecured, P=117 P=39 employees through salary deduction no impairment Due from: 30 days upon receipt of billings; noninterest- Unsecured, SKI Joint venture partner bearing no impairment 1 P=1 30 days upon receipt of billings; noninterest- Unsecured, Others Affiliates* bearing no impairment 59 28 Total (see Note 7) P=177 P=68 Due to: Rockwell-Meralco BPO Joint venture partner 30 days upon receipt of (see Note 17) billings; noninterest- bearing Unsecured P=519 P=144 Total (see Note 18) P=519 P=144 Loans Payable/Other noncurrent liability Pilipinas Shell Petroleum (see Note 18) Investor of subsidiary Noninterest-bearing Unsecured P=– P=137 Advances to: BTHC group 30 days upon receipt Unsecured, fully of billings; noninterest- provided with Associate bearing allowance P=1,591 P=1,591 P=1,591 P=1,591 *Affiliates pertain to various entities within the Lopez group *SGVFS024294* - 117 -
Compensation of key management personnel are as follows:
2016 2015 (In Millions) Short-term employee and benefits P=1,459 P=1,261 Retirement and other long-term employee benefits 180 131 Share-based payments – 9 P=1,639 P=1,401
29. Registrations with the BOI and Philippine Economic Zone Authority (PEZA)
The following are the BOI Registrations of the Group:
Entity Project Name Grant Date ITH Period Remarks BGI 130 MW BMGPP February 14, 2013 Seven years from - complex July 2013 or date of commissioning of the power plants, whichever is earlier. FNPC 450 MW Combined Cycle November 22, 2013 Four years from The ITH shall be limited only to the revenues Natural Gas Power April 2016 or generated from the sales of electricity of Plant (the “San actual start of the San Gabriel power plant. On Gabriel” power plant) commercial November 5, 2016, the San Gabriel Part operations, started its commercial operations. whichever is earlier. EBWPC 150 MW Burgos Wind June 29, 2011 Seven years from On June 3, 2014, EBWPC received a legal Farm December 2015 service letter from BOI granting the or date of upward amendment of registered capacity commissioning, of the Burgos Wind Farm from 86 MW to whichever is 150 MW. earlier
EDC 4.16 MW Burgos Solar June 16, 2015 Seven yearsd - Power Plant - Phase 1 beginning in December 2015. 2.66 MW Burgos Solar December 3, 2015 Seven yearsd - Power Plant - Phase 2 beginning in June 2015. Nasulo Power Plant February 12, 2014 Seven years While the Nasulo power plant has a capacity beginning in of 49.4 MW, the ITH shall be limited January 2016 or only to the revenues derived from the sale date of of 30 MW. commissioning, whichever is earlier GCGI 112.5 MW Tongonan November 13, 2015 Seven years Only revenues derived from power generated Geothermal Power beginning in (i.e., 36.79 MW or the capacity in excess Plant April 2015 of the 75.71 MW, whichever is lower) and sold to the grid, other entities and/or communities shall be entitled to ITH. 192.5 MW Palinpinon December 11, 2015 Seven years Only revenues derived from power generated Geothermal Power beginning in (i.e., 39.66 MW or the capacity in excess Plant February 2014 of the 152.84 MW, whichever is lower) and sold to the grid, other entities and/or communities shall be entitled to ITH. PMPC 115 MW San Gabriel March 19, 2014 Four years from The ITH shall be limited only to revenues Avion Natural Gas - November 2014 generated from sale of electricity of the Fired Power Plant (the or actual start of 115 MW Avion Plant. On September Avion Plant) commercial 26,2016, the Avion Plant started its operations, commercial operations. whichever come earlier. Rockwell land Edades Serviced June 6, 2013 Six years reckoning Registration as new operator of Tourist Apartments on February Accommodation Facility for its Edades 2014. Serviced Apartments in accordance with the provisions of Omnibus Investments Code of 1987. *SGVFS024294* - 118 -
Entity Project Name Grant Date ITH Period Remarks
On January 8, 2015, Rockwell Land requested for amendments of investment and project timetable and sales revenue projection under the above mentioned BOI certification due to unforeseen circumstances affecting the construction and changes from projected launch. The request was approved on April 13, 2015.
On June 24, 2015, request for status upgrade of said BOI registration from Non-pioneer to Pioneer status was made. Company's request for status upgrade for its Edades Serviced Apartments, under BOI Certificate of Registration No 2013-121, was approved on November 4, 2015. Likewise, ITH period was also amended from 4 to 6 years.
The following companies are registered with PEZA pursuant to Republic Act No. 7916, the Philippine Special Economic Zone Act of 1995:
▪ As an Ecozone Developer/Operator - FPIP ▪ As an Ecozone Facilities Enterprise - FPDMC, FSRI, FPDC ▪ As an Ecozone Export Enterprise - FUI, FPPSI, FPSC and FPNC
On March 14, 2017, PEZA approved the cancellation of the registration of FPSC as an Ecozone Export Enterprise effective thirty (30) days from FPSC’s receipt of the approval
As registered enterprises, these subsidiaries are entitled to certain tax and nontax incentives. The companies are entitled to certain incentives which include, among others, ITH or a special tax rate of 5% on gross income (less allowable deductions and additional deduction for training expenses) in lieu of all national and local taxes. The 5% tax on gross income shall be paid and remitted as follows:
▪ Three percent (3%) to the National Government; and ▪ Two percent (2%) to the treasurer’s office of the municipality or city where the enterprise is located.
Income from non-PEZA registered activities is subject to 30% regular corporate income tax.
30. Financial Risk Management Objectives and Policies
The Group has various financial instruments such as cash equivalents, short-term investments, trade and other receivables, investments in equity securities, trade payables and other current liabilities which arise directly from its operations. The Group’s principal financial liabilities consist of loans payable and long-term debts. The main purpose of these financial liabilities is to raise financing for the Group’s growth and operations. The Group also enters into derivative and hedging transactions, primarily interest rate swaps, cross-currency swap and foreign currency forwards, as needed, for the sole purpose of managing the relevant financial risks that are associated with the Group’s borrowing activities and as required by the lenders in certain cases.
The Group has an Enterprise-wide Risk Management Program which aims to identify risks based on the likelihood of occurrence and impact to the business, formulate risk management strategies, assess risk management capabilities and continuously monitor the risk management efforts. The main financial risks arising from the Group’s financial instruments are interest rate risk, foreign *SGVFS024294* - 119 - currency risk, credit risk, liquidity risk, credit concentration risk, merchant risk, and equity price risk. The BOD reviews and approves policies for managing each of these risks as summarized below. The Group’s accounting policies in relation to derivative financial instruments are set out in Note 2 to the consolidated financial statements.
Interest Rate Risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.
The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long-term debts with floating interest rates. The Group policy is to manage interest cost through a mix of fixed and variable rate debt. On a regular basis, the Finance team of the Group monitors the interest rate exposure and presents it to management by way of a compliance report. To manage the exposure to floating interest rates in a cost-efficient manner, the Group may consider prepayment, refinancing, or entering into derivative instruments as deemed necessary and feasible.
As at December 31, 2016 and 2015, approximately 75% and 72%, respectively, of the Group’s borrowings are subject to fixed interest rate.
Interest Rate Risk Table. The following table set out the carrying amounts, by maturity, of the Group’s financial instruments that are subject to interest rate risk as at December 31, 2016 and 2015:
2016 More than More than 1 Year 3 Years Within up to up to More than Interest Rates 1 Year 3 Years 5 Years 5 Years Total (In Millions) Floating Rate Parent 4,800 million FRCNs 1.5% + 6 months PDST F rate or BSP overnight rate, whichever is higher P=1,008 P=1,056 P=– P=– P=2,064 Power Generation FGP Term Loan Facility 3.54% 1,279 3,160 1,883 5,868 12,190 EBWPC $150.0M ECA Debt Facility 3.30% 298 820 988 4,868 6,974 EBWPC 5.6 B Commercial Debt Facility 3.65% 126 253 253 4,740 5,372 EDC US$175M Refinanced Syndicated Term Loan 3.30% 4,350 – – – 4,350 Red Vulcan’s Staple Financing 5.38% 2,075 – – – 2,075 EDC US$80.0 million Term Loan 2.56% – 3,620 – – 3,620 FG Hydro’s 4.3 billion Loan 3.07% 273 574 629 329 1,805 EBWPC $37.5M Commercial Debt Facility 3.30% 75 205 247 1,217 1,744 FGPC Uncovered US$188 million Facility 5.17% 219 – – – 219
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2015 More than More than 1 Year 3 Years Within up to up to More than Interest Rates 1 Year 3 Years 5 Years 5 Years Total (In Millions) Floating Rate Parent 4,800 million FRCNs 1.5% + 6 months PDST F rate or BSP overnight rate, whichever is higher P=1,008 P=2,064 P=– P=– P=3,072 Power Generation FGP Term Loan Facility 2.97% 1,211 2,706 1,113 7,718 12,748 EBWPC $150.0M ECA Debt Facility 2.75% 318 653 865 5,082 6,918 EDC US$175M Refinanced Syndicated Term Loan 2.01% 126 252 252 4,867 5,497 EBWPC 5.6 B Commercial Debty 2.75% 103 440 569 4,058 5,170 Red Vulcan’s Staple Financing 2.93% 1,300 3,775 – – 5,075 FG Hydro’s 4.3 billion Loan 5.00% 383 850 935 1,020 3,188 EDC US$80.0 million Term Loan 2.39% 188 3,426 – 3,614 EBWPC $37.5M Commercial Debt Facility 6.19% 80 163 216 1,271 1,730 FGPC Uncovered US$188 million Facilty 4.50% 308 316 – – 624 Manufacturing First Philec’s $20.6 million Long Term Loan 3 months LIBOR + 3.50% 121 243 243 243 850
Floating interest rates on financial instruments are repriced semi-annually on each interest payment date. Interest on financial instruments classified as fixed rate is fixed until the maturity of the instrument.
The following table demonstrates the sensitivity to a reasonably possible change in interest rates for the years ended December 31, 2016 and 2015, with all other variables held constant, of the Group’s income before income tax and equity (through the impact of floating rate borrowings, and derivative assets and liabilities):
Effect Increase/ on Income Decrease Before Effect in Basis Points Income Tax on Equity (In Millions) 2016 Parent Company - floating rate borrowings +100 P=– P=21 -100 – (21) Subsidiaries - floating rate borrowings - U.S. Dollar +100 291 671 -100 (291) (633)
Philippine Peso +100 93 – -100 (93) – 2015 Parent Company - floating rate borrowings +100 31 – -100 (31) – Subsidiaries - floating rate borrowings - U.S. Dollar +100 314 699 -100 (314) (707)
Philippine Peso +100 13 – -100 (13) –
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The effect of changes in interest rates in equity pertains to the fair valuation of derivatives designated as cash flow hedges and is exclusive of the impact of changes affecting the Group’s consolidated statements of income.
The Group determined the +/- 1% reasonably possible change based on linear estimates of the future foreign exchange rate based on the previous 12-month average monthly foreign exchange rates.
Foreign Currency Risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.
Foreign Currency Risk with Respect to U.S. Dollar. The Group, except First Gen group (excluding EDC and subsidiaries), FSRI, FPSC, First PV, FPNC, FGHC International and FPH Fund, is exposed to foreign currency risk through cash and cash equivalents and short-term investments denominated in U.S. dollar. Any depreciation of the U.S. dollar against the Philippine peso posts foreign exchange losses relating to cash and cash equivalents and short-term investments.
To better manage the foreign exchange risk, stabilize cash flows, and further improve the investment and cash flow planning, the Group may consider derivative contracts and other hedging products as necessary. The U.S.dollar denominated monetary assets are translated to Philippine peso using the exchange rate of P=49.72 to US$1.00 and =47.06P to US$1.00 as at December 31, 2016 and 2015, respectively.
The table below summarizes the Group’s exposure to foreign exchange risk with respect to U.S. dollar as at December 31: 2016 2015 U.S. Dollar- Philippine U.S. Dollar- Philippine denominated Peso denominated Peso Balances Equivalent Balances Equivalent (In Millions) Cash and cash equivalents $9 P=447 $5 P=215 Short-term investments 45 2,237 41 1,915
Foreign Currency Denominated Assets $54 2,684 $46 P=2,130
The following table sets out the impact of the range of reasonably possible movement in the U.S. dollar exchange rates with all other variables held constant on the Group’s income before income tax and equity for the years ended December 31, 2016 and 2015. Change in Exchange Rate Effect on Income in U.S. dollar against Philippine peso Before Income Tax (In Millions) 2016 + 5% P=85 - 5% (=P85)
2015 + 5% 64 - 5% (64) Foreign Currency Risk with Respect to Philippine Peso and Euro. Certain financial assets and liabilities as well as some costs and expenses are denominated in US Dollar or in European Union euro. To manage the foreign currency risk, the Group may consider entering into derivative *SGVFS024294* - 122 - transactions, as necessary.
In the case of EDC, its exposure to foreign currency risk is mitigated to some degree by some provisions of its GRESC’s, SSA’s and PPA’s and Renewable Energy Payment Agreement (REPA). The service contracts allow full cost recovery while its sales contracts include billing adjustments covering the movements in Philippine peso and the U.S. dollar rates, U.S. Price and Consumer Indices, and other inflation factors. To further mitigate the effects of foreign currency risk, EDC will prepay, refinance, enter into derivative contracts, or hedge its foreign currency denominated loans whenever deemed feasible.
The following table sets out the foreign currency-denominated monetary assets and liabilities (translated into U.S. dollar) as at December 31, 2016 and 2015 that may affect the audited consolidated financial statements of the Group:
2016 Original Currency Japanese Chilean New Zealand Hongkong Singapore Great Britain Equivalent U.S. Dollar Euro- Yen- Peso dollar Dollar Dollar Pound- Philippine denominated denominated denominated denominated denominated denominated denominated denominated Peso Balance Balance Balance Balance Balance Balance Balance Balance Balances1 Financial Assets Loans and receivables: Cash and cash equivalents $283.9 €– ¥– CHL142.7 NZ$– HK$– SG$– £– P=14,114.0 Receivables 168.3 – – – – – – – 8,370.3 Long-term receivables 2.3 – – – – – – – 114.3 454.5 – – 142.7 – – – – 22,598.6 AFS financial assets 2.3 – – – – – – – 113.3 Financial asssets at FVPL – – – – – – – – – Total financial assets 456.8 – – 142.7 – – – – 22,711.9 Financial Liabilities Liabilities at amortized cost: Accounts payable and accrued expenses 323.4 7.1 328.3 – 0.5 0.1 0.1 0.2 16,080.8 Dividends payable 0.3 – – – – – – – 14.0 Long-term debts 1,858.5 – – – – – – – 92,406.3 Total financial liabilities 2,182.2 7.1 328.3 – 0.5 0.1 0.1 0.2 108,501.1 Net financial liabilities $1,725.4 €7.1 ¥328.3 (CHL142.7) NZ$0.5 HK$0.1 SG$0.1 £0.2 P=85,789.2 1 PHP1=US$0.020, PHP1=€0.019, PHP1=¥2.352, PHP1=CHLP=13.458, PHP1 = HK$0.156, PHP1 = NZD0.029, PHP1 =SG$0.029 and PHP1 =GB£0.018 as of December 31, 2016. 2015 Original Currency Japanese Chilean New Zealand Swedish Singapore Great Britain Equivalent U.S. Dollar Euro- Yen- Peso dollar kroner Dollar Pound Philippine denominated denominated denominated denominated denominated denominated denominated denominated Peso Balance Balance Balance Balance Balance Balance Balance Balance Balances1 Financial Assets Loans and receivables: Cash and cash equivalents $499.8 €– ¥– CHLP=3,416.3 NZ$– SEK– SG$– £– P=23,519.6 Receivables 148.4 – – – – – – – 6,985.6 Long-term receivables 2.0 – – – – – – – 92.2 650.2 – – 3,416.3 – – – – 30,597.4 AFS financial assets – – – – – – – – – Financial assets at FVPL – – – – – – – – – Total financial assets 650.2 – – 3,416.3 – – – – 30,597.4 Financial Liabilities Liabilities at amortized cost: Accounts payable and accrued expenses 330.1 7.1 143.4 – 0.3 1.3 0.1 0.3 15,536.8 Dividends payable – – – – – – – – – Long-term debts 1,812.2 – – – – – – – 85,282.8 Total financial liabilities 2,142.3 7.1 143.4 – 0.3 1.3 0.1 0.3 100,819.6 Net financial liabilities (assets) $1,492.1 €7.1 ¥143.4 (CHLP=3,416.3) NZ$0.3 SEK1.3 SG$0.1 £0.3 P=70,222.2 1 PHP1=US$0.021, PHP1=€0.019, PHP1=¥2.557, PHP1=CHLP=15.065, PHP1 = SEK0.178, PHP1 = NZD0.031, PHP1 =SG$0.030 and PHP1 =GB£0.014 as of December 31, 2015.
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The following table sets out, for the years ended December 31, 2016 and 2015, the sensitivity to a reasonably possible movement in the foreign currency exchange rates applicable to the First Gen group, with all other variables held constant, to the First Gen group’s income before income tax and equity (due to changes in revaluation of monetary assets and liabilities):
2016 Foreign Currency Increase (Decrease) Increase Appreciates on Income Before (Decrease) (Depreciates) By Income Tax on Equity (Amounts in Millions) U.S. Dollar 10% P=234.68 (P=8,579) (10%) (259.54) 8,579 European Euro 3% (11.44) – (3%) 11.44 – Japanese Yen 10% (12.43) – (10%) 15.41 – Hong Kong Dollar 10% (0.50) – (10%) 0.50 – New Zealand Dollar 10% (1.49) – (10%) 1.99 – Chilean Peso 10% (0.99) – (10%) 0.99 – Singapore Dollar 10% (0.50) – (10%) 0.50 – Great Britain Pound 10% (0.99) – (10%) 1.49 –
2015 Foreign Currency Increase (Decrease) Increase Appreciates on Income Before (Decrease) (Depreciates) By Income Tax on Equity (Amounts in Millions) U.S. Dollar 10% P=218.03 (P=7,024) (10%) (230.60) 7,024 European Euro 4% (14.59) – (4%) 14.59 – Japanese Yen 10% (5.18) – (10%) 6.12 – Sweden Kroner 10% (0.47) – (10%) 0.94 – New Zealand dollar 10% (0.94) – (10%) 0.94 – Chilean Peso 10% 20.71 – (10%) (25.41) – Singapore Dollar 10% – – (10%) 0.47 – Great Britain Pound 10% (1.88) – (10%) 2.35 –
The effect of changes in foreign currency rates in equity pertains to the fair valuation of the derivatives designated as cash flow hedges and is exclusive of the impact of changes affecting the Group’s consolidated statements of income.
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Credit Risk Credit risk is the risk that the Group will incur losses from customers, clients or counterparties that fail to discharge their contracted obligations. The Group manages credit risk by setting limits on the amount of risk the Group is willing to accept for individual counterparties and by monitoring exposures in relation to such limits.
As a policy, the Group trades only with recognized, creditworthy third parties and/or transacts only with institutions and/or banks which have demonstrated financial soundness. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis and the level of the allowance account is reviewed on an ongoing basis to ensure that the Group’s exposure to credit risk is not significant. With respect to credit risk arising from the other financial assets of the Group, which comprise mostly of cash and cash equivalents, short-term investments and trade and other receivables, the Group’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments.
Credit Risk Exposure. The table below shows the gross maximum exposure to credit risk of the Group as at December 31:
2016 2015 (In Millions) Loans and receivables: Cash and cash equivalents* P=31,526 P=40,572 Short-term investments 5,936 6,577 Trade and other receivables: Trade 28,232 24,056 Others 2,472 2,748 Special deposits and funds 285 174 DSRA 1,027 1,324 Refundable deposits 184 195 Long-term receivables 192 59 Restricted cash 190 98 AFS financial assets 12,940 14,727 FVPL investments 1,969 2,203 Derivative assets 639 328 Total credit exposure P=85,592 P=93,061 * Excluding the Group’s cash on hand amounting to =5P million in 2016 and =5P million in 2015. The Group’s deposit accounts in certain banks are covered by the Philippine Deposit Insurance Corporation insurance coverage.
The Group holds no significant collateral as security and there are no significant credit enhancements in respect of the above assets.
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Aging Analysis of Financial Assets. The following tables show the Group’s aging analysis of past due but not impaired financial assets as at December 31:
2016 Neither Past Due Past Due but not Impaired nor < 30 30–60 61–90 91–120 > 120 Impaired Days Days Days Days Days Total Impaired Total (In Millions) Loans and Receivables Cash and cash equivalents P=31,526 P=– P=– P=– P=– P=– P=– P=– P=31,526 Short-term investments 5,936 – – – – – – – 5,936 Trade and other receivables 13,971 13,589 2,328 816 – – 16,733 424 31,128 Special deposits and funds 285 – – – – – – – 285 DSRA 1,027 – – – – – – – 1,027 Refundable deposits 184 – – – – – – – 184 Long-term receivables 192 – – – – – – – 192 Restricted cash 190 – – – – – – – 190 Financial Assets AFS financial assets 12,940 – – – – – – – 12,940 FVPL investments 1,969 – – – – – – – 1,969 Derivative assets 639 – – – – – – – 639 P=68,859 P=13,589 P=2,328 P=816 P=– P=– P=16,733 P=424 P=86,016 *Part of “Others” under Other Noncurrent Assets
2015 Neither Past Due Past Due but not Impaired nor < 30 30–60 61–90 91–120 > 120 Impaired Days Days Days Days Days Total Impaired Total (In Millions) Loans and Receivables Cash and cash equivalents P=40,572 P=– P=– P=– P=– P=– P=– P=– P=40,572 Short-term investments 6,577 – – – – – – – 6,577 Trade and other receivables 22,761 1,265 351 343 364 1,720 4,043 416 27,220 Special deposits and funds 174 – – – – – – – 174 DSRA 1,324 – – – – – – – 1,324 Refundable deposits 195 – – – – – – – 195 Long-term receivables 59 – – – – – – – 59 Restricted cash 98 – – – – – – – 98 Financial Assets AFS financial assets 14,727 – – – – – – – 14,727 FVPL investments 2,203 – – – – – – – 2,203 Derivative assets 328 – – – – – – – 328 P=89,018 P=1,265 P=351 P=343 P=364 P=1,720 P=4,043 P=416 P=93,477 *Part of “Others” under Other Noncurrent Assets
Credit Quality of Neither Past Due Nor Impaired Financial Assets. The payment history of the counter parties and their ability to settle their obligations are considered in evaluating credit quality. Financial assets are classified as high grade if the counterparties are not expected to default in settling their obligations, thus, credit exposure is minimal. These counterparties normally include banks, related parties and customers who pay on or before due date. Financial assets are classified as standard grade if the counterparties settle their obligations to the Group with tolerable delays. Low grade accounts are accounts which have probability of impairment based on historical trend. These accounts show propensity of default in payment despite regular follow-up actions and extended payment terms. As at December 31, 2016 and 2015, the financial assets categorized as neither past due nor impaired are viewed by management as high grade. Meanwhile, past due but not impaired financial assets are classified as standard grade. Concentration of Credit Risk The Group, through First Gen’s operating subsidiaries namely, FGP and FGPC, earns a substantial portion of its revenues from Meralco. Meralco is committed to pay for the capacity and energy generated by the San Lorenzo and Santa Rita power plants under the existing long-term PPAs which are due to expire in September 2027 and August 2025, respectively. While the PPAs *SGVFS024294* - 126 - provide for the mechanisms by which certain costs and obligations including fuel costs, among others, are passed-through to Meralco or are otherwise recoverable from Meralco, it is the intention of First Gen, FGP and FGPC to ensure that the pass-through mechanisms, as provided for in their respective PPAs, are followed.
EDC’s geothermal and power generation businesses trade with two major customers, namely NPC and TransCo. Any failure on the part of NPC and TransCo to pay its obligations to EDC would significantly affect EDC’s business operations.
The Group’s exposure to credit risk arises from default of the counterparties, with a maximum exposure equal to the carrying amounts of the receivables from Meralco, in the case of FGP and FGPC, and the receivables from NPC and TransCo, in the case of EDC.
The table below shows the risk exposure in respect to credit concentration of the Group as at December 31, 2016 and 2015:
2016 2015 Trade receivables from Meralco P=8,884 P=7,347 Trade receivables from NPC and TransCo 3,895 1,882 P=12,779 P=9,229 Total receivables 30,704 P=26,804 Credit concentration percentage 41.62% 34.43%
Liquidity Risk The Group’s exposure to liquidity risk refers to lack of funding needed to finance its growth and capital expenditures, service its maturing loan obligations in a timely fashion, and meet its working capital requirements. To manage this exposure, the Group maintains internally generated funds and prudently manages the proceeds obtained from fundraising in the debt and equity markets. On a regular basis, the Group’s Treasury Department monitors the available cash balances. The Group maintains a level of cash and cash equivalents deemed sufficient to finance the operations.
In addition, the Group has short-term investments and has available credit lines with certain banking institutions. First Gen’s operating subsidiaries’ EDC, FGP and FGPC, in particular, maintain a DSRA to sustain the debt service requirements for the next payment period. As part of its liquidity risk management, the Group regularly evaluates its projected and actual cash flows. It also continuously assesses the financial market conditions for opportunities to pursue fund raising activities.
As at December 31, 2016 and 2015, 25% of the Group’s debts will mature in less than one year, based on the carrying value of borrowings reflected in the consolidated financial statements.
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The tables summarize the maturity profile of the Group’s financial assets used for liquidity management and liabilities as at December 31, 2016 and 2015 based on contractual undiscounted receipts and payments.
2016 On Less than 3 to 12 > 1 to More than Demand 3 Months Months 5 Years 5 Years Total (In Millions) Financial Assets Cash and cash equivalents P=31,526 P=– P=– P=– P=– P=31,526 Short-term investments – 5,936 – – 5,936 Trade receivables 26,660 1,959 2,085 – – 30,704 AFS financial assets 12,940 – – – – 12,940 FVPL investments 1,969 – – – – 1,969 Other current financial assets 1,871 – – – – 1,871 Other noncurrent financial assets – – 646 – – 646 74,966 1,959 8,667 – – 85,592 Financial Assets Designated as Cash Flow Hedges Derivative contract receipts 1 – 92 239 – 332 Derivative contract payments – – (54) (106) – (160) 1 – 38 133 – 172 P=74,967 P=1,959 P=8,705 P=133 P=– P=85,764
Financial Liabilities Carried at Amortized Cost Loans payable P=812 P=– P=– P=– P=– P=812 Trade payables and other current liabilities 19,041 10,506 1,572 – – 31,119 Long-term debts, including current portion 18,293 2,306 19,324 71,705 51,319 162,947 38,146 12,812 20,896 71,705 51,319 194,878 Financial Liabilities Designated as Cash Flow Hedges Derivative contract receipts – – (141) (439) – (580) Derivative contract payments – – 453 888 – 1,341 – – 312 449 – 761 P=38,146 P=12,812 P=21,208 P=72,154 P=51,319 P=195,639
2015 On Less than 3 to 12 > 1 to More than Demand 3 Months Months 5 Years 5 Years Total (In Millions) Financial Assets Cash and cash equivalents P=40,572 P=– P=– P=– P=– P=40,572 Short-term investments – – 6,577 – – 6,577 Trade receivables 23,116 1,604 988 1,096 – 26,804 AFS financial assets 14,727 – – – – 14,727 FVPL investments 2,203 – – – – 2,203 Other current financial assets 1,806 – – – – 1,806 Other noncurrent financial assets – – 561 – – 561 82,424 1,604 8,126 1,096 – 93,250
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2015 On Less than 3 to 12 > 1 to More than Demand 3 Months Months 5 Years 5 Years Total (In Millions) Financial Assets Designated as Cash Flow Hedges Derivative contract receipts P=4 P=– P=50 P=192 P=– P=246 Derivative contract payments – – (57) (152) – (209) 4 – (7) 40 – 37 P=82,428 P=1,604 P=8,119 P=1,136 P=– P=93,287
Financial Liabilities Carried at Amortized Cost Loans payable P=– P=470 P=713 P=– P=– P=1,183 Trade payables and other current liabilities 5,997 11,510 5,212 1,250 – 23,969 Long-term debts, including current portion 640 612 16,500 45,260 106,807 169,819 6,637 12,592 22,425 46,510 106,807 194,971 Financial Liabilities Designated as Cash Flow Hedges Derivative contract receipts – – (134) (501) (14) (649) Derivative contract payments – – 519 1,243 27 1,789 – – 385 742 13 1,140 P=6,637 P=12,592 P=22,810 P=47,252 P=106,820 P=196,111
Merchant Risk The Group, through First Gen , has two fully-merchant power plants under FNPC and PMPC. These new gas plants are exposed to the volatility of spot prices because of supply and demand changes. Apart from supply and demand, there are other factors that could influence trends and movements in the WESM prices. These factors include (but are not limited to) unexpected outages, weather conditions, transmission constraints, and changes in fuel prices. These are expected to cause variability in the operating results of the aforementioned merchant plants.
The Group plans to mitigate these risks by having a balanced portfolio of contracted and spot capacities. It intends to contract half of FNPC’s capacity. As of December 31, 2016, First Gen Group is 79% contracted in terms of installed capacity. This percentage is targeted to increase.
Equity Price Risk The Group’s quoted equity securities are susceptible to market price risk arising from uncertainties about future values of the investment in equity securities. The Group manages the equity price risk through diversification and by placing limits on individual and total equity instruments. The Group’s BOD reviews and approves all equity investment decisions.
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The following table demonstrates the sensitivity to a reasonably possible change in share price, with all other variables held constant:
Change in Effect on Equity Price* Equity Investment in equity securities 2016 11% P=1,296 (11%) (P=1,296)
2015 10% P=1,420 (10%) (=P1,420)
* The sensitivity analysis includes the Company’s quoted equity securities with amounts adjusted by the specific beta for these investments as of reporting date.
Capital Management The primary objective of the Group’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business, comply with its financial loan covenants and maximize shareholder value.
The Group manages its capital structure and makes adjustments to it, in light of changes in business and economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes during the years ended December 31, 2016 and 2015.
The Group monitors capital using a debt-to-equity ratio, which is total debt divided by total equity. The Group’s practice is to keep the debt-to-equity ratio not more than 2.50:1.
2016 2015 (In Millions) Long-term debts (current and noncurrent portions) P=162,947 P=169,819 Total debt 162,947 169,819
Equity attributable to the equity holders of the Parent 53,497 48,500 NCI 106,028 95,669 Total equity P=159,525 P=144,169
Debt-to-equity ratio 1.02:1 1.18:1
The Parent Company and certain of its subsidiaries are obligated to perform certain covenants with respect to maintaining specified debt-to-equity and minimum debt-service-coverage ratios, as set forth in their respective agreements with the creditors (see Note 18). As at December 31, 2016 and 2015, the Group is in compliance with those covenants.
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31. Financial Instruments
Set out in the following table is a comparison by category of carrying amounts and fair values of all of the Group’s financial instruments in the consolidated financial statements as at December 31, 2016 and 2015.
2016 2015 Carrying Carrying Value Fair Value Value Fair Value (In Millions) Financial Assets Derivative assets accounted for as cash flow hedges P=639 P=639 P=387 P=387 Designated at FVPL 1,969 1,969 2,203 2,203 Loans and receivables Cash and cash equivalents 31,531 31,531 40,597 40,597 Short-term investments 5,936 5,936 6,577 6,577 Trade and other receivables 30,704 30,704 26,804 26,804 Special deposits and funds 285 285 174 174 DSRA 1,027 1,027 1,324 1,324 Refundable deposits 184 184 195 195 Long-term receivables 192 192 59 59 Restricted cash 190 190 98 98 70,049 70,049 75,828 75,828 AFS: Equity securities 12,689 12,689 14,611 14,611 Proprietary membership 123 123 116 116 Debt Securities 128 128 130 130 12,940 12,940 14,857 14,857 Total Financial Assets P=85,597 P=85,597 93,275 93,275
Financial Liabilities Financial liabilities carried at amortized cost: Long-term debts, including current portion P=162,947 P=193,335 P=169,819 P=184,060 Retention Payable 1,056 1,056 783 783 Derivative liabilities accounted for as cash flow hedges 817 817 1,247 1,247 Total Financial Liabilities P=164,820 P=195,208 P=171,849 P=186,090
Fair Value and Categories of Financial Instruments The fair values of cash and cash equivalents, short-term investments, trade and other receivables, restricted cash deposits, loans payable, trade payables, and other current liabilities approximate the carrying amounts at financial reporting date due to the short-term nature of the accounts.
Long-term Receivables The fair value of long-term receivables was computed by discounting the expected cash flows using the applicable rates of 3.40% and 3.89% in 2016 and 2015, respectively.
AFS Financial Assets and FVPL Financial Assets The fair values of investments in equity securities and FVPL financial assets are based on quoted market prices as at financial reporting date. For equity instruments that are not quoted, the investments are carried at cost less allowance for impairment losses, if any, due to the unpredictable nature of future cash flows and the lack of suitable methods of arriving at a reliable fair value.
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Long-Term Debts The fair values of long term debts were computed by discounting the instruments expected future cash flows using the following prevailing rates as at December 31, 2016 and 2015:
Long-term Debt Basis 2016 2015 Lopez Holdings Credit adjusted PDST-R2 interest rates in 2015 and PDST-F interest rates in 2014 5.4% to 4.2% 4.2% to 4.6% FGP and FGPC Credit adjusted U.S. dollar interest rates 0.97% to 2.18% 0.6527% to 1.6266% First Gen and Credit adjusted U.S. dollar interest rates FNPC 0.64% to 2.65% 0.484% to 2.254% EDC and First Gen Applicable rates Hydro 1.75% to 34.18% 1.75% to 11.27% Red Vulcan’s Credit adjusted PDST-R2 interest rates in Staple Financing 2015 and PDST-F interest rates in 2014 approximates carrying value 2.67% to 3.99% Interest bearing Credit adjusted PDEx interest rates loans of Rockwell land 1.880% to 5.00% 2.7% to 5.2% Installment Credit adjusted PDEx interest rates payable at Rockwell Land 1.880% to 5.00% 2.7% to 5.1%
Fair Value Hierarchy of Financial Assets and Liabilities The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:
Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; Level 2: valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable; and Level 3: valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.
2016 Level 1 Level 2 Level 3 Total (In Millions) Financial Assets Long-term receivables P=– P=– P=192 P=192 AFS financial assets: Equity securities 12,812 – – 12,812 Debt securities 128 – – 128 Designated at FVPL – 1,969 – 1,969 Derivative assets accounted for as cash flow hedges – 639 – 639 Total Financial Assets P=12,940 P=2,608 P=192 P=15,740
Financial Liabilities Derivative liabilities accounted for as cash flow hedges P=– P=817 P=– P=817
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2015 Level 1 Level 2 Level 3 Total (In Millions) Financial Assets Long-term receivables P=– P=– P=59 P=59 AFS financial assets: Equity securities 14,727 – – 14,727 Debt securities 130 – – 130 Designated at FVPL – 2,203 – 2,203 Derivative assets accounted for as cash flow hedges – 328 – 328 Total Financial Assets P=14,857 P=2,531 P=59 P=17,447
Financial Liabilities Derivative liabilities accounted for as cash flow hedges P=– P=1,247 P=– P=1,247
As at December 31, 2016 and 2015, there were no transfers between Level 1 and Level 2 fair value measurements and there were no transfers into and out of Level 3 fair value measurements.
Derivative Financial Instruments The Group, through First Gen group, enters into derivative transactions such as interest rate swaps to hedge its interest rate risks arising from its floating rate borrowings, cross currency swap and foreign currency forwards to hedge the foreign exchange risk arising from its loans and payables. These derivatives (including embedded derivatives) are accounted for either as Derivatives not designated as accounting hedges or derivatives designated as accounting hedges.
The table below shows the fair value of First Gen group’s outstanding derivative financial instruments, reported as assets or liabilities, together with their notional amounts as at December 31, 2016 and 2015. The notional amount is the basis upon which changes in the value of derivatives are measured.
2016 2015 Derivative Derivative Notional Derivative Derivative Notional Assets Liabilities Amount Assets Liabilities Amount (see Note 11) (see Note 11) (In Millions) Derivatives Designated as Accounting Hedges Freestanding derivatives: Interest rate swaps P=110 P=817 $442 P=– P=1,246 $500 Cross-currency swaps 468 – 75 383 – 110 Call spread swaps 60 – – – – – Total derivatives P=638 P=817 $517 P=383 P=1,246 $610
Presented as: Current P=470 P=– $– P=59 P= – $– Noncurrent 168 817 – 324 1,247 – Total derivatives P=638 P=817 $– P=383 P=1,247 $–
Derivatives not Designated as Accounting Hedges The Group’s (through First Gen group) derivatives not designated as accounting hedges include freestanding derivatives used to economically hedge certain exposures but were not designated by management as accounting hedges. Such derivatives are classified as at FVPL with changes in fair value directly taken to consolidated statements of income.
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Foreign Currency Swap Contracts A foreign currency swap is an agreement to exchange amounts in different currencies based on the spot rate at trade date and to re-exchange the same currencies at a future date based on an agreed rate.
In 2013, EDC entered into a total of 22 foreign currency swap contracts with aggregate notional amount of US$105.6 million and an average forward rate of =44P per US$1. EDC settled these foreign currency swap contracts in 2014 resulting in a =15.1P million gain that was recorded under “Derivative gains (losses)” in the profit or loss.
In 2014, EDC recognized P=7.5 million gain from the fair value changes of the foreign currency swap contracts. This is recorded under “Derivative gains (losses)” in the profit or loss.
EDC did not enter into any foreign currency swap transaction in 2016 and 2015.
Derivatives Designated as Accounting Hedges The Group, through First Gen group, has interest rate swaps accounted for as cash flow hedges for its floating rate loans and cross-currency swaps and foreign currency forwards accounted for as cash flow hedges of its Philippine peso and U.S. dollar denominated borrowings and Euro denominated payables, respectively. Under a cash flow hedge, the effective portion of changes in fair value of the hedging instrument is recognized as cumulative translation adjustments in other comprehensive income (loss) until the hedged item affects earnings.
Interest Rate Swaps – FGPC. On November 14, 2008, FGPC entered into 8 interest rate swap agreements with hedge providers. On the same date, FGPC designated the interest rate swaps as hedges of the cash flow variability in the Covered and Uncovered Facilities, attributable to the movements in the 6-month U.S. LIBOR (see Note 18).
Under the four interest rate swap agreements that hedge 100% of the Covered Facility, FGPC pays a fixed rate of 4.4025% and receives a 6-month U.S. LIBOR on the aggregate amortizing notional amount of US$312.0 million, simultaneous with the interest payments every May and November on the hedged loan. The notional amounts of the interest rate swaps are amortized based on the repayment schedule of the hedged loan. The interest rate swap agreements have a term of 12 ½ years and will mature on May 10, 2021 (coinciding with the maturity of the hedged loan).
Under the four interest rate swap agreements that hedge 75% of the Uncovered Facility, FGPC pays a fixed rate of 4.0625% and receives a 6-month U.S. LIBOR on the aggregate amortizing notional amount of US$141.0 million, simultaneous with the interest payments every May and November on the hedged loan. The notional amounts of the interest rate swaps are amortized based on the repayment schedule of the hedged loan. The interest rate swaps have a term of 8 ½ years and will mature on May 10, 2017 (coinciding with the maturity of the hedged loan).
As at December 31, 2016 and 2015, the aggregate negative fair value of the interest rate swaps that was deferred to “Cumulative translation adjustments” account in the consolidated statements of financial position amounted to P=502.2 million, net of related deferred tax effect of P=213.8 million (US$10.1 million, net of related deferred tax effect of US$4.3 million) and =729.4P million, net of related deferred tax effect of P=394 million (US$15.5 million, net of related deferred tax effect of US$6.7 million), respectively.
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Interest Rate Swaps - FGP In April 2013, FGP entered into two interest rate swap agreements to hedge its floating rate exposure on US$80.0 million of its US$420.0 million term loan facility. Under the interest rate swap agreements, FGP pays a fixed rate of 1.425% and receives a floating rate of U.S. LIBOR, on a semi-annual basis, simultaneous with the interest payments every June and December on the hedged loan.
In May 2013, FGP entered into another interest rate swap agreement with RCBC to hedge its floating rate exposure on another US$20.0 million of the US$420.0 million term loan facility. Under the interest rate swap agreement, FGP pays a fixed rate of 1.28% and receives a floating rate of U.S. LIBOR, on a semi-annual basis, simultaneous with the interest payment every June and December on the hedged loan. The notional amounts of interest rate swap is amortized based on the repayment schedule of the hedged loan. The interest rate swaps were designated as cash flow hedges and will mature on June 10, 2020.
As at December 31, 2016 and 2015, the positive fair values of the interest rate swaps that were deferred to “Cumulative translation adjustments” account in the consolidated statements of financial position amounted to =34.8P million, net of deferred tax income tax effect of P=14.92 million ($0.7 million, net of related deferred income tax effect of $0.3 million) and P=23.53 million ($0.5 million, net of related deferred income tax effect of $0.2 million), respectively.
There was no ineffective portion recognized in the consolidated statements of income for the years ended December 31, 2016 and 2015.
The outstanding aggregate notional amount and the related cumulative mark-to-market gains and losses of the interest rate swaps designated as cash flow hedges as at December 31 are as follows:
2016 2015 Notional amount $272,865 $350,134 Cumulative mark-to-market losses (P=14,388) (=P22,192) Cumulative mark-to-market gains 1,021 653
The net movements in the fair value of interest rate swaps of FGPC and FGP are as follows:
2016 2015 (In Millions) Fair value at beginning of year (P=1,013) (=P1,237) Fair value changes taken into equity during the year (52) (287) Fair value changes realized during the year 438 564 Foreign exchange differences (38) (53) Fair value at end of year (665) (1,013) Deferred tax effect on cash flow hedges 200 304 Fair value deferred into equity (P=465) (=P709)
Fair value changes during the year, net of deferred income tax, are recorded in the consolidated statements of comprehensive income and under the “Cumulative translation adjustments” account in the consolidated statements of financial position. The fair value change realized during the year was taken into “Finance costs” account in the consolidated statements of income. This pertains to the net difference between the fixed interest paid/accrued and the floating interest received/accrued on the interest rate swap agreements as at financial reporting date. *SGVFS024294* - 135 -
For the years ended December 31, 2016 and 2015, fair value changes taken to the consolidated statements of income amounted to =282.4P million ($5.7 million) and =561.72P million ($12.4 million) respectively.
Cross Currency Swaps – EDC. In 2014 and 2012, EDC entered into 6 and an additional 6 non- deliverable cross-currency swap (NDCCS) agreements with an aggregate notional amount of $65.0 million and $45.0 million, respectively, to partially hedge the foreign currency and interest rate risks on its Refinanced Syndicated Term Loan that is benchmarked against US LIBOR and with flexible interest reset feature that allows EDC to select what interest reset frequency to apply (i.e., monthly, quarterly, or semi-annually). As it is EDC’s intention to reprice the interest rate on the hedged loan quarterly, EDC utilizes NDCCS with quarterly interest payments and receipts.
Under the NDCCS agreements, EDC receives floating US$ interest based on 3-month US LIBOR plus 175 basis points and pays fixed peso interest. On specified dates, EDC also receives specified U.S. dollar amounts in exchange for specified peso amounts based on the agreed swap rates. These U.S. dollar receipts correspond with the expected interest and fixed principal amounts due on the hedged loan. Effectively, the 12 NDCCS converted 62.86% of the hedged loan into a fixed rate peso loan.
The maturity date of the 12 NDCCS coincides with the maturity date of the hedged loan.
As of December 31, 2016 and 2015, the outstanding aggregate notional amount of EDC’s NDCCS amounted to =3.7P billion ($75.0 million). For the years ended December 31, 2016 and 2015, the aggregate fair value changes on these NDCCS amounting to P=13.4 million and =11.3P million respectively, were recognized under “Cumulative translation adjustments” account in the consolidated statements of financial position.
Interest Rate Swap – EBWPC. In the last quarter of 2014, EBWPC entered into four (4) interest rate swaps (IRS) with aggregate notional amount of $150.0 million. This is to partially hedge the interest rate risks on its ECA and Commercial Debt Facility (the Foreign Facility) that is benchmarked against U.S. LIBOR and with flexible interest reset feature that allows EBWPC to select what interest reset frequency to apply. Under the IRS agreement, EBWPC will receive semi-annual interest of 6-month USD-LIBOR and will pay fixed interest. EBWPC designated the IRS as hedging instruments in cash flow hedge against the interest rate risk arising from the Foreign Facility. In the first three quarter of 2016, EBWPC entered into 3 additional IRS aggregate notional amount of $30.0 million.
The maturity date of the seven (7) IRS coincides with the maturity date of the Foreign Facility.
As of December 31, 2016 and 2015, the outstanding aggregate notional amount of EBWPC’s IRS amounted to $169 million and $147 million, respectively. For the year ended December 31, 2016 and 2015, the aggregate fair value changes on these IRS amounting to P=12.4 million loss and P=188.8 million loss were recognized under “Cumulative translation adjustments” account in the consolidated statements of financial position.
Hedge Effectiveness Results Since the critical terms of the hedged loan and the IRS/ NDCCS match, except for one to two days timing difference on the interest reset dates, the hedges were assessed to be highly effective. As such, the aggregate fair value changes on these IRS/NDCCS amounting to $8.7 million and $5.7 million were recognized under “Cumulative translation adjustments” account in the consolidated statement of financial position. No ineffectiveness was recognized in the consolidated statements of income for the years ended December 31, 2016 and 2015. *SGVFS024294* - 136 -
As of December 31, 2016 and 2015, the net movement of changes made to “Cumulative translation adjustment” account for EDC’s cash flow hedges are as follows:
2016 2015 (In Millions) Balances at beginning of year (P=196) (=P184) Fair value change taken into equity during the year 413 259 Fair value change realized during the year (252) (271) (35) (196) Deferred income tax effect on cash flow hedges 11 (4) Balances at end of year (P=24) (=P200)
32. Significant Contracts, Franchise and Commitments
a. PPAs and PSAs
FGP and FGPC FGP and FGPC each have an existing PPA with Meralco, the largest power distribution company operating in the island of Luzon and the Philippines and the sole customer of both companies. Under the PPA, Meralco will purchase in each contract year from the start of commercial operations, a minimum number of kWh of the net electrical output of FGP and FGPC for a period of 25 years. Billings to Meralco under the PPA are substantially in U.S. dollar and a small portion is billed in Philippine peso.
Under the respective PPAs of FGP and FGPC, the fixed capacity fees and fixed operating and maintenance fees are recognized monthly based on the actual NDC tested and proven, which is usually conducted on a semi-annual basis. Total fixed capacity fees and fixed operating and maintenance fees amounted to P=14,092.4 million ($298 million) in 2016, =13,426.9P million ($296.4 million) in 2015, and =13,181P million (US$297.2 million) in 2014.
FG Bukidnon On January 9, 2008, FG Bukidnon and Cagayan Electric Power and Light Co., Inc (CEPALCO), an electric distribution utility operating in the City of Cagayan de Oro, signed a PSA for the FG Bukidnon plant. Under the PSA, FG Bukidnon shall generate and deliver to CEPALCO and CEPALCO shall take, or pay for even if not taken, the Available Energy for a period commencing on the date of ERC approval until March 28, 2025.
On June 14, 2012, FG Bukidnon signed a Transmission Service Agreement with NGCP for the latter’s provision of the necessary transmission services to FG Bukidnon. Under the PSA, the transmission-related charges shall be passed through to CEPALCO.
FG Hydro As at December 31, 2016, there are four remaining third party long-term power supply agreements being serviced by FG Hydro.
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Details of the existing contracts are as follows:
Related Contract Expiry Date Other Development Edong Cold Storage and Ice Plant December 25, 2020 A new agreement was signed by in November 2010 for the supply of power in the succeeding 10 years. NIA-Upper Pampanga River October 25, 2020 FG Hydro and NIA-UPRIIS signed a new Integrated Irrigation System agreement in October 2010 for the supply of power in the succeeding 10 years. Nueva Ecija II Electric August 25, 2018 The ERC granted a provisional approval on Cooperative, Inc., Area 1 the PSA between FG Hydro and NEECO II- (NEECO II – Area 1) Area 1 on Oct. 7, 2013 with a pending final resolution of the application for the approval thereof. PAMES December 25, 2008 There was no new agreement signed. However, FG Hydro had continued to supply PAMES’ electricity requirements with PAMES’ compliance to the agreed restructured payment terms.
The PSA with NEECO II – Area 2 expired on December 25, 2016 and was not renewed.
In addition to the above contracts, FG Hydro entered into PSAs with (1) FGES for the delivery of electricity to a contestable customer of FGES which commenced on February 26, 2016 and will end on February 25, 2018 and (2) BGI for the delivery of electricity to a customer of FG Hydro for a period of thirty (30) months and will remain effective until August 25, 2018.
EDC EDC sells electricity to NPC pursuant to the following 25-year PPAs which provide, among others, that NPC shall pay EDC a base price per kilowatt-hour of electricity delivered subject to inflation adjustments:
Plant Date Commenced Contracted Energy (GWH) 588.4 MW Unified Leyte November 1997 1,370 for Leyte-Cebu 3,000 for Leyte-Luzon 52.0 MW Mindanao I March 1997 330* 390** 54.0 MW Mindanao II June 1999 398*
*Minimum energy offtake **Succeeding year
EDC’s 49.0 MW Nasulo power plant has PSAs with San Miguel Electronic (SMEC) and First Gen Energy Solutions (First GES) which will expire on December 25, 2024 and August 25, 2018, respectively. The PSA with SMEC for 2.6MW provides, among others, that SMEC shall pay EDC a base price per kilowatt-hour of electricity delivered subject to inflation adjustments.
Revenue from sale of electricity covered by PPAs amounted to P=14,190.0 million ($2,698.1 million), P=13,867.6 million ($2,578,9 million) and =13,439.8P million ($296.7 million) in 2016, 2015 and 2014, respectively. *SGVFS024294* - 138 -
Green Core Geothermal Inc. (GCGI) With GCGI’s takeover of Palinpinon and Tongonan Power Plants effective October 23, 2009, Schedule X of the Asset Purchase Agreement with PSALM provides for the assignment of 12 NPC PSAs to GCGI.
As of December 31, 2016, GCGI has 23 remaining PSAs with various cooperative and industrial customers in the Visayas region. The PSAs run from 5 to 30 year periods; 19 of these will expire from 2025 to 2040.
Total revenue from sale of electricity under the PSCs and PSAs amounted to P= 11,092.1 million ($234.6 million), P= 11,169.2 million ($246.6 million), and P= 10,486.7 million ($231.5 million) in 2016, 2015 and 2014, respectively.
BGI As of December 31, 2016, BGI’s outstanding PSAs are as follows:
Customers Contract Start Contract Expiration ULGEI August 26, 2015 December 25, 2025 First GES June 26, 2016 December 25, 2021 Camarines Sur II Electric Cooperative, Inc. January 26, 2013 December 26, 2018 FPIC December 26, 2012 December 26, 2018 FG Hydro February 26, 2016 August 25, 2018 IMAK-INEC December 26, 2016 July 25, 2018
Total revenue from the sale of electricity amounted to P=3,145.8 million, ($66.5 million), =4,224.1P ($93.2 million) and P=3,641.3($93.2 million) in 2016, 2015 and 2014, respectively. The costs of purchases of electricity from WESM were offset against revenue from sale of electricity. Any excess revenue from or excess cost of sale of electricity is presented as revenue from sale of electricity or cost of sale of electricity, respectively.
ULGEI As of December 31, 2016, ULGEI’s outstanding PSAs are as follows:
Customers Contract Start Contract Expiration Camarines Sur IV Electric Cooperative Inc. (CASURECO IV) August 26, 2015 December 25, 2025 Bohol Light Company, Inc. (BLCI) August 26, 2015 August 25, 2021 Bohol II Electric Cooperative, Inc. April 24, 2016 December 25, 2018
The total revenue from the sale of electricity under PSA’s amounted to $17.5 million, $9.0 million and nil in 2016, 2015 and 2014, respectively. b. Stored Energy Commitment of EDC
In 1996 and 1997, EDC entered into Addendum Agreements to the PPA related to the Unified Leyte power plants, whereby any excess generation above the nominated energy or take-or- pay volume will be credited against payments made by NPC for the periods it was not able to accept electricity delivered by EDC. As of December 31, 2016 and 2015, the commitment for stored energy is equivalent to 4,326.6 GWh.
*SGVFS024294* - 139 - c. Service Contract
GSCs and GRESCs of EDC Under P.D. 1442, all geothermal resources in public and/or private lands in the Philippines, whether found in, on or under the surface of dry lands, creeks, rivers, lakes, or other submerged lands within the waters of the Philippines, belong to the State, inalienable and imprescriptible, and their exploration, development and exploitation. Furthermore, the Philippine Government may enter into service contracts for the exploration, development and exploitation of geothermal resources in the Philippines.
Pursuant to P.D. 1442, EDC entered into several GSCs with the Philippine Government through the DOE granting EDC the right to explore, develop, and utilize the country’s geothermal resource subject to sharing of net proceeds with the Philippine Government. The net proceeds is what remains after deducting from the gross proceeds the allowable recoverable costs, which include development, production and operating costs. The allowable recoverable costs shall not exceed 90% of the gross proceeds. EDC pays 60% of the net proceeds as share of the Philippine Government and retains the remaining 40%. The 60% Philippine Government share is comprised of government share and income taxes. The government share is split between the DOE (60%) and the LGUs (40%) where the project is located.
Geothermal Renewable Energy Service Contracts and Geothermal Operating Contracts R.A. 9513, otherwise known as the Renewable Energy Act of 2008 (RE Law) and which became effective in January 2009, mandates the conversion of existing GSCs under P.D. 1442 into Geothermal Renewable Energy Service Contracts (GRESCs) so companies may avail of the incentives under the RE Law. Aside from the tax incentives, the significant terms of the service concessions under the GRESCs are similar to the GSCs except that the Parent Company has control over any significant residual interest over the steam fields, power plants and related facilities throughout the concession period and even after the concession period.
On October 23, 2009, EDC received from DOE the Certificate of Registration as the RE Developer for Tongonan Geothermal, Southern Negros Geothermal Project, Bacon-Manito Geothermal, Mt. Apo Geothermal Project and Northern Negros Geothermal.
EDC also holds geothermal resource service contracts, each with a five-year pre-development period expiring in 2017 and a 25-year contract period expiring between 2037 and 2040, for the following prospect areas: ▪ Ampiro Geothermal Project ▪ Mandalagan Geothermal Project ▪ Mt. Zion Geothermal Project ▪ Lakewood Geothermal Project ▪ Balingasag Geothermal Project ▪ Mt. Zion 2 Geothermal Project ▪ Amacan Geothermal Project
Under the GRESCs, EDC pays the Government government share equivalent to 1.5% of the gross income from the sale of geothermal steam produced and such other income incidental to and arising from generation, transmission, and sale of electric power generated from geothermal energy within the contract areas.
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The RE Law also provides that the exclusive right to operate geothermal power plants shall be granted through a Renewable Energy Operating Contract with the Government through the DOE. Accordingly, on May 8, 2012, the EDC’s subsidiaries, GCGI and BGI secured three Geothermal Operating Contracts (GOCs) with a twenty-five (25) year contract period expiring in 2037, renewable for another twenty-five (25) years and covering the geothermal power plant operations for Tongonan, Palinpinon and bacon-Manito.
WESC of EDC On September 14, 2009, EDC has entered into a WESC with the DOE granting EDC the right to explore and develop the Burgos wind project for a period of 25 years from effective date. The DOE shall approve the extension of the WESC for another 25 years under the same terms and conditions, provided that EDC is not in default in any material obligations under the WESC, and has submitted a written notice to the DOE for the extension of the contract not later than one (1) year prior to the expiration of the 25-year period. The WESC provides that all materials, equipment, plants and other installations erected or placed on the contract area by EDC shall remain the property of EDC throughout the term of the contract and after its termination.
On May 26, 2010, the BOD of EDC approved the assignment and transfer to EBWPC of all the contracts, assets, permits and licenses relating to the establishment and operation of the Burgos Wind Project under DOE Certificate of Registration No. WESC 2009-09-004. On May 16, 2013, EBWPC was granted a Certificate of Confirmation of Commerciality by the DOE.
As of December 31, 2016, EDC holds eleven (11) WESC with the DOE for 25 year contract periods expiring between 2034 to 2038. The WESCs cover the following: ▪ Burgos/Pasuquin, Ilocos Norte - 150 MW wind, Burgos 1 wind, Burgos 2 wind, Burgos 3 Wind, Burgos 4 Wind ▪ Pagudpod, Ilocos Norte - 84 MW wind ▪ Matnog and Magdalena Sorsogon - Matnog 1 wind Matnog 2 wind, Matnog 3 wind ▪ Batad and San Dionisio, Iloilo - Iloilo 1 wind ▪ Manapla and Cadiz City, Negros Occidental - Negros wind
Solar Energy Service Contract (SESC) As of December 31, 2016, EDC holds six (6) SESCs with the DOE for 25 year contract periods expiring between 2039 and 2041. The SESCs cover the following projects: (1) 6.82 MW Burgos, Ilocos Norte; (2) Murcia, Negros Occidental; (3) President Roxas, North Cotabato; (4) Matalam, North Cotabato (5) Bogo, Cebu ; and Iloilo Solar Project.
SSA The SSA on EDC’s Bacman provides, among others, that NPC shall pay EDC a base price per kwh of gross generation, subject to inflation adjustments and based on a guaranteed take-or- pay rate at the designated plant factors. The SSA is for a period of 25 years.
Hydropower Service Contract (HSC) A number of companies within the First Gen Group have HSCs with the DOE which grant the exclusive right to explore, develop and utilize the hydropower resources in the following contract areas for a period of 25 years from 2009 to 2034: (1) Agusan River, (2) Puyo River Hydropower Project in Jabonga, Agusan del Norte; (3) Cabadbaran River Hydropower Project in Cabadbaran, Agusan del Norte; (4) Bubunawan River Hydropower Project in Baungon and Libona, Bukidnon; (5) Tumalaong River Hydropower Project in Baungon, Bukidnon; and (6)
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Tagoloan River Hydropower Project in Impasugong and Sumilao, Bukidnon. These HSCs allows for the availment of both fiscal and non-fiscal incentives pursuant to the RE Law.
In 2012, the group obtained HSC’s for the following projects: (1) 300 MW Pump Storage Hydroelectric Power Plant in Pantabangan, Nueva Ecija; (2) 300 MW Angat (Pump Storage) Hydro Project in Norzagaray, Bulacan, respectively; (3) Balintingon Reservoir Multi-Purpose Project (“BRMPP”).
RSC In 2016, FGES has entered into various RSC with contestable customers ranging from a contract period of 2 to 10 years. These agreements provide for the supply of electricity at an agreed price on a per kWh basis to contestable customers. Under the respective RSCs, FGES charges the customer for both the basic energy and pass through charges, as may be applicable. As of December 31, 2016 and 2015, FGES has outstanding RSCs with 22 and 2 contestable customers, respectively. d. GSPA FGP and FGPC each have an existing GSPA with the consortium of Shell Philippines Exploration B.V., Chevron Malampaya, LLC and PNOC Exploration Corporation (collectively referred to as Gas Sellers), for the supply of natural gas in connection with the operations of the power plants. The GSPAs, now on their fourteenth Contract Year, are for a total period of approximately 22 years.
Under the GSPA, FGP and FGPC are obligated to consume (or pay for, if not consumed) a minimum quantity of gas for each Contract Year (which runs from December 26 of a particular year up to December 25 of the immediately succeeding year), called the Take-Or- Pay Quantity (TOPQ). Thus, if the TOPQ is not consumed within a particular Contract Year, FGP and FGPC will incur an “Annual Deficiency” for that Contract Year equivalent to the total volume of unused gas (i.e., the TOPQ less the actual quantity of gas consumed). FGP and FGPC are required to make payments to the Gas Sellers for such Annual Deficiency after the end of the Contract Year. After paying for Annual Deficiency gas, FGP and FGPC can, subject to the terms of the GSPA, “make-up” such Annual Deficiency by consuming the unused-but-paid-for gas (without further charge) within 10 Contract Year after the Contract Year for which the Annual Deficiency was incurred, in the order that it arose. On January 6, 2015, FGPC received an invoice from the Gas Sellers for an Annual Deficiency amount of P=97.7 million ($2.2 million) for the Contract Year ending on December 25, 2014 (“CY 2014”). FGPC disputed a portion of the Gas Sellers’ computation of TOPQ for CY 2014 in the amount of =31P million ($0.7 million) on the grounds that, among others, there are differences noted in calculating the Shortfall Gas on various dates, and certain claims for relief due to force majeure events that affected the Santa Rita Plant. Considering the differences noted, FGPC has sought correction of the CY 2014 Annual Reconciliation Statement. On August 28, 2015, FGPC received a letter from the Gas Sellers accepting the correction in the CY 2014 ARS. Consequently, the Gas Sellers’ claim from FGPC has been reduced to P= 68 million ($1.5 million). In 2015, FGPC has fully taken the volume of gas equivalent to the annual deficiency for CY 2014. e. Agreements with NGCP
FG Hydro entered into a Memorandum of Agreement (MOA) with NGCP on August 31, 2011 for the performance of services on the operation of the PAHEP 230 kV switchyard and its related appurtenances (Switchyard). NGCP shall pay FG Hydro a monthly fixed operating *SGVFS024294* - 142 -
cost of P= 0.1 million and monthly variable charges representing energy consumed at the Switchyard. The MOA is effective for a period of five (5) years and renewable for another three (3) years under such terms as maybe agreed by both parties.
On June 14, 2012, FG Bukidnon signed a Transmission Service Agreement with NGCP for the latter’s provision of the necessary transmission services to FG Bukidnon. The charges under this agreement are as provided in the Open Access Transmission Service Rules and/or applicable ERC orders/issuances. Under the PSA, these transmission-related charges shall be passed through to CEPALCO. f. O&M Agreements
FGP and FGPC FGP and FGPC have separate O&M Agreements with SPOI mainly for the operation, maintenance, management and repair services of their respective power plants. As stated in the respective O&M Agreements of FGP and FGPC, SPOI is responsible for maintaining adequate inventory of spare parts, accessories and consumables. SPOI is also responsible for replacing and repairing the necessary parts and equipment of the power plants to ensure the proper operation and maintenance of the power plants to meet the contractual commitments of FGP and FGPC under their respective PPAs and in accordance with the Good Utility Practice.
FGP and FGPC each signed a new contract took effect on August 1, 2010 (the Commencement Date) and will expire on the earlier of (i) the 20th anniversary of the Commencement Date, or (ii) the satisfactory completion of the major inspections of all units of the San Lorenzo and Santa Rita power plants, in each case nominally scheduled at 200,000 equivalent operating hours, as stipulated in their respective O&M Agreements.
O&M charges include Euro, U.S. dollar and Philippine peso components. The Euro denominated charge is hedged using foreign currency forwards to minimize the risk of foreign exchange fluctuations (see Note 31).
In 2016, prepaid major spare parts amounting to P=1,516 million was reclassified to “Property, plant and equipment” account as a result of the completion of the scheduled maintenance outage of Santa Rita power plant. As of December 31, 2016 and 2015, certain O&M charges amounting to P=3,256.7 ($65.5 million) and =P3,270.7 million ($69.5 million), respectively, which relate to major spare parts that are expected to be replaced during the next scheduled major maintenance outage, were presented as part of the “Other noncurrent assets” account in the consolidated statements of financial position (see Note 15).
EBWPC EBWPC will operate and maintain the wind farm under a ten-year O&M agreement with Vestas. The Vestas O&M contract is a service and energy-based availability agreement based on Vestas’ AOM 5000 product. The agreement is a full-scope maintenance contract covering both scheduled and unscheduled maintenance with an energy-based availability on the wind turbines. The agreement covers the wind turbines, wind farm electrical balance-of-plant systems, the wind turbine yaw back-up generators, and the Burgos Substation.
As opposed to a traditional O&M contract that provides a guarantee that the turbines in a wind power plant are operational for a defined period of time on an annual basis (referred to as time-based availability), the AOM 5000 model provides an energy-based guarantee, which encourages the contractor to ensure that the turbines are fully-operational when the wind is blowing. *SGVFS024294* - 143 -
FG Hydro In 2006, FG Hydro entered into an O&M Agreement with the NIA, with the conformity of NPC. Under the O&M Agreement, NIA will manage, operate, maintain and rehabilitate the Non-Power Components of the PAHEP/MAHEP in consideration for a service fee based on actual cubic meter of water used by FG Hydro for power generation. The O&M Agreement is effective for a period of 25 years commencing on November 18, 2006 and renewable for another 25 years under the terms and conditions as may be mutually agreed upon by both parties. g. Interconnection Agreement
SIA FGPC has an agreement with Meralco and NPC for: (a) the construction of substation upgrades at the NPC substation in Calaca and the donation of such substation upgrades to NPC; (b) the construction of a 35-kilometer transmission line from the power plant to the NPC substation in Calaca and subsequent donation of such transmission line to NPC; (c) the interconnection of the power plant to the NPC Grid System; and (d) the receipt and delivery of energy and capacity from the power plant to Meralco’s point of receipt.
On July 15, 2015, FGPC has agreed to give, transfer and convey, by way of donation, the Substation Improvements to TransCo amounting to $1.2 million pursuant to the SIA. The transferred substation improvements were accounted for as intangible assets since FGPC still maintains the right to use these assets under the provisions of the PPA with Meralco and the SIA. The cost of the rights to use the Substation Improvements is amortized using the straight-line method over 10 years, which is the remaining term of the PPA with Meralco. The remaining amortization period is 8.67 years as of December 31, 2016.
Maintenance services related to the transmission line are rendered by MIESCOR, a subsidiary of Meralco, on the 230 kV transmission line from the Santa Rita plant to the Calaca Substation in Batangas under the Transmission Line Maintenance Agreement. This involves the monthly payment of P=0.8 million ($0.02 million) as retainer fee and =3.4P million ($0.08 million) for every six-month period as service fee, with both fees subject to periodic adjustment as set forth in the agreement. The amount of compensation for additional services requested by FGPC outside the scope of the agreement is subject to mutual agreement between FGPC and MIESCOR. Total operations and maintenance expense (shown as part of the “Power plant operations and maintenance” in the “Costs of sale of electricity” account in the consolidated statements of income) amounted to =18.92P million ($0.4 million) in 2016, P=27.18 million ($0.6 million) in 2015, and =22.18P million ($0.5 million) in 2014. The TLMA with Miescor was terminated in October 2016
Interim Interconnection Agreement FGP has an agreement with NPC and Meralco whereby NPC will be responsible for the delivery and transmission of all energy and capacity from FGP’s power plant to Meralco’s point of receipt. h. Ancillary Services Procurement Agreement (ASPA)
FG Hydro entered into an agreement with the NGCP on February 23, 2011 after being certified and accredited by NGCP as capable of providing Contingency Reserve Service, Dispatchable Reserve Service, Reactive Power Support Service and Black Start Service. Under the agreement, FG Hydro through the PAHEP facility shall provide any of the above- stated ancillary services to NGCP. *SGVFS024294* - 144 -
The ASPA is effective for a period of three (3) years, commencing on February 23, 2011 and shall be automatically renewed for another three (3) years after the end of the original term subject to certain conditions as provided in the ASPA.
The ERC has provisionally approved the ASPA on June 6, 2011. However, ERC altered the rates that FG Hydro can charge NGCP, and likewise imposed caps and floors to the various ancillary services that FG Hydro can provide to NGCP. As provided for in the ASPA, the agreement was automatically renewed subject to the same terms of the agreement. The extended agreement ended in February 23, 2017, FG Hydro is now in negotiation with NGCP for a new ASPA. i. FNPC’s Contracts
On December 16, 2013, FNPC signed the following contracts for the San Gabriel project, which is intended to serve the mid-merit and, potentially, the base load requirements of the Luzon Grid started commercial operations in November 2016.
Salient points of the FNPC contracts are as follows:
Contract Counterparty Scope Equipment Supply Contract Siemens Aktiengesellschaft Engineering, design and supply of equipment composed mainly of the Siemens 8000H gas turbine, steam turbine, Heat Recovery Steam Generator, generator, control systems, high voltage equipment, condenser and auxiliaries. Construction Services Contract Siemens, Inc. Design, installation, testing and commissioning of the San Gabriel power plant. Operation and Maintenance SPOI 10-year operation, maintenance, management and repair Agreement services of San Gabriel I power plant. SPOI is responsible for the day-to-day administration of the power plant, maintaining adequate inventory of spare parts, accessories and consumables, and shall operate, maintain and repair the plant in accordance with Good Utility Practice. Service Agreement with the Parsons Brinckerhoff PB Philippines, Inc. will act as the Employer’s Employer’s Representative Philippines, Inc. Representative for FNPC in the implementation of the Equipment Supply and Construction Services Contracts with Siemens. The Employer’s Representative manages the two contracts for FNPC such that San Gabriel power plant is built according the specifications and guarantees in the contracts. j. REPA
Under Section 2.2 of the ERC Resolution No. 24, Series of 2013, A Resolution Adopting the Guidelines on the Collection of the FIT Allowance (FIT-All) and the Disbursement of the FIT- All Fund (the FIT-All Guidelines), all eligible renewable energy (RE) plant shall enter into a REPA with the TransCo for the payment of the FIT.
Pursuant to the FIT-All Guidelines, EBWPC entered into a REPA with TransCo for its Burgos Wind Power Plants. The REPA became effective after all the documents enumerated in Section 3.1 of the REPA have been submitted to and certified complete by TransCo. Included in those required documents is the FIT COC issued by the ERC on April 13, 2015.
Similarly, on April 24, 2015, the EDC entered into a REPA for its 4.16-MW Solar Power Plants with TransCo.
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In accordance with the REPA, all actual RE generation from the commercial operations date (COD) until the effective date of the REPA (effective date) were billed to and collected from the Philippine Electricity Market Corporation (PEMC) at market price.
After the effective date, billings for all actual RE generation have been submitted directly to and collected from the TransCo at the applicable FIT rate as approved by the ERC. In addition, the actual FIT differential from the COD until the effective date was also billed to TransCo over the number of months which lapsed during that period.
Total revenue from TransCo recognized in 2016 and 2015 from the Burgos Wind Power Plants and Solar Power Plants amounted to P=2,817.4 million and P=2,124 million, respectively.
Total revenue from PEMC recognized in 2016 and 2015 from the Burgos Wind and Solar Power Plants amounted to =4.7P million and =279.6P million, respectively. k. Franchise
First Gen, through FGHC, has a franchise granted by the 11th Congress of the Philippines through R.A. No. 8997 to construct, install, own, operate and maintain a natural gas pipeline system for the transportation and distribution of the natural gas throughout the island of Luzon (the “Franchise”). The Franchise is for a term of 25 years until February 25, 2026. As of April 6, 2017, FGHC, through its subsidiary FG Pipeline, has an ECC for the Batangas to Manila pipeline project and has undertaken substantial pre-engineering works and design and commenced preparatory works for the right-of-way acquisition activities, among others. l. Real Estate Construction Agreements
Rockwell Land had the following outstanding contracts. The amounts are inclusive of all pertinent local and national taxes, overhead and cost of labor and materials and all cost necessary for the proper execution of the works.
Amount Paid as of Contract December 31 Project Contractor Amount 2016 (In Millions) Proscenium Phase 1a Phenix Garuda Construction and Development P=2,396 P=634 Corporation Proscenium Phase 1b Megawide Construction Corporation 2,100 403 RBC Sheridan Phenix Garuda Construction and Development 900 422 Corporation Santolan Town Plaza Omicron Construction 402 87 Proscenium Phase 2 IPM Construction and Development Corp. 61 32 Phenix Garuda Construction and Development 1,970 328 Corporation Proscenium Megawide Construction Corporation 980 403 Substructure and Podium Mall Expansion and Phenix Garuda Construction and Development 459 230 Hotel Corporation 32 Sanson Omicron Construction 55 23 Vantage Asdec Builders 25 14 Vantage Millennium Erectors Corporation 460 92
*SGVFS024294* - 146 - i. Lease Commitments
FGPC and FG Bukidnon FGPC has a non-cancelable annual offshore lease agreement with the DENR for the lease of a parcel of land in Sta. Rita, Batangas where the power plant complex is located. The term of the lease is for a period of 25 years starting May 26, 1999 for a yearly rental of =3P million (US$0.05 million) and renewable for another 25 years at the end of the term. The land will be appraised every ten years and the annual rental after every appraisal shall not be less than 3% of the appraised value of the land plus 1% of the value of the improvements, provided that such annual rental cannot be less than P=3 million (US$0.05 million).
FG Bukidnon has a non-cancelable lease agreement with PSALM on the land occupied by its power plant. The term of the lease is for a period of 20 years commencing on March 29, 2005, renewable for another period of 10 years or the remaining corporate life of PSALM, whichever is shorter. The rental paid in advance by FG Bukidnon for the entire term is =1.12P million (US$0.02 million).
Others - as Lessee EDC’s lease commitments pertain to rentals on the drilling rigs, head office and various office space and warehouse for steam/electricity projects. Rent expense amounted to P= 215.7 million, P= 669.6 million, and =P610.9 million in 2016, 2015 and 2014, respectively.
As of December 31, 2016 and 2015, future minimum rental payments under the non-cancelable operating leases are as follows:
2016 2015 (In Millions) Within five years P=927 P=429 After five years 6 9 P=933 P=438
Others - as Lessor The Group has entered into commercial property and equipment leases. These non-cancellable leases have remaining terms of between two and five years. All leases include a clause to enable upward revision of the rental charge on an annual basis according to prevailing market conditions. Future minimum lease revenues are as follows:
2016 2015 (In Millions) Within five years P=479 P=547 After five years 390 326 P=869 P=873
Rental income amounted to P=1,353 million in 2016 and P=1,003 million in 2015.
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33. Contingencies
a. Tax Contingencies
Several companies within the Group received Final Assessment Notices (FAN) from the BIR Large Taxpayers Service (LTS) for the taxable year 2009 amounting to P=1,953 million for alleged deficiency taxes. Alleged interest and penalties indicated in the FANs amounted to P=1,861 million. The companies duly protested on factual, due process and legal grounds, including prescription of some assessments and have filed Petitions for Review with the CTA questioning the validity of the assessment on the same foregoing grounds following the inaction by the BIR on their protest. The management of the companies, based on consultation with their legal counsels, believe that the final settlement of the cases, if any, would not adversely affect the companies’ financial position or results of operations.
b. Writ of Kalikasan
On November 19, 2010, the SC issued a Writ of Kalikasan with Temporary Environmental Protection Order resulting from a petition filed by the .West Tower Condominium Corporation, et al., against respondents FPIC, First Gen, their respective BODs and officers and John Does and Richard Roes. The petition was filed in connection with the oil leak at the basement of the West Tower Condominion which is being attributed to a portion of FPIC’s pipeline located in Bangkal, Makati City.
FPIC filed an application for DOE’s issuance of the required certification, and on October 25, 2013 the DOE issued a certification that the white oil pipeline is safe to return to commercial operations. FPIC submitted the DOE certification to the SC on October 29, 2013. On June 16, 2015, the SC issued another resolution recognizing the powers of the DOE to oversee the operation of the pipelines. The resolution also stated that the DOE is fully authorized by law to issue an order for the return to commercial operations of the pipeline following the conduct of integrity tests. As of April 6, 2017, the final resolution of the Writ remains pending with the SC. c. Complaints filed by West Tower Condominium Corporation and Unit Owners and Residents
West Tower Condominium Corporation and a number of unit owners and residents of West Tower have filed a civil case for damage suits against FPIC, its directors and officers, First Gen, Pilipinas Shell Petroleum Corporation and Chevron Philippines, Inc. for a total approximate amount of P=2.5 billion representing actual, moral, exemplary damages, medical fund and lawyers’ fees. In a resolution dated June 30, 2014, the CA denied the petition of the West Tower and affirmed the trial court’s recognition of the case as being as ordinary action for damages. The CA, however, also ruled that the individual residents who joined West Tower in the civil case need not file separate cases, but instead can be joined as parties in the present case. West Tower and FPIC each filed a motion for partial reconsideration, with West Tower arguing that the case is an ordinary action for damages, and FPIC assailing the ruling that the individual residents can be joined as parties in the present case. Both motions were denied in a CA resolution dated December 11, 2014. On February 20, 2015, FPIC filed before the SC a Petition for Review of the CA’s denial of its Motion for Partial Reconsideration. As at April 6, 2017, the case remains pending.
A criminal complaint for negligence under Article 365 of the Revised Penal Code was filed against FPIC directors and some of its officers, as well as directors of First Gen, Pilipinas
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Shell Petroleum Corporation and Chevron Philippines, Inc. As of April 6, 2017, the case remains pending. e. Motion for lifting TRO from restraining Generation Companies from demanding and collecting from Meralco the deferred amounts
In three cases, the SC issued separate TROs restraining Meralco from increasing the generation charge rate it charges to its consumers during the November 2013 billing period, and similarly restraining PEMC and other generation companies, including certain subsidiaries of First Gen, namely, FGPC, FGP, FG Hydro, BGI, and BEDC, from demanding and collecting from Meralco the deferred amounts representing the costs raised by the latter. The TROs remained effective until April 22, 2014, unless renewed or lifted ahead of such date.
On February 26, 2014, FGPC, FGP, FG Hydro, BGI and BEDC filed with the SC a Memorandum with Motion to Lift TRO. It is First Gen Group’s position that its right to the payment of the generation charges owed by Meralco is neither dependent nor conditional upon Meralco’s right to collect the same from its consumers. In the case of FGPC and FGP, Meralco’s obligation to pay is contractual and thus governed by the terms and conditions of their respective PPAs. Ultimately, Meralco is bound to comply with its contractual obligations to FGPC and FGP, whether via the pass-through mechanism or some other means. On April 22, 2014, the subject TRO was extended indefinitely until further orders from the SC. f. First Philec and its Subsidiaries
In 2012, First PV and FPNC initiated arbitration proceedings against Nexolon with the International Court of Arbitration of the ICC. The arbitral tribunal rendered the final award in October 2014 which required Nexolon to pay damages and pre-award interest to FPNC in the amount of P= 1.1 billion ($24.8 million) and a put option price to First PV in the amount of P=2.09 billion. To date, no payments have been made on the award by Nexolon which is reported to be in rehabilitation proceedings. FPNC and First PV have filed their appropriate claims in Korean rehabilitation courts. At the same time, to mitigate losses, FPNC is seeking alternatives to realize value from the remaining assets of FPNC.
The claims have not been recognized in the First Philec entities’ financial statements pursuant to PAS 37 which requires the recognition of contingent assets only when the realization of income is virtually certain. g. Legal claims
The Group is contingently liable for other lawsuits or claims filed by third parties, including labor related cases, which are pending decision by the courts, the outcomes of which are not presently determinable. In the opinion of management and its legal counsel, the eventual total liability from these lawsuits or claims, if any, will not have a material effect on the consolidated financial statements.
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34. Other Matters
Proposed Amendments to the Electric Power Industry Reform Act (EPIRA)
Below are proposed amendments to the EPIRA that, if enacted, may have a material effect on First Gen group’s electricity generation business, financial condition and results of operations.
In the Philippine Congress, pending for committee approval are: a. Senate Bill (SB) No. 2167: An Act Amending Section 47 of R.A. No. 9136, Otherwise Known As the EPIRA b. SB No. 762: An Act Amending R.A. No. 9136, Otherwise Known As the EPIRA c. House Bill (HB) No. 84: An Act Requiring the Energy Regulatory Commission to Conduct A Transparent Bidding Process for Power Supply, Amending for the purpose Section 45, B of Republic Act No. 9136, Otherwise Known as the EPIRA d. HB No. 1222 An Act Declaring Power Infrastructure Projects as Projects of National Significance, amending for the Purpose Certain Provisions of Republic Act Numbered 9136, Otherwise Known as the EPIRA, and for other Purposes e. HB No. 1650 An Act Requiring the Energy Regulatory Commission to Conduct Transparent Bidding Process for Power Supply, Amending for the Purpose Section 45 (b) of Republic Act No. 9136, Otherwise Known as the EPIRA f. HB No. 2298 An Act Amending Paragraph (J) Section 47 of Republic Act 9136 of the EPIRA g. HB No. 3508 An Act to Address the Worsening State of the Power Industry in the Philippines, Amending for the Purpose Section 47 of Republic Act 9136, and for other Purposes h. HB No. 3896 An Act Amending Section 47 of Republic Act No. 9136, Otherwise Known as the EPIRA i. Joint Resolution 574 Urging the Appropriate House Committee to Conduct an Inquiry, in Aid of Legislation, on Amending R.A. No. 9136, Otherwise Known as the EPIRA Specifically Section 38 Thereof, on the Powers, Functions and Membership of the Energy Regulatory Commission (ERC) Following the Suicide of ERC Director Francisco Jose Villa Jr. from Alleged Pressure from ERC Chair and Chief Executive Officer Jose Vicente B. Salazar to Approve Contracts without Proper Bidding and due Adherence to Procedure, and Allegations of Corruption Behind ERC Deals, and the Possibility of Withholding the ERC Budget During the Pendency of the Inquiry j. Joint Resolution 656 Resolution Calling for an Investigation in Aid of Legislation by the Appropriate Committee of the House of Representatives to Review Sections 4, 5, 6, 7, and 8 of Rule 29 A of the Implementing Rules and Regulations (IRR) of Republic Act 9136 Otherwise Known as EPIRA and other Related Laws
The aforementioned bills passed their respective first readings and are currently being deliberated in the committees.
First Gen Group cannot provide any assurance whether these proposed amendments will be enacted in their current form, or at all, or when any amendment to the EPIRA will be enacted. Proposed amendments to the EPIRA, including the above bills, as well as other legislation or regulation could have a material impact on the First Gen Group’s business, financial position and financial performance.
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35. Notes to Consolidated Statements of Cash Flows
The non-cash investing and financing activities pertain to the following:
a. Unrealized loss on investment in equity securities amounting to =P2,427 million in 2016 and unrealized gain of =P2,914 million and =P162 million in 2015 and 2014, respectively.
b. Acquisition by Rockwell Primaries of 60% interest in ATRKE Land with unpaid purchase price of P= 265 million and =P345 million as at December 31, 2016 and 2015, respectively. Non- controlling interest of 40% amounts to P= 303 million and P= 252 million in 2016 and 2015, respectively.
36. Events after the Reporting Date
FPH In February 16 and March 2017, FPH purchased 149,999 and 499,998 common shares, respectively, in Asian Eye Institute (AEI) for a total consideration of =P84.5 million. With the purchase, FPH increased its effective ownership in AEI from 47.03% to 62.39%.
First Gen Pursuant to a 2-year buyback extension program approved by First Gen’s BOD on May 11, 2016, First Gen purchased from the open market the following redeemable preferred stocks after December 31, 2016:
Number Total Payments Series Date of Shares Market Price (In Millions) G 1/12/2017 1,800,000 P=113 P=203.4 F 1/12/2017 400,000 108 43.2 F 3/15/2017 22,840 108 2.5 G 3/22/2017 49,000 118 5.8
EDC On February 28, 2017, EDC declared cash dividends amounting to 0.0008 per share on the preferred shares in favor of preferred stockholders and a cash dividend of 0.14 per share on the common shares in favor of common stockholders both of record as of March 20, 2017, payable on or before April 12, 2017.
ABS-CBN On February 22, 2017, the BOD approved the declaration of cash dividend of =1.04P per common share or an aggregate amount of P=881 million to all common stockholders of record as of March 8, 2017 payable on March 22, 2017. On the same date, the BOD also approved the declaration and payment of 2% per annum cash dividend on ABS-CBN preferred shares with a record date set for March 8, 2017 and payable on March 22, 2017.
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37. Standards Issued but not yet Effective
Pronouncements issued but not yet effective are listed below. Unless otherwise indicated, the Group does not expect the future adoption of the said pronouncements to have a significant impact on its consolidated financial statements. The Group intends to adopt the following pronouncements when they become effective.
Effective beginning on or after January 1, 2017
§ Amendment to PFRS 12, Clarification of the Scope of the Standard (Part of Annual Improvements to PFRSs 2014 - 2016 Cycle) - The amendments clarify that the disclosure requirements in PFRS 12, other than those relating to summarized financial information, apply to an entity’s interest in a subsidiary, a joint venture or an associate that is classified as held for sale.
§ Amendments to PAS 7, Statement of Cash Flows, Disclosure Initiative - The amendments to PAS 7 require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes.
§ Amendments to PAS 12, Income Taxes, Recognition of Deferred Tax Assets for Unrealized Losses The amendments clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of that deductible temporary difference. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount.
Effective beginning on or after January 1, 2018
§ Amendments to PFRS 2, Share-based Payment, Classification and Measurement of Share- based Payment Transactions - The amendments to PFRS 2 address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and the accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash settled to equity settled.
§ Amendments to PFRS 4, Insurance Contracts, Applying PFRS 9, Financial Instruments, with PFRS 4 - The amendments address concerns arising from implementing PFRS 9, the new financial instruments standard before implementing the forthcoming insurance contracts standard. They allow entities to choose between the overlay approach and the deferral approach to deal with the transitional challenges.
§ PFRS 15, Revenue from Contracts with Customers - PFRS 15 establishes a new five-step model that will apply to revenue arising from contracts with customers. Under PFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in PFRS 15 provide a more structured approach to measuring and recognizing revenue.
The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under PFRSs. Either a full or modified retrospective application is required. The Group is currently assessing the impact of adopting this standard. *SGVFS024294* - 152 -
§ PFRS 9, Financial Instruments - PFRS 9 reflects all phases of the financial instruments project and replaces PAS 39, Financial Instruments: Recognition and Measurement, and all previous versions of PFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. Retrospective application is required, but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. The adoption of PFRS 9 will have an effect on the classification and measurement of the Group’s financial assets and impairment methodology for financial assets, but will have no impact on the classification and measurement of financial liabilities. The adoption will also have an effect on the application of hedge accounting and on the amount of its credit losses. The Group is currently assessing the impact of adopting this standard.
§ Amendments to PAS 28, Measuring an Associate or Joint Venture at Fair Value (Part of Annual Improvements to PFRSs 2014 - 2016 Cycle) - The amendments clarify that an entity that is a venture capital organization, or other qualifying entity, may elect, at initial recognition on an investment-by-investment basis, to measure its investments in associates and joint ventures at fair value through profit or loss.
§ Amendments to PAS 40, Investment Property, Transfers of Investment Property - The amendments clarify when an entity should transfer property, including property under construction or development into, or out of investment property. The amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. A mere change in management’s intentions for the use of a property does not provide evidence of a change in use. The amendments should be applied prospectively to changes in use that occur on or after the beginning of the annual reporting period in which the entity first applies the amendments. Retrospective application is only permitted if this is possible without the use of hindsight.
§ Philippine Interpretation IFRIC-22, Foreign Currency Transactions and Advance Consideration - The interpretation clarifies that in determining the spot exchange rate to use on initial recognition of the related asset, expense or income on the derecognition of a non- monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognizes the nonmonetary asset or non- monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine the date of the transactions for each payment or receipt of advance consideration.
Effective beginning on or after January 1, 2019
§ PFRS 16, Leases - Under the new standard, lessees will no longer classify their leases as either operating or finance leases in accordance with PAS 17, Leases. Rather, lessees will apply the single-asset model. Under this model, lessees will recognize the assets and related liabilities for most leases on their balance sheets, and subsequently, will depreciate the lease assets and recognize interest on the lease liabilities in their profit or loss. Leases with a term of 12 months or less or for which the underlying asset is of low value are exempted from these requirements.
The accounting by lessors is substantially unchanged as the new standard carries forward the principles of lessor accounting under PAS 17. Lessors, however, will be required to disclose more information in their financial statements, particularly on the risk exposure to residual value.
*SGVFS024294* - 153 -
Entities may early adopt PFRS 16 but only if they have also adopted PFRS 15. When adopting PFRS 16, an entity is permitted to use either a full retrospective or a modified retrospective approach, with options to use certain transition reliefs.
The Group is currently assessing the impact of adopting PFRS 16.
Deferred effectivity
§ Amendments to PFRS 10 and PAS 28, Sale or Contribution of Assets between an Investor and its Associate or Joint Venture - The amendments address the conflict between PFRS 10 and PAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments clarify that a full gain or loss is recognized when a transfer to an associate or joint venture involves a business as defined in PFRS 3, Business Combinations. Any gain or loss resulting from the sale or contribution of assets that does not constitute a business, however, is recognized only to the extent of unrelated investors’ interests in the associate or joint venture.
*SGVFS024294* SyCip Gorres Velayo & Co. Tel: (632) 891 0307 BOA/PRC Reg. No. 0001, 6760 Ayala Avenue Fax: (632) 819 0872 December 14, 2015, valid until December 31, 2018 1226 Makati City ey.com/ph SEC Accreditation No. 0012-FR-4 (Group A), Philippines November 10, 2015, valid until November 9, 2018
INDEPENDENT AUDITOR’S REPORT ON SUPPLEMENTARY SCHEDULES
The Board of Directors and Stockholders Lopez Holdings Corporation 4th Floor, Benpres Building Exchange Road, Pasig City
We have audited in accordance with Philippine Standards on Auditing, the consolidated financial statements of Lopez Holdings Corporation and Subsidiaries as at December 31, 2016 and 2015 and for each of the three years in the period ended December 31, 2016, included in this Form 17-A and have issued our report thereon dated April 6, 2017. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the Index to Consolidated Financial Statements and Supplementary Schedules are the responsibility of the Company’s management. These schedules are presented for purposes of complying with Securities Regulation Code Rule 68, As Amended, and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, fairly state, in all material respects, the information required to be set forth therein in relation to the consolidated financial statements taken as a whole.
SYCIP GORRES VELAYO & CO.
Editha V. Estacio Partner CPA Certificate No. 91269 SEC Accreditation No. 1136-AR-1 (Group A), September 2, 2014, valid until September 1, 2017 Tax Identification No. 178-486-845 BIR Accreditation No. 08-001998-94-2016, January 3, 2017, valid until January 2, 2020 PTR No. 5908695, January 3, 2017, Makati City
April 6, 2017
*SGVFS024294*
A member firm of Ernst & Young Global Limited
Lopez Holdings Corporation and Subsidiaries Schedule A. Financial Assets December 31, 2016 Amounts in Millions
Financial Assets Name of Issuing Number of shares Amount Valued based on Income received entity and or principal shown in the market quotation at and accrued association of amount of bonds balance sheet end of reporting each issue and notes period Loans and receivables: Cash and cash equivalents 31,531 585 Short term investments 5,936 Trade and other receivables 30,704 1,285
Other current financial asets FVPL investments Various 1,120 5 Debt service reserve account 1,027 Derivative assets 470 (112) Restricted cash 190 Refundable deposits 184
Other noncurrent financial assets FVPL investments 850 Special deposits and funds 285 Long-term receivables 192 Derivative assets 168
AFS Financial asssets: Investment in equity securities Quoted equity securities Meralco and others 44,475,706 11,941 11,941 1,115 Quoted government debt securities 128 128 Unquoted equity securities Narra ventures and others 748 Proprietary membership Various 123 123 85,597 2,878 Lopez Holdings Corporation and Subsidiaries Schedule B. Amounts Receivable from Directors, Officers, Employees, RelatedParties and Principal Stockholders (Other than Related parties) December 31, 2016 Amounts in Millions
Name and Balance at Current Noncurrent Balance Designation beginning Deductions at end of debtor of period Additions Amounts Amounts of collected written off period
NONE Lopez Holdings Corporation and Subsidiaries Schedule C. Amounts Receivable from Related Parties which are eliminated during the consolidation of financial statements December 31, 2016 Amounts in Millions
Ending Balance Amount Receivable to Beginning Balance Additions Deductions Current Noncurrent Eliminated Name of Subsidiary/Counterparty Collections Write off
First Philippine Properties Group 578 646 - - 1,224 - 1,224 First Balfour Group 1,542 - (425) - 1,117 - 1,117 First Philec Group 2,375 - (970) (1,187) 218 - 218 First Philippine Holdings Corp. 25 99 - - 124 - 124 FPH Capital Resources, Inc. 6 33 - - 39 - 39 First Gen Group 3 19 - - 22 - 22 First Philippine Industrial Park 4 1 - - 5 - 5 Securities Transfer Services, Inc. 4 - (3) - 1 - 1 First Philippine Realty Corp. 1 1 - - 2 - 2 First Philippine Industrial Corp. 7 - (7) - - - - First Philippine Utilities Corp. ------Rockwell Land Corp. ------4,545 799 (1,405) (1,187) 2,752 - 2,752 Lopez Holdings Corporation and Subsidiaries Schedule D. Intangible Assets - Other Assets December 31, 2016 Amounts in Millions
Deductions Description Balance at Additions Charged to cost and Charged to other Other changes Balance beginning at cost expenses accounts (Disposal) additions (deductions) at end A. Goodwill and Intangible assets Goodwill 48,258 - - - (4) 48,254 Concession Rights for Contracts Acquired 2,985 - (587) - - 2,398 Water Rights 1,527 - (96) - - 1,431 Pipeline Rights 248 - (28) - 12 232 Other Intangible Assets 165 4 (81) - 3 91 53,183 4 (792) - 11 52,406
B. Other Assets (Noncurrent) Deferred input VAT - net of allowance 4,650 7 (53) 48 (65) 4,587 Prepaid major spare parts 3,273 1,314 - (1,514) 184 3,257 Exploration and evaluation assets 3,074 37 - - (2) 3,109 Tax credit certificates 2,754 1,104 (1,190) 304 (161) 2,811 EDC funding To Enerco 947 555 - - - 1,502 Advances to contractors 548 103 (182) - - 469 Prepaid expenses 535 148 - - - 683 Deferred debt issuance costs 339 19 (46) (331) 19 - Land held for future development 269 1,683 - (886) - 1,066 Retirement assets 239 - (56) 14 44 241 Others 632 450 - (184) - 898 17,260 5,420 (1,527) (2,549) 19 18,623 Lopez Holdings Corporation and Subsidiaries Schedule E. Long Term Debt December 31, 2016 Amounts in Millions
Amount shown as Amount shown as Title of Issue and type of obligation Total Loans Current Long-term Parent Company Restructured 7.875% Notes and LTCPs 235 - 235
FPHC Group 6,000 million Fixed Rate Note (FXCN) 5,364 291 5,073 5,000 million FXCN 4,101 241 3,860 4,800 million Floating Rate Corporate Notes (FRCNs) 2,061 1,006 1,055
Power Generation Companies First Gen: $300 million 10-year Notes 14,784 - 14,784 $200 million Term Loan 9,586 288 9,298 FGP’s term loan facility with various local banks 15,996 1,663 14,333 FGPC’s Term Loans: US$312 million Covered Facility 10,063 1,084 8,979 US$188 million Uncovered Facility 876 876 - FNPC’s $265 million Export Credit Facility 9,948 796 9,152 Red Vulcan’s Staple Financing Agreement for 29.2 billion 2,072 2,072 - FG Hydro’s 4.3 billion Loan 1,805 273 1,532 EDC: US$300 Million Notes 14,838 - 14,838 International Finance Corp (IFC) ▪ IFC - 4.1 billion 2,199 337 1,862 ▪ IFC - 3.3 billion 2,227 245 1,982 FXCN ▪ 4.0 billion 3,604 133 3,471 ▪ 3.0 billion 2,701 99 2,602 Peso Fixed Rate Bond (FXR) ▪ 4.0 billion 3,964 - 3,964 ▪ 3.0 billion 2,949 - 2,949
(Forward) Amount shown as Amount shown as Title of Issue and type of obligation Total Loans Current Long-term US$80 Million Term Loan 3,592 - 3,592 US$175.0 Million Refinanced Syndicated Term Loan 4,343 4,343 - DBP P291.2 Million Term Loan 289 - 289 UBP 1.5 Billion Term Loan 1,493 30 1,463 Security Bank 1.0 Billion Term Loan 993 - 993 GCGI 8.5 Billion Term Loan 6,919 1,006 5,913 EBWPC $315 million Project Financing $37.5 million Commercial Debt Facility 1,692 68 1,624 $150.0 million ECA Debt Facility 6,711 267 6,444 5,600 million Commercial Debt Facility 5,151 214 4,937 BGI Loan 5.0 Billion Term Loan 4,362 589 3,773
Real Estate Development Rockwell Land: 10,000 million FXCN 6,182 1,605 4,577 5,000 million Peso Bonds 4,970 - 4,970 4,000 million Term Loan 3,981 - 3,981 Installment Payable for an Acquisition of Land 521 - 521 Rockwell Primaries’ Unsecured Notes Payable 336 107 229
Construction and Other Services First Balfour: 1,000 million Loan Agreement 840 294 546 Equipment Financing Loan 23 18 5 ThermaPrime: 1,300 million Loan Facility 722 290 432 Equipment Financing Loan 219 30 189
Manufacturing Company First Philec’s 235 Security Bank Term Loan 235 28 207 162,947 18,293 144,654 Note : Balances shown are already net of the unamortized portion of debt issuance costs as of December 31, 2016 in compliance with PAS 32, “Financial Instruments: Presentation.” Please refer to Note 18 to the consolidated financial statements for additional information. Lopez Holdings Corporation and Subsidiaries Schedule F. Indebtedness to Related Parties (Long-Term Loans from RelatedCompanies) December 31, 2016 Amounts in Millions
Name of related party Balance at beginning of period Balance at end of period
NOT APPLICABLE Lopez Holdings Corporation and Subsidiaries Schedule G. Guarantees of Securities of Other Issuers December 31, 2016 Amounts in Millions
Name of issuing entity of securities guaranteed by Title of issue of each class Total amount Amount owned by person for Nature of guarantee the company for which this statement is filed of securities guaranteed guaranteed and which statement is filed outstanding
NONE Lopez Holdings Corporation and Subsidiaries Schedule H. Capital Stock December 31, 2016
Title of Number of Number of shares Number of shares Number of Directors, Issue Shares issued and reserved for options, shares held officers and authorized outstanding as warrants, conversion by related employees shown under related and other rights parties Others balance sheet caption
Common stock 5,500,000,000 4,626,158,482 4,162,607 2,430,603,242 44,960,158 LOPEZ HOLDINGS CORPORATION AND SUBSIDIARIES RECONCILIATION OF PARENT COMPANY’S RETAINED EARNINGS AVAILABLE FO R DIVIDEND DECEMBER 31, 2016 (Amounts in Millions)
The SEC issued Memorandum Circular No. 11 Series of 2008 on December 5, 2008, which provides guidance on the determination of Parent Company’s retained earnings available for dividend declaration.
The table below presents the Parent Company’s retained earnings available for dividend declaration as of December 31, 2016:
Unappropriated retained earnings, as adjusted previous year P=6,075 Net income during the year closed to retained earnings 900 Deferred tax liability recognized during the year 9 Adjustments, net of tax: Unrealized foreign exchange loss 22 Mark-to-market loss on derivative assets and financial assets measured at fair value through profit or loss (57) 6,949 Dividend declaration during the year (924)
Unappropriated retained earnings, as adjusted P=6,025 LOPEZ HOLDINGS CORPORATION SUPPLEMENTARY SCHEDULE REQUIRED UNDER SRC RULE 68, AS AMENDED (2011)
SCHEDULE L. LIST OF STANDARDS AND INTERPRETATIONS UNDER PFRS DECEMBER 31, 2016
PHILIPPINE FINANCIAL REPORTING STANDARDS Adopted Not Not Applicable AND INTERPRETATIONS Adopted Effective as of December 31, 2016
Framework for the Preparation and Presentation of ✓ Financial Statements Conceptual Framework Phase A: Objectives and qualitative characteristics
PFRSs Practice Statement Management Commentary ✓
Philippine Financial Reporting Standards
PFRS 1 First-time Adoption of Philippine Financial ✓ (Revised) Reporting Standards
Amendments to PFRS 1 and PAS 27: Cost ✓ of an Investment in a Subsidiary, Jointly Controlled Entity or Associate
Amendments to PFRS 1: Additional ✓ Exemptions for First-time Adopters
Amendment to PFRS 1: Limited Exemption ✓ from Comparative PFRS 7 Disclosures for First-time Adopters
Amendments to PFRS 1: Severe ✓ Hyperinflation and Removal of Fixed Date for First-time Adopters
Amendments to PFRS 1: Government Loans ✓
Amendments to PFRS 1: Borrowing Costs ✓
Amendment to PFRS 1: Meaning of ✓ Effective PFRSs
PFRS 2 Share-based Payment ✓
Amendments to PFRS 2: Vesting Conditions ✓ and Cancellations
Amendments to PFRS 2: Group Cash-settled ✓ Share-based Payment Transactions PHILIPPINE FINANCIAL REPORTING STANDARDS Adopted Not Not Applicable AND INTERPRETATIONS Adopted Effective as of December 31, 2016
Amendment to PFRS 2: Definition of ✓ Vesting Condition
Amendments to PFRS 2: Classification and Not Early Adopted Measurement of Share-based Payment Transactions*
PFRS 3 Business Combinations ✓ (Revised) Amendment to PFRS 3: Accounting for ✓ Contingent Consideration in a Business Combination
Amendment to PFRS 3: Scope Exceptions ✓ for Joint Arrangements
PFRS 4 Insurance Contracts ✓
Amendments to PAS 39 and PFRS 4: ✓ Financial Guarantee Contracts
Amendments to PFRS 4: Applying PFRS 9 with Not Early Adopted PFRS 4*
PFRS 5 Non-current Assets Held for Sale and ✓ Discontinued Operations
Amendments to PFRS 5: Changes in ✓ Methods of Disposals
PFRS 6 Exploration for and Evaluation of Mineral ✓ Resources
PFRS 7 Financial Instruments: Disclosures ✓
Amendments to PAS 39 and PFRS 7: ✓ Reclassification of Financial Assets
Amendments to PAS 39 and PFRS 7: ✓ Reclassification of Financial Assets - Effective Date and Transition
Amendments to PFRS 7: Improving ✓ Disclosures about Financial Instruments
Amendments to PFRS 7: Disclosures - ✓ Transfers of Financial Assets PHILIPPINE FINANCIAL REPORTING STANDARDS Adopted Not Not Applicable AND INTERPRETATIONS Adopted Effective as of December 31, 2016
Amendments to PFRS 7: Disclosures - ✓ Offsetting Financial Assets and Financial Liabilities
Amendments to PFRS 7: Mandatory ✓ Effective Date of PFRS 9 and Transition Disclosures
Amendments to PFRS 7: Disclosures - ✓ Servicing Contracts
Amendments to PFRS 7: Applicability of ✓ the Amendments to PFRS 7 to Condensed Interim Financial Statements
PFRS 8 Operating Segments ✓
Amendments to PFRS 8: Aggregation of ✓ Operating Segments and Reconciliation of the Total of the Reportable Segments’ Assets to the Entity’s Assets
PFRS 9 Financial Instruments* Not Early Adopted
Amendments to PFRS 9: Mandatory Not Early Adopted Effective Date of PFRS 9 and Transition Disclosures*
Amendments to PFRS 9: Hedge accounting Not Early Adopted and amendments to PFRS 9, PFRS 7 and PAS 39 (2013 version)*
Amendments to PFRS 9 (2014 version)* Not Early Adopted
PFRS 10 Consolidated Financial Statements ✓
Amendments to PFRS 10, PFRS 12 and ✓ PAS 27: Investment Entities
Amendments to PFRS 10 and PAS 28: ✓ Applying the Consolidation Exception
Amendments to PFRS 10 and PAS 28: Sale Not Early Adopted or Contribution of Assets between an Investor and its Associate or Joint Venture*
PFRS 11 Joint Arrangements ✓ PHILIPPINE FINANCIAL REPORTING STANDARDS Adopted Not Not Applicable AND INTERPRETATIONS Adopted Effective as of December 31, 2016
Amendments to PFRS 11: Accounting for ✓ Acquisitions of Interests in Joint Operations
PFRS 12 Disclosure of Interests in Other Entities ✓
Amendments to PFRS 10, PFRS 12 and ✓ PAS 27: Investment Entities
Amendment to PFRS 12, Clarification of the Not Early Adopted Scope of the Standard*
PFRS 13 Fair Value Measurement ✓
Amendment to PFRS 13: Short-term ✓ Receivables and Payables
Amendment to PFRS 13: Portfolio ✓ Exception
PFRS 14 Regulatory Deferral Accounts ✓
PFRS 15 Revenue from Contracts with Customers* Not Early Adopted
PFRS 16 Leases* Not Early Adopted
Philippine Accounting Standards
PAS 1 Presentation of Financial Statements ✓ (Revised) Amendment to PAS 1: Capital Disclosures ✓
Amendments to PAS 32 and PAS 1: ✓ Puttable Financial Instruments and Obligations Arising on Liquidation
Amendments to PAS 1: Presentation of ✓ Items of Other Comprehensive Income
Amendments to PAS 1: Clarification of the ✓ Requirements for Comparative Information
Amendments to PAS 1: Disclosure ✓ Initiatives
PAS 2 Inventories ✓
PAS 7 Statement of Cash Flows ✓
Amendments to PAS 7: Disclosure Not Early Adopted Initiative* PHILIPPINE FINANCIAL REPORTING STANDARDS Adopted Not Not Applicable AND INTERPRETATIONS Adopted Effective as of December 31, 2016
PAS 8 Accounting Policies, Changes in Accounting ✓ Estimates and Errors
PAS 10 Events after the Reporting Date ✓
PAS 11 Construction Contracts ✓
PAS 12 Income Taxes ✓
Amendment to PAS 12: Deferred Tax: ✓ Recovery of Underlying Assets
Amendments to PAS 12: Recognition of Not Early Adopted Deferred Tax Assets for Unrealized Losses*
PAS 16 Property, Plant and Equipment ✓
Amendments to PAS 16: Classification of ✓ Servicing Equipment
Amendment to PAS 16 and PAS 38: ✓ Revaluation Method - Proportionate Restatement of Accumulated Depreciation / Amortization
Amendment to PAS 16 and PAS 38: ✓ Clarification of Acceptable Methods of Depreciation and Amortization
Amendment to PAS 16 and PAS 41: Bearer ✓ Plants
PAS 17 Leases ✓
PAS 18 Revenue ✓
PAS 19 Employee Benefits ✓ (Amended) Amendments to PAS 19: Actuarial Gains ✓ and Losses, Group Plans and Disclosures
Amendments to PAS 19: Defined Benefit ✓ Plans: Employee Contributions
Amendments to PAS 19: Regional Market ✓ Issue Regarding Discount Rate
PAS 20 Accounting for Government Grants and ✓ Disclosure of Government Assistance PHILIPPINE FINANCIAL REPORTING STANDARDS Adopted Not Not Applicable AND INTERPRETATIONS Adopted Effective as of December 31, 2016
PAS 21 The Effects of Changes in Foreign ✓ Exchange Rates
Amendment: Net Investment in a Foreign ✓ Operation
PAS 23 Borrowing Costs ✓ (Revised)
PAS 24 Related Party Disclosures ✓ (Revised) Amendments to PAS 24: Key Management ✓ Personnel
PAS 26 Accounting and Reporting by Retirement ✓ Benefit Plans
PAS 27 Separate Financial Statements ✓ (Revised) Amendments to PFRS 10, PFRS 12 and ✓ PAS 27: Investment Entities
Amendments to PAS 27: Equity Method in ✓ Separate Financial Statements
PAS 28 Investments in Associates and Joint ✓ (Amended) Ventures
Amendments to PFRS 10 and PAS 28: ✓ Applying the Consolidation Exception
Amendments to PAS 28: Measuring an Not Early Adopted Associate or Joint Venture at Fair Value*
Amendments to PFRS 10 and PAS 28: Sale Not Early Adopted or Contribution of Assets between an Investor and its Associate or Joint Venture*
PAS 29 Financial Reporting in Hyperinflationary ✓ Economies
PAS 31 Interests in Joint Ventures ✓
PAS 32 Financial Instruments: Disclosure and ✓ Presentation
Amendments to PAS 32 and PAS 1: ✓ Puttable Financial Instruments and Obligations Arising on Liquidation PHILIPPINE FINANCIAL REPORTING STANDARDS Adopted Not Not Applicable AND INTERPRETATIONS Adopted Effective as of December 31, 2016
Amendment to PAS 32: Classification of ✓ Rights Issues
Amendments to PAS 32: Offsetting ✓ Financial Assets and Financial Liabilities
Amendments to PAS 32: Tax Effect of ✓ Distribution to Holders of Equity Instruments
PAS 33 Earnings per Share ✓
PAS 34 Interim Financial Reporting ✓
Amendments to PAS 34: Interim Financial ✓ Reporting and Segment Information for Total Assets and Liabilities
Amendments to PAS 34: Disclosure of ✓ Information ‘Elsewhere in the Interim Financial Report’
PAS 36 Impairment of Assets ✓
Amendments to PAS 36: Recoverable ✓ Amount Disclosures for Non-Financial Assets
PAS 37 Provisions, Contingent Liabilities and ✓ Contingent Assets
PAS 38 Intangible Assets ✓
Amendments to PAS 16 and PAS 38: ✓ Revaluation Method - Proportionate Restatement of Accumulated Depreciation / Amortization
Amendment to PAS 16 and PAS 38: ✓ Clarification of Acceptable Methods of Depreciation and Amortization
PAS 39 Financial Instruments: Recognition and ✓ Measurement
Amendments to PAS 39: Transition and ✓ Initial Recognition of Financial Assets and Financial Liabilities PHILIPPINE FINANCIAL REPORTING STANDARDS Adopted Not Not Applicable AND INTERPRETATIONS Adopted Effective as of December 31, 2016
Amendments to PAS 39: Cash Flow Hedge ✓ Accounting of Forecast Intragroup Transactions
Amendments to PAS 39: The Fair Value ✓ Option
Amendments to PAS 39 and PFRS 4: ✓ Financial Guarantee Contracts
Amendments to PAS 39 and PFRS 7: ✓ Reclassification of Financial Assets
Amendments to PAS 39 and PFRS 7: ✓ Reclassification of Financial Assets - Effective Date and Transition
Amendments to Philippine Interpretation ✓ IFRIC - 9 and PAS 39: Embedded Derivatives
Amendment to PAS 39: Eligible Hedged ✓ Items
Amendments to PAS 39: Novation of ✓ Derivatives and Continuation of Hedge Accounting
PAS 40 Investment Property ✓
Amendments to PAS 40: Clarifying the ✓ Interrelationship between PFRS 3 and PAS 40 when Classifying Property as Investment Property or Owner-Occupied Property
Amendments to PAS 40: Transfers of Not Early Adopted Investment Property*
PAS 41 Agriculture ✓
Amendments to PAS 41: Bearer Plants ✓
Philippine Interpretations
IFRIC 1 Changes in Existing Decommissioning, ✓ Restoration and Similar Liabilities
IFRIC 2 Members’ Share in Co-operative Entities ✓ and Similar Instruments PHILIPPINE FINANCIAL REPORTING STANDARDS Adopted Not Not Applicable AND INTERPRETATIONS Adopted Effective as of December 31, 2016
IFRIC 4 Determining Whether an Arrangement ✓ Contains a Lease
IFRIC 5 Rights to Interests arising from ✓ Decommissioning, Restoration and Environmental Rehabilitation Funds
IFRIC 6 Liabilities arising from Participating in a ✓ Specific Market - Waste Electrical and Electronic Equipment
IFRIC 7 Applying the Restatement Approach under ✓ PAS 29 Financial Reporting in Hyperinflationary Economies
IFRIC 8 Scope of PFRS 2 ✓
IFRIC 9 Reassessment of Embedded Derivatives ✓
Amendments to Philippine Interpretation ✓ IFRIC - 9 and PAS 39: Embedded Derivatives
IFRIC 10 Interim Financial Reporting and Impairment ✓
IFRIC 11 PFRS 2- Group and Treasury Share ✓ Transactions
IFRIC 12 Service Concession Arrangements ✓
IFRIC 13 Customer Loyalty Programmes ✓
IFRIC 14 The Limit on a Defined Benefit Asset, ✓ Minimum Funding Requirements and their Interaction
Amendments to Philippine Interpretations ✓ IFRIC- 14, Prepayments of a Minimum Funding Requirement
IFRIC 15 Agreements for the Construction of Real Not Early Adopted Estate*
IFRIC 16 Hedges of a Net Investment in a Foreign ✓ Operation
IFRIC 17 Distributions of Non-cash Assets to Owners ✓
IFRIC 18 Transfers of Assets from Customers ✓ PHILIPPINE FINANCIAL REPORTING STANDARDS Adopted Not Not Applicable AND INTERPRETATIONS Adopted Effective as of December 31, 2016
IFRIC 19 Extinguishing Financial Liabilities with ✓ Equity Instruments
IFRIC 20 Stripping Costs in the Production Phase of a ✓ Surface Mine
IFRIC 21 Levies ✓
IFRIC 22 Foreign Currency Transactions and Advance Not Early Adopted Consideration*
SIC-7 Introduction of the Euro ✓
SIC-10 Government Assistance - No Specific ✓ Relation to Operating Activities
SIC-12 Consolidation - Special Purpose Entities ✓
Amendment to SIC - 12: Scope of SIC 12 ✓
SIC-13 Jointly Controlled Entities - Non-Monetary ✓ Contributions by Venturers
SIC-15 Operating Leases - Incentives ✓
SIC-25 Income Taxes - Changes in the Tax Status ✓ of an Entity or its Shareholders
SIC-27 Evaluating the Substance of Transactions ✓ Involving the Legal Form of a Lease
SIC-29 Service Concession Arrangements: ✓ Disclosures
SIC-31 Revenue - Barter Transactions Involving ✓ Advertising Services
SIC-32 Intangible Assets - Web Site Costs ✓
*Standards and interpretations which will become effective subsequent to December 31, 2016.
Note: Standards and interpretations tagged as “Not applicable” are those standards and interpretations which were adopted but the entity has no significant covered transaction as at and for the years ended December 31, 2016 and 2015. LOPEZ HOLDINGS CORPORATION AND SUBSIDIARIES MAP OF RELATIONSHIP OF THE COMPANIES WITHIN THE GROUP DECEMBER 31, 2016
52.5% V&E 79.3% V
56.6% E
46.47% V&E FIRST PHILIPPINE HOLDINGS CORP. AND SUBSIDIARIES CORPORATE STRUCTURE December 31, 2016
46.47% First Philippine Holdings
Property Power Distribution Power Generation Manufacturing 30.00% Panay Electric Company 66.24% 86.58% 3.94% First Gen Rockwell Land Corporation 100% Manila Electric Company Corporation 100% First Philippine Rockwell Integrated Property Electric Corporation Services, Inc. 99.15% 100% Philippine Electric Other Businesses Rockwell Primaries Development Corporation 60% Corporation 100% 60.00% Rockwell Primaries South First Philec Inc. (formerly First 100% Development Corp. Electro Dynamics Corp. First Philippine 100% First Balfour, Inc. Industrial Corporation Stonewell Property 100% 100% Development Corporation First Philippine 100% 100% Torreverde Corp. 100% Power Systems Primaries Properties Sales ThermaPrime Drilling Therma One 100% Specialists Inc. Corporation Transport Securities Transfer 100% Corporation 77% First Philec Manufacturing Services, Inc. Rockwell Leisure Club, Inc. 98.00% 100% Technologies Corporation 100% FPHC Realty and Rockwell Hotels and Leisure 100% First PhilippineRealty Development Management Corp. First Philec Solar Corporation Corporation 100% 100% Corporation 100% FPH Capital Retailscapes Inc. FGHC International Resources Inc. 100% Cleantech Energy 100% 100% 100% First Philippine FP Island Energy Corp. FPH Fund 70.00% Holdings PTE, Ltd. 100% Utilities Corporation First Philippine 100% 100% First PV Ventures Corporation Industrial Park, Inc. First Philippine Properties Corp. FPH Ventures 100% FPIP Property Developers and Management Corporation 100% 70.00% 100% 100% FPH Land 100% 100% 100% 100% 100% 60% First Philec Nexolon FPIP Utilities Incorporated First Philec Solar Ventures Inc. First First First First FWV First Corporation Solutions Industrial Industrial Industrial Philippine Sumiden 85.00% Biofields 100.00% Township, Township Township Dev’t Corp. Corp Realty, Inc. Grand Batangas Resort 25% 67% First Philec Energy TerraPrime, Inc. Inc. Water, Inc. Utilities, Inc. Development Incorporated Solutions, Inc. MHE-Demag (P), Inc. xiii 40.52% First Batangas Hotel Corp. FIRST GEN CORPORATION CORPORATE STRUCTURE DECEMBER 31, 2016
xiv ENERGY DEVELOPMENT CORPORATION Prime Terracotta CORPORATE STRUCTURE Holdings Corporation DECEMBER 31, 2016 E: 100% V: 100%
Red Vulcan Holdings Corporation
E: 40% V: 60%
D: 100% D: 60% D: 100% D: 100% D: 100% D: 100% EDC Wind Energy EDC Drillco EDC Geothermal First Gen Hydro Power EDC Bright Solar EDC Holdings Holdings Inc. Corporation (EDC Corporation (EGC) Corporation (FGHPC) Energy Holdings Inc. International Limited (EWEHI) Drillco) (EBSEHI) (EHIL) ID: 100% ID: 100% ID: 100% D: 99.99% ID: 0.01% ID: 100% •EDC Pagali Burgos Wind Power •EDC Bayog Burgos Wind Power •Matnog 3 Renewable Energy •EDC Bago Solar Power Corporation (EBSPC) ID: 100% Corporation (EPBWPC) Corporation (EBBWPC) Corporation (M3REC) •EDC Burgos Solar Corporation (EBSC) EDC Hong EDC Hong Kong •EDC Burgos Wind Power •Matnog 1 Renewable Energy •Iloilo 1 Renewable Energy • Kayabon Geothermal, Inc. (KGI) Energy Development (EDC) Kong International • Green Core Geothermal Inc. Corporation (EBWPC) Corporation (M1REC) Corporation (I1REC) • EDC Mindanao Geothermal Inc. (EMGI) Corporation Chile Limitada Limited Investments (GCGI) •EDC Pagudpud Wind Power •Matnog 2 Renewable Energy •Negros 1 Renewable Energy •Mount Apo Renewable Energy Inc. (MAREI) Limited (EHKL) • Bac-Man Geothermal Inc. Corporation (EPWPC) Corporation (M2REC) Corporation (N1REC) (EHKIIL) (BGI) • Unified Leyte Geothermal ID: 100% ID: 100% ID: 95% ID: 95% ID: 100% ID: 99.99% Energy Inc. (ULGEI) ID: 0.01% • Southern Negros Geothermal, EDC Soluciones EDC Chile PT EDC Panas Bumi EDC Desarollo Inc. (SNGI) PT EDC Indonesia EDC Peru Sostenibles Ltd Holdings SPA Indonesia Sostenible Ltd •Bac-Man Energy Development Holdings S.A.C. Corporation (BEDC) ID: 100% ID: 100% ID: 99.96% ID: 0.01% ID: 99.99% ID: 0.01% EDC Energia Verde Chile SpA EDC Geotermica Chile EDC Energia Verde EDC Geotermica Peru S.A.C. ID: 100% SPA EDC Geotermica Del Sur Peru S.A.C. S.A.C. EDC Energia de la Tierra SpA ID: 70% ID: 30% Geotermica Crucero EDC Energia Azul S.A.C. Peru S.A.C. Energy Development ID: 70% Geotermica Tutupaca ID: 70% Corporation Peru EDC Energia Peru S.A.C. Legend: Norte Peru S.A.C. S.A.C. D – Direct Ownership ID – Indirect Ownership EDC Energia ID: 0.01% E – Economic Interest Geotermica S.A.C. V – Voting Interest ID: 70% Geotermica Loriscota EDC Progreso Geotermica ID: 99.99% Peru S.A.C. Peru S.A.C.
EDC Energia Renovable Peru S.A.C. xv LOPEZ HOLDINGS CORPORATION AND SUBSIDIARIES MAP OF RELATIONSHIP OF THE COMPANIES WITHIN THE GROUP DECEMBER 31, 2016 LOPEZ HOLDINGS CORPORATION AND SUBSIDIARIES Financial Ratios
December % 2016 2015 Inc. (Dec.) Financial Ratios Return on average stockholders' equity % Net income 6,557 6,191 6% Ave. stockholders' equity (attributable to parent) 57,435 51,712 11% 11.42% 11.97% 5%
Long-term debt to equity ratio Long-term debt 162,947 169,819 -4% Stockholders' equity (attributable to parent) 60,267 54,603 10% 2.70 3.11 -13%
Long-term debt to equity ratio Long-term debt 162,947 169,819 -4% Stockholders' equity 166,393 150,272 11% 0.98 1.13 -13%
Assets to equity ratio Total assets 366,250 358,584 2% Stockholders' equity (attributable to parent) 60,267 54,603 10% 6.08 6.57 -7%
Current ratio Current assets 99,587 103,543 -4% Current liabilities 51,168 50,899 1% 1.95 2.03 -4%
Quick ratio Cash and Cash Equivalents, ST Investments and Trade & Other Receivables 68,171 73,958 -8% Current liabilities 51,168 50,899 1% 1.33 1.45 -8%
Interest coverage ratio EBIT 35,791 29,252 22% Interest expense 9,236 9,035 2% 3.88 3.24 20%
Solvency Ratio Total Assets 366,250 358,584 2% Total Liabilities 206,725 214,415 -4% 1.77 1.67 6%
Debt Ratio Total debt 163,759 171,002 -4% Total Assets 366,250 358,584 2% 0.45 0.48 -6%
Debt-to-Equity Ratio Total debt 163,759 171,002 -4% Stockholders' equity 159,525 144,169 11% 1.03 1.19 -13%
Gross Profit Margin Sales - Cost of Sales 24,502 21,840 12% Sales 91,910 96,510 -5% 0.27 0.23 18% Net Profit Margin Net Profit 20,744 16,126 29% Sales 91,910 96,510 -5% 0.23 0.17 35%
Return on Assets Net Income 20,744 16,126 29% Total Assets 366,250 358,584 2% 0.06 0.04 26%
Return on Equity Net Income 20,744 16,126 29% Total Stockholders' Equity 159,525 144,169 11% 0.13 0.11 16%
Price/Earning Ratio Price Per Share 7.800 6.600 18% Earnings per common share 1.421 1.350 5% 5.49 4.89 12%
Operating Revenue 91,910 96,510 Other Revenue 9,667 3,023 Gross Revenue 101,577 99,533
Operating Expenses 67,408 74,670 Other Expenses 7,614 4,646 Gross Expenses 75,022 79,316