Table of Contents

1 Financial Highlights 2 2010 Key Metrics 4 Corporate Structure 5 Mission, Vision and Values 6 Significant Events and Milestones 8 Message from the Chairman 12 Message from the President and Chief Executive Officer 16 Message from the Chief Financial Officer 20 Business Review 20 Maynilad Water Services, Inc. (Maynilad) 26 Metro Pacific Tollways Corp. (MPTC) 32 Beacon Electric Asset Holdings, Inc. (Beacon) 38 Hospital Group 44 Board of Directors 50 Senior Executives 53 Key Officers of Portfolio Companies 55 Corporate Governance 58 Risk Management 60 Corporate Social Responsibility 64 Financial Review

About our Cover

Creating exceptional value doesn’t happen overnight. Objectives must be defined, strategies mapped out and executed precisely to ensure success. Given MPIC’s focus on building a prime portfolio of infrastructure investments, this takes considerable planning and preparation. Our laundry list of to-dos is ambitious, but the last few years have affirmed the soundness of our approach and allowed us to check off key milestones and move forward. We remain confident about the future and will aggressively pursue compelling opportunities in our space, mindful of our responsibilities to our stakeholders and our continuing commitment to nation-building. Financial Highlights

Total Investments Equity Total Investments(in Peso (in Millions) millions of pesos) (in Peso Millions) Equity (in millions of pesos) 60,000 58,906 50,000 47,395 47,899 50,981 50,000 40,000

40,000

30,000 30,000 26,155

20,000 17,444 20,000

10,000 10,000

0 0 2008 2009 2010 2008 2009 2010

Revenues Core Income (in Peso Millions) (in Peso Millions) Revenues (In Peso Millions) Core Income (in millions of pesos) 20,000 4,000 3,856 18,564

16,108

15,000 3,000

2,047 10,000 2,000

5,041 5,000 1,000

347

0 0 2008 2009 2010 2008 2009 2010

Metro Pacific Investments Corporation 1 Exclusive water concession for the West zone of Metro Manila to 2037. 9.3M population, 7.4M served, covering 540 km2; 12 cities, 5 municipalities Distribution network MAYNILAD totaling 6,476kms.

Concession for North Luzon Expressway until 2037. Operates 67% of the total lane kilometers of tollroads in the Philippines. 2010 MPTC Key Franchise until 2028 to Metrics distribute to 31 cities and 80 municipalities covering 9,337 km2, Distributes more than half of the total electricity consumed in the Philippines. MERALCO

Operates the largest hospital network in the Philippines. Makati Med, Cardinal Santos, Davao Doctors, Riverside Medical, Lourdes Hospital. Over 1 million patients served. HOSPITALS

2 2010 Annual Report Revenues (In Peso Millions) Contribution to MPIC 2,394 2008 (In Peso Millions) 8,245 2009 Volume of water supplied 804MCM 10,619

Volume of water billed 374MCM 2010 12,050 Non-revenue water Core Income Average 53.5% (In Peso Millions) 2008 Period end 51.0% 2,323

Billed customers 903,682 2009 3,328 Capital expenditure 7,679 2010 (In Peso Millions) 4,835

Net Revenues (In Peso Millions) 2008 5,198

2009 Contribution to MPIC 1,434 5,489 2010 (In Peso Millions) 5,858 Average daily vehicle entries 159,882 Core Income

Average kilometer travelled 3,115,475 2008 (In Peso Millions) Capital expenditure 1,281 987 2009 (In Peso Millions) 1,220

2010 1,465

Revenues (In Peso Millions)

2008 Contribution to MPIC 1,486 191,775 (In Peso Millions) 2009 184,872

Energy sales (In GWh) 30,247 2010 System loss 7.94% 245,461 Interruption frequency rate 4.73 times Core Income

2008 (In Peso Millions) Cumulative interruption time 3.30 hours 2,605

Number of customers (in thousands) 4,847 2009 Capital expenditure (In Peso Millions) 10,096 7,003 2010 12,155

Revenues (In Peso Millions) 2008 4,293

Contribution to MPIC 172 2009 (In Peso Millions) 5,959 Number of beds 1,599 2010 6,989 Number of accredited doctors 3,105 Core Income Number of enrollees 4,545 (In Peso Millions) 2008 Capital expenditure 1,075 338

(In Peso Millions) 2009 528 2010 474

Metro Pacific Investments Corporation 3 Corporate Structure

water toll roads power hospitals 55.41% 99.85% 50.00% 34.90% 34.85% 51.00% 100.00% DMCI- METRO BEACON MEDICAL DAVAO RIVERSIDE EAST MANILA MPIC PACIFIC ELECTRIC7 DOCTORS DOCTORS MEDICAL HOSPITAL INC. 5 HOSPITAL CENTER, MANAGERS Water TOLLWAYS 6 4 3 2 (Makati INC. INC. CORP. Co., Inc.1 CORP. Medical (Our Lady of Center) Lourdes Hospital)

5.88% 91.91% 67.10% 45.93% 34.80% 100.00% Maynilad MANILA TOLLWAYS Manila COLINAS Water NORTH MANAGEMENT Electric VERDES HOSPITAL Services, Inc. TOLLWAYS CORP. Company CORP. MANAGERS CORP. (Cardinal Santos Medical Center)

Key Partner: Key Partner: Key Partner: DMCI EGIS PLDT

CORPORATE PROFILE and HISTORY Metro Pacific Investments Corporation ("the Group" or "the Company") was incorporated and registered with the Securities and Exchange Commission ("SEC") on 20 March 2006. It serves as a holding company for investments in infrastructure projects. On 15 December 2006, the Company listed with the Philippine Stock Exchange.

The major shareholder of the Company is Metro Pacific Holdings, Inc. ("MPHI"), which owns 55.6 percent of the shares of the Company as of 31 December 2009. MPHI is a Philippine corporation whose major stockholders are Enterprise Investment Holdings, Inc. ("EIH") (60.0%), Intalink B.V. ("Intalink") (26.7 %) and First Pacific International Limited ("FPIL") (13.3%). Intalink B.V., FPIL and EIH are affiliated companies of First Pacific Company Limited ("First Pacific").

The Group's major subsidiaries and their corresponding incorporation / registration dates:

1 DMCI - MPIC Water Company - 17 November 2006 2 Metro Pacific Tollways Corporation - 13 November 2008 3 East Manila Hospital Managers Corp - 15 October 2010 4 Riverside Medical Center - 17 July 1964

The Group's associates and joint ventures and their corresponding acquisition dates:

5 Medical Doctors Inc. - 1 June 2007 6 Davao Doctors Hospital - 31 May 2008 7 Beacon Electric Asset Holdings Inc. - 2 October 2009

4 2010 Annual Report Mission, Vision and Values

MISSION We are the leading Philippine infrastructure investment firm. We manage, transform and grow our companies while continuously seeking investment opportunities to create long-term value for our shareholders. VISION We have a stellar portfolio of infrastructure assets, each being the dominant player in its field. We are admired globally for excellence in investing in and transforming infrastructure. We attract, retain and develop world-class talent

Through our companies and foundation, we significantly contribute to the economic development of the Philippines and thereby uplift the quality of life of every Filipino. VALUES

Integrity and Teamwork and Entrepreneurship Financial Discipline Transparency Empowerment and Accountability We adhere to the highest We recognize the diverse We innovate, take risks, act We employ rigorous ethical and corporate strengths and abilities quickly and decisively, and financial analysis to arrive governance standards within the team. We enable are customer focused at sound business decisions. and inspire people to We are results-driven and achieve superior results meet our commitments

Metro Pacific Investments Corporation 5 Significant Events

2010 APRIL JUNE • MPTC’s Segment 8.1, a 2.4 kilometer • Maynilad started operation of its state-of- JANUARY expressway connecting NLEX Valenzuela to the-art Putatan Water Treatment Plant to • MPIC reported consolidated Core Net Balintawak along Mac Arthur Highway was supply potable water to an initial 4,585 Income of P2.04 billion for the full year of inaugurated households in Muntinlupa 2009, an improvement of 490 percent from • MWSS approved a 15-year extension of • Metro Pacific Tollways Development the restated Core Net Income of P347 Maynilad’s concession to 2037 Corporation, a wholly-owned subsidiary of million for 2008 • Maynilad commissioned the Villamor MPTC, submitted an unsolicited proposal to • pumping station, with a reservoir capacity DPWH for the Connector road project MARCH of 10 MLD of water. It will serve elevated • Maynilad secured second Sahara mobile • MPIC and Piltel consolidated 28.2 percent parts of the southern portion of Maynilad’s leak detection unit for its aggressive non- of its Meralco holdings in Beacon Electric concession area revenue water (NRW) reduction program. which acquired additional shares to take its • David J. Nicol was appointed as MPIC’s • Inaugurated MPTC’s Segment 8.1, a holding to 34.8 percent Chief Financial Officer 2.7 kilometer stretch of toll road from • Maynilad allocated P1.7 billion for the Mindanao Avenue to North Luzon pipelaying project that will complement MAY Expressway at Valenzuela City its state-of-the-art water treatment plant • MPIC signed a Share Purchase Agreement • MPIC divested in favor of Harbour Center in Putatan, Muntinlupa. The pipelaying to acquire 51 percent of Riverside Medical Port Terminal Inc, all of its shares of project involves the laying of 9.4 kilometers Center, Inc. common stock of Manila North Harbour of primary lines and 63 kilometers of • Maynilad began P600-million pipelaying Port, Inc. (MNHPI), representing 35 percent secondary lines to interconnect Barangays project along Coastal Road from of the outstanding capital stock of MNHPI. Putatan, Bayanan, Ayala Alabang, and Kabihasnan to Longos, Bacoor in Cavite. • MPIC’s Core Net Income was P1.93 billion portions of Alabang, Poblacion and Tunasan The construction of the 4.2 kilometers for the 1st Half of 2010, an improvement • MPIC’s earnings for the quarter reported mainline is expected to benefit more than of 169 percent over Core Net Income of a consolidated Core Net Income of P755 130,000 families in Las Piñas and Cavite P716 million for the 1st Half of 2009 million for the first three months of 2010, once completed early next year • MPIC held its Annual Shareholders’ Meeting an improvement of 118 percent from the at Makati Shangri-la first quarter Core Net Income of P356 • David J. Nicol was appointed as Director million for 2009 Milestones

March 2006 (Clinica Hilario), Inc. with mandatory May 2008 • MPIC was incorporated and registered conversion into direct ownership of • Signed share purchase agreements with the SEC to serve as a holding 33.00 percent in Makati Medical Center with several shareholders of Davao company for investments in real estate Doctors Hospital Inc. to acquire a total and infrastructure projects August 2007 of approximately 34.85 percent of the • Maynilad signed agreements with its issued share capital of the corporation December 2006 lenders and the government to pave the for P498 million • DMCI-MPIC won the right to acquire wayfor early exit from rehabilitation 83.97 percent interest in Maynilad July 2008 • MPIC shares were exchanged in PSE, January 2008 • Completed acquisition of the interests effectively listing MPIC by way of • Full conversion into equity of P750.0 of Ashmore Investment Management introduction million Subordinated Convertible Notes PLC and First Pacific Company Limited of Medical Doctors Inc. (“MDI”) which in DMCI-MPIC Water Company, Inc. that January 2007 resulted in a 33.00 percent ownership raised MPIC’s stake in DMWC to 55.41 • Completed sale transaction of 83.97 interest in MDI and consequently, Makati percent and in Maynilad to 50.90 percent percent of Maynilad Water Services Med on a fully-diluted basis Company to MPIC and its partner, DMCI • Signed an Interim Operating Agreement Holdings February 2008 with the Roman Catholic Archbishop of • Maynilad exited from a court Manila to handle the interim operation May 2007 administered rehabilitation and of Cardinal Santos Medical Center for • Completed new investment in Makati aggressively advanced a wide-ranging a period of six months, it subsequently Medical through subscription of P750.0 expansion and facilities improvement in assigned the agreement to Colinas million in Convertible Subordinated line with its strategic goals Verdes Hospital Managers Corporation, Notes issued by Medical Doctors a wholly-owned subsidiary of MDI

6 2010 Annual Report JULY NOVEMBER 2011 • Resignation of Rogelio S. Singson as • MPIC entered into a Cooperation President and CEO of Maynilad Agreement with Fil-Estate Corporation JANUARY relating to its rights and interest in the MRT • Maynilad was given the approval by the AUGUST 3 companies consisting of Metro Rail Transit Metropolitan Waterworks and Sewerage • Victorico P. Vargas was appointed as Holdings, Inc. Metro Rail Transit II, Inc., Metro System (MWSS) to implement the 2011 Maynilad’s President and CEO Rail Transit Corporation and Monumento adjustment in water tariff with effect from • MPTC declared inaugural cash dividends Rail Transit Corporation 16 February 2011 in the aggregate amount of P445.0 million • MNTC signed concession agreement • MNTC’s application for toll rate adjustment or P0.089 per share to the Corporation’s with BCDA granting MNTC the rights for Phase 1 (Balintawak to Sta. Ines and stockholders of record as of 23 August to manage, operate and maintain the 94- Subic to Tipo) and Phase 2, Segment 8.1, 2010 kilometers Subic-Clark-Tarlac-Expressway, has been provisionally approved by the Toll with effectivity subject to Philippine Regulatory Board with effect from 1 January SEPTEMBER government approvals and consent of Japan 2011 • MPIC’s consolidated Core Net Income Bank for International Cooperation/Japan • Meralco was given approval to implement amounted to P2.94 billion for the nine International Cooperation Agency Energy Regulatory Commission (ERC) months of 2010, an improvement of 142 order for the tariff increase of 0.1547/kWh percent over Core Net Income of P1.21 DECEMBER resulting to 1.6464/kWh with effect on 16 billion for the 3rd quarter of 2009 • MPIC full year earnings for 2010 amounted January 2011 to P3.86 billion, an improvement of 88 OCTOBER percent over Core Net Income of P2.05 FEBRUARY • MPIC through its wholly-owned East billion 2011 • President Benigno S. Aquino III led formal Manila Hospital Managers Corp. took-over unveiling of Maynilad’s Putatan Water operation and management of the Our Treatment Plant Lady of Lourdes Hospital located in Sta. Mesa, Manila MARCH • MPIC declared a cash dividend of P0.015 per common share in favor of stockholders as of record date 17 March 2011

August 2008 November 2009 • Purchased an effective 99.85 percent • MPTC bid to be BCDA’s private sector ownership interest held by First partner for the management, operation Philippine Holdings Corporation and and maintenance of SCTEX Benpres Holdings Corporation in First Philippine Infrastructure Inc., the majority May 2010 owner of the concession holder for the • Riverside Medical Center, Inc. is the North Luzon Expressway fourth premier hospital to join MPIC’s growing nationwide health care March 2009 portfolio • Colinas Verdes Hospital Managers Corp. entered into a long-term agreement to NOVEMBER 2010 manage and operate Cardinal Santos • Commenced operation and Medical Center for a period of 20 years management of Our Lady of Lourdes Hospital (“OLLH”) in Sta. Mesa October 2009 through its wholly-owned East Manila • Purchased 12.9 percent of Meralco and Hospital Managers Corp, OLLH is issued 3.2 billion common shares to the the fifth hospital in MPIC’s health care PLDT Beneficial Trust Fund portfolio.

Metro Pacific Investments Corporation 7 Message from the Chariman

“We focused on fleshing out the bones of our structure as opposed to years past – Maynilad Water in 2006, Makati Medical in 2007, Tollways in 2008 and Meralco in 2009 – when we were adding new business lines every year.”

-Manuel V. Pangilinan Chairman My fellow shareholders,

Another year has just passed and your Company is one step further in its mission to be the leading infrastructure firm in the country. We focused on fleshing out the bones of our structure as opposed to years past – Maynilad Water in 2006, Makati Medical in 2007, Tollways in 2008 and Meralco in 2009 – when we were adding new business lines every year.

Building Our Human Capital As we integrated these businesses into the family, we have had to build up our human capital as well. We have always had financial and strategic knowhow but we have had to scale our team at MPIC appropriately, from 26 at the end of 2009 to 40 by the end of 2010, to bolster the financial reporting, human resources, business development and government relations work that are essential for us to oversee and manage our various portfolio companies.

As with MPIC, our investee companies have also seen their ranks augmented as they set about executing their respective visions for enhanced customer experiences and increasing shareholder returns.

At Maynilad, we had to let go of a treasured resource in Rogelio Singson, the current Secretary of the Department of Public Works and Highways. We took the opportunity to secure the services of Ricky Vargas, formerly Head of Human Resources and Business Transformation at PLDT. We believe he can champion the culture change we want at Maynilad – less of engineering and more of customer service. Changes he has effected include organizing a key accounts group to serve better the requirements of our large customers, hiring a business development head to lend more structure around Maynilad’s efforts to expand beyond its present concession, and re-structuring the Information Technology department to provide more data points for service delivery and operational effectivity improvement.

In Meralco, where I concurrently serve as the CEO, we have sought to align its culture closer to the wider corporate group. In this effort, Senior Management is expected to lead by example – we have appointed new heads for HR, Customer Relations and Finance along

8 2010 Annual Report with myself and a Chief Operating Officer to lead the charge. Compensation has been revised to reward individual performance and, to facilitate teamwork, tied the bonus package to the firm’s bottom line results. We have also provided employees with a clear roadmap for the future that they can rally around and support.

MPTC has been busy expanding its road network. The North Luzon Expressway (NLEX) is a fairly mature road. In order to grow beyond the organic increase in traffic on NLEX, MPTC has been bidding for concessions and working to extend NLEX. To ensure they have the requisite management bandwidth to meet future requirements, it has embarked on a talent management program and centralized human resources (HR) and the internal audit function. The talent management program is meant to identify the future leaders of their expansion projects, and ultimately of MPTC itself, and provide them with the tools needed to govern and manage effectively. For HR and internal audit, centralization of these functions across the Manila North Tollways Corporation (MNTC – concession owner of NLEX) and Tollways Management Corporation (TMC – Operations and Management Company) allows uniform processes, better oversight and a clear path to expanding capacity once the expansion projects of MPTC come on line.

At the Hospital Group, we have centralized responsibility for the schools attached to some of our hospitals. The schools have been experiencing a secular decline in revenues with the slackening demand for nurses and health care specialists internationally. With accountability and reporting lines clarified, we are hopeful that we will be able to report positive news on this end by next year’s report. To continue the theme of procuring synergies whenever warranted for the hospital group, we are in the process of hiring a group purchasing manager. That should make the upgrade of equipment a more strategic exercise where we consider the needs of the whole network in determining what to buy, taking into account economies of scale when negotiating purchases.

These efforts and the incredible work put in by our people have resulted in the record financial results that will be discussed in more detail by Joey Lim, our President and CEO, and by each of the portfolio companies in their respective reports.

However, I would like to focus more on the question we are most often asked by investors after discussing our results to them.

What’s Next? We are still on a journey and have not stopped looking for new opportunities, both at our level and at the operating companies we own and oversee.

Everyone has heard about our interest in the Metro Rail Transit (MRT3) traversing EDSA and the airports serving Metro Manila. In lieu of discussing these individual projects, it might be best to talk first about the qualities outside of financial returns, that attract us to a particular prospect.

Metro Pacific Investments Corporation 9 “We have a lot more to do, the We like businesses with proven franchises. Franchised businesses, particularly in main ones being: bring to fruition infrastructure, are usually regulated by government and we believe we have a demonstrable the strategy enumerated for each experience in managing our regulatory relationships in a mutually beneficial way. From institutional experience built up at PLDT to recent successes at MPIC with Meralco, Maynilad and MPTC, we company, continue to participate in have shown the ability to work with Government in pursuing goals that are common to each. the infrastructure modernization of Our flexibility in managing relationship with regulators along with our emphasis on enhancing the Philippines, and earn a reasonable customer service is reflected in our ability to obtain the contractually mandated (or sometimes rate of return on our capital.” formulaic) returns with Government support and tacit agreement, if not active support, from the public.

We view complex situations or overlooked companies as good opportunities. Maynilad was in rehabilitation when we put in our bid, MPTC was operating with only NLEX in its portfolio when we invested in the company and Meralco had been overlooked for the longest time by most because of their inability to secure the relevant tariff adjustments. In each of these, we felt our patience and experience in financial oversight, strategic management or regulatory relationship would allow us to transform these companies.

We want the ability to take control. It would be hard to implement the changes we feel would be necessary to bring companies out of rehabilitation, improve customer service or re-set strategy without having the authority and flexibility that management control gives you. We may not have the majority stake in each of our portfolio investments and our future investments may not see us as the majority stakeholder either. However, we will make sure that we have enough in present and future projects to ensure that we can appoint the CEO and CFO.

In terms of financial returns, we obviously do the necessary analysis but our decision is not based solely on how we think the business can operate as a steady state or even in an optimised version of its current state. We want to change these businesses and we like to think that the Internal Rates of Return (IRR) that our studies generate, especially given the long concessions and transformational opportunities that come with our acquisitions, are take-off points and not end goals as such.

10 2010 Annual Report “We want to change these businesses and we like to think that the Internal Rates of Return that our studies generate, especially given the long concessions and transformational opportunities that come with our acquisitions, are take-off points and not end goals as such.”

To complete the discussion of our acquisition strategy, I would like to say that we are both opportunistic and strategic in our approach. We are opportunistic because interesting projects will not always be out in the open, ready for analysis and easy to incorporate into our five year plans. There will be times when projects will come to us from out of the blue. It would be a disservice to you if we did not act on them because we were not able to pave the way for our participation, or bid with presentations on our rationale to you – our shareholders. We will, however, invest in businesses that have the characteristics above, with the potential for returns that we have partially realized in our existing investments.

Our Outlook In our cover we showcase a “To-Do” list. We have checked some objectives off: build a premier portfolio of infrastructure assets, transform overlooked or distressed assets into performing companies, start paying a dividend at MPIC level, and so forth. We have a lot more to do, the main ones being: bring to fruition the strategy enumerated for each company, continue to participate in the infrastructure modernization of the Philippines, and earn a reasonable rate of return on our capital.

There are obstacles out there: competition from other conglomerates and business groups wanting a piece of the infrastructure pie, continued weakness in Europe, turmoil in the Middle East and North Africa, inflation worries in Asia, prospects of higher interest rates, the devastation in Japan and a host of other concerns. There will always be issues that we will have to deal with but, as our CFO will discuss, our Balance Sheet is flexible and strong while I have discussed with you the readiness of our Management and staff to face the said challenges.

We are optimistic about our future and we hope you stay with us as we pursue our goals relentlessly. I look forward to reporting better results in 2011.

MANUEL V. PANGILINAN Chairman of the Board

Metro Pacific Investments Corporation 11 Message from the President and Chief Executive Officer

“Your Company is once again reporting record Revenues and Core Income for the year. Core income grew substantially by 88 percent, reflecting the first full year of contribution from Meralco, while continuing progress at Maynilad and Metro Pacific Tollways Corporation (MPTC) contributed to the 15 percent growth in Revenues.”

-Jose Ma. K. Lim President and Chief Executive Officer

Your Company is once again reporting record Revenues and Core Income for the year. Core income grew substantially by 88 percent, reflecting the first full year of contribution from Meralco, while continuing progress at Maynilad and Metro Pacific Tollways Corporation (MPTC) contributed to the 15 percent growth in Revenues. Our share price delivered a 50 percent return through 2010 – although recent concerns in the Middle East, inflation worries and continued economic woes in Europe have reduced this gain to 25 percent during the first quarter of 2011.

The change in the proportion of contributions to Core Income from each of our business groups highlights the continuing transformation at MPIC.

The growth in Meralco’s role primarily comes from its first full year as a contributing entity as opposed to only three months in 2009 and secondarily from the 74 percent growth in Meralco’s Core Income. As a result, the relative contribution from Maynilad and MPTC dropped proportionately, which belies the much improved stand-alone results from both of these companies. Our hospital group was the only business line that suffered in comparison with 2009, due to the poor enrollment at the nursing schools along with increased depreciation arising from investments in our hospitals.

Summary of Portfolio Company Results Meralco continued to show marked improvement from prior to our entry into the company. 2008 had Core Income at P2.8 billion, improving to P7.0 billion in 2009, our year of entry, and further rising to P12.2 billion in 2010. The biggest component in this progression has been the long overdue tariff increases that Meralco has been able to secure from its regulator, a rise from P0.97 per kwh to P1.65 per kwh, or a total of P0.68/kWh from 2009 onwards. We expect that for the third rate rebasing period commencing mid-2011, tariff

12 2010 Annual Report Core Income Contribution from Portfolio Companies

2009 2010 P3,205 M P5,486 M

Maynilad MPTC 48% Maynilad 40% 44% Meralco MPTC 27% 26% Meralco Hospitals 7% 5% Hospitals 3%

growth will slow and therefore future revenue growth will have to come from our planned entry into power generation and retail electricity sales.

Maynilad’s performance in 2010 was exemplary given the challenging conditions it faced: growth in Revenue was 13 percent and for Core Income, 48 percent. Water shortage was the biggest factor the Company had to overcome with the impact of El Niño reducing water supply by as much as 30 percent during the summer. The national elections also caused delays in extending its primary pipe network to the southern part of its concession area. Despite these challenging conditions, Maynilad’s billed volume grew by 7 percent through an 11 percent increase in the number of customers – a testament to the hard work of its employees and the successful mitigation strategy the company implemented. Although rationing of supply continues in the first quarter of 2011, our renewed ability to undertake expansion of our network and the gradual return to normal water levels at the Angat Dam allows us to anticipate similarly good financial results going forward.

MPTC numbers were consistent with the reliable increment in traffic volume experienced at the North Luzon Expressway (NLEX). Increases of 7 percent in Revenues and 20 percent in Core Income reflect the 6 percent growth in both average daily vehicle entries and average kilometres travelled. The company has also been actively laying down a path for the future, with the award of the Subic-Clark-Tarlac Expressway (SCTEX) concession, the groundbreaking of Segment 9 (the first of two sections composing the Harbour Link road) to extend NLEX up to the port area of Manila and the grant of “original proponent” status for the Connector Road. The Connector Road is the culmination of our plans to link the northern and southern toll road systems of “Maynilad’s performance in 2010 Luzon through the heart of Metro Manila and we expect the government to put this project up was exemplary given the challenging for Swiss Challenge by the second half of 2011. Our original proponent status gives us the right conditions it faced: growth in Revenue to match any superior offer submitted through the Swiss Challenge. These projects should start was 13 percent and for Core Income, 48 contributing to MPTC’s bottom line within the medium term but 2011 results should be fairly flat percent. Water shortage was the biggest relative to 2010 given the expiry of the company’s tax holiday. factor the Company had to overcome with the impact of El Niño reducing At the hospitals, the relatively lower performance compared with last year was affected by two issues. Higher depreciation and personnel charges as a result our investments in infrastructure, water supply by as much as 30 percent equipment and staffing at Makati Med, Davao Doctors and Cardinal Santos have cut into profit during the summer.” margins. It will take time for us to drive patient turn-over to levels that will allow us to earn back

Metro Pacific Investments Corporation 13 “There is a continual drive to enhance returns on our investments in the medium term and to ensure employees are adequately and appropriately motivated and rewarded for their success.”

our investments at these hospitals, but this is to be expected and we are working to improve marketing of our expanded facilities and services. A second factor that hindered financial performance is the further drop in enrolment at the schools attached to some of our hospitals, which have continued to be affected by the lack of demand for nursing graduates abroad. We are now in talks with an educational institute for a joint venture to manage these nursing schools. Given our plans, we are hopeful that returns from the group will show double digit growth in 2011. As such, our confidence in the industry remains high. We have added two new hospitals to our network: Riverside Medical Center in the Visayas and Our Lady of Lourdes Hospital in the central part of Manila, and we continue to be on the look-out for acquisition opportunities.

Active Management Our businesses performed as we expected because we take an active hand in the strategic direction and management of these companies.

We appoint the CEO and CFO at each company from a pool of seasoned leaders who share our governance, service and shareholder value culture. Strategies, five year plans and compensation structures are reviewed every year to determine if we are on the right track. There is a continual drive to enhance returns on our investments in the medium term and to ensure employees are adequately and appropriately motivated and rewarded for their success.

Throughout the year, the tactical implementation of strategies and the performance of each company versus budget are monitored through our participation in the bi-weekly Management Committee and monthly Board meetings. We confront issues head on and strive for an open culture.

We find constant communication to be the best way to ascertain potential pitfalls and opportunities.

Investor Relations We take the same open communication approach with our investors. In 2010, we attended 12 investor conferences and went on two non-deal road shows. Including meetings outside those events, we met 189 unique, prospective or existing, investors across 240 meetings. Issues and opinions that are gathered in these meetings are collated and circulated to the management team for assessment and further action. Additionally, to leverage the greater reach of brokerages, we have been working with various firms to increase the number of analysts covering our stock. From four at the end of 2009, we now have 11 analysts covering the stock – six of whom are with foreign brokers (UBS, CLSA, JP Morgan, DBP Daiwa, ATR KimEng, Deutsche Regis), and five of which are local.

14 2010 Annual Report “Partnership is one other component Evaluating Investments that we manage closely. Developing The amount of communication we foster with investors is driven by the complexity and and cultivating partnerships to flesh out changing nature of our organization. In 2010, we consolidated our Meralco shareholdings in a holding company structure, divested our interests in Manila North Harbour, were awarded the our capabilities on the technical and SCTEX concession, launched Segment 9 of NLEX, received formal acceptance to undertake the operational aspects of each business has Connector project and added two new hospitals. been crucial in ensuring success at each of our endeavours.” As our Chairman indicated in his message, we are not finished. In evaluating each investment, the key points for us are in understanding the framework that governs the tariff/fee mechanism and determining the critical points of contact with government for regulatory supervision, while also evaluating the aspects of the business that can be transformed or expanded upon to boost financial returns.

Partnership is one other component that we manage closely. Developing and cultivating partnerships to flesh out our capabilities on the technical and operational aspects of each business has been crucial in ensuring success at each of our endeavours. Our partnerships with DM Consunji Inc. (DMCI) at Maynilad, EGIS at MPTC and the doctors at our hospitals have enabled our portfolio companies to deliver outstanding service while leveraging MPIC’s strengths in strategic direction, regulatory relationship management and financial oversight. As we move forward with potential projects and acquisitions, we put aside a significant proportion of our time to vet prospective partners on their technical competence and cultural fit. We have never been the experts when entering a new business but, because of successful partnerships in our existing investments, we have never faced a shortage of specialists seeking us out for a joint venture.

Looking Forward There is no shortage of opportunities for each of our companies either. Meralco is pursuing power generation and retail electricity supply with the implementation of Open Access by the regulators. Maynilad has approximately two million people it still needs to connect to its network and has further commitments to develop both sewage treatment and new sources of water. MPTC is on its way to connecting the Northern and Southern toll road systems, and the hospital group continues to expand its footprint nationwide. As for MPIC, our interest in the Metro Rail Transit 3 (MRT3) system has garnered the most press, but we are likewise interested in the existing and proposed international airports.

Our portfolio will continue to grow in the next few years. We are not growing for growth’s sake, however. In five years time, we expect to be earning a Return on Equity in the mid to high teens and starting to return capital to shareholders in a more significant way through our dividends. We hope you remain with us for the duration of that journey.

Jose Ma. K. Lim President and Chief Executive Officer

Metro Pacific Investments Corporation 15 Message from the Chief Financial Officer

“Consolidated core income for 2010 increased by 88 percent to P3.9 billion driven by a 72 percent increase in Contribution from Operations to P5.5 billion.”

-David J. Nicol Chief Financial Officer

The majority of this Annual Report deals with the Audited Consolidated Financial Statements of the Group and the interpretation of these statements for our shareholders in terms of contribution to Core Income. There is no value to repeating this analysis here, except to note that the focus on Core Income is our attempt to communicate with our shareholders what we consider to be the true and fair underlying earnings of the Group, stripped of one-off gains and losses – including the effect of foreign exchange. Without doing this, it is very difficult for our shareholders to interpret our results or to have a basis on which to form a view as to our future earnings outlook.

All numbers presented are in Pesos millions, except as otherwise stated.

MPIC CONSOLIDATED NET INCOME 2009 2010 Variance Core Income 2,047 3,856 88% None-core (expense)/Income 253 (985) - Net Income 2,300 2,871 25%

In 2009, net income benefitted from the release of provisions at Maynilad for previously collected tariffs over which there had been uncertainty as to Maynilad’s entitlement, net of deferred tax adjustments, as a result of a rate rebasing agreement with Maynilad’s regulator. As these were not recurring items, they were stripped from core income. In 2010, there were some significant one- off charges that were also stripped from core income, principal amongst which were: various provisions for long-pending items at Meralco including pensions, systems loss and others; and provision for unrecoverable input VAT on the tollroads business.

16 2010 Annual Report “...the focus on Core Income is our attempt to communicate with our shareholders what we consider to be the true and fair underlying earnings of the Group, stripped of one-off gains and losses – including the effect of foreign exchange.”

Consolidated core income for 2010 increased by 88 percent to P3.9 billion driven by a 72 percent increase in Contribution from Operations to P5.5 billion. The increased operating contribution reflects mainly: continued strong billed volume growth and tariff progression at Maynilad; increased traffic volume on the NLEX, due partly to opening of Segment 8.1 during the year; and a full year contribution from the equity interest in Meralco, which in itself showed strong earnings growth on increased volume of power sold at an increased average distribution tariff.

Feedback on our financial statements from our investors is that:

(i) in many cases they find the audited financial statements rather impenetrable; and (ii) they would like to understand more about the financial position of the Company itself.

Audited Financial Statements The Company holds less than 100 percent of its principal operating subsidiaries, Maynilad and Manila North Tollways Corporation (MNTC) both of which it consolidates. The Company equity accounts for its largest single investment, Beacon Electric, which it holds 50 percent of and which in turn owns 34.8 percent of Meralco, and some of its hospital investments where its shareholding is below 50 percent.

The financial statements are further complicated by the concession accounting and acquisition accounting standards attributable to our water and tollroads businesses which some investors find to be counter intuitive. This is due to:

(i) capital expenditures being mainly added, when complete, to “concession assets” rather than fixed assets; and (ii) the requirement to fair value the entire concession, on acquisition by MPIC of the concession holding company, and to then amortize this valuation on a straight-line basis over the life of the concession. For 2010 and the foreseeable future the sum of these non cash adjustments reduces core income for the Group by approximately P500 million compared with the underlying proportionate core income of our subsidiaries.

The Company maintains a careful calibration of the consolidated financial statements but manages each investment individually by reference to that particular business’s cashflow. The holding company’s financial position and leverage capacity is then set by reference to the ability

Metro Pacific Investments Corporation 17 of each investment to remit dividends to it. There are no cross default provisions in the portfolio from one investment to another and it is the policy of the Company not to guarantee the borrowings of its investments.

Tracking the cash flows for the Company itself and how we expect these to evolve in future is the information most of our investors seek and this is provided below.

Stand alone Company Cash Flow information 2009 2010 Directional Commentaries Dividends from Investments Maynilad - 340 Dividends are expected to increase rapidly as the concession becomes cash flow positive in late 2012 / early 2013. MNTC/MPTC 898 1,189 Dividends declared are on the basis of available cash after provisions for future capital expenditures, working capital and taxes, debt service and payment of PNCC Franchise Fee. A combination of the expiring MNTC tax holiday on the built portion of the NLEX at end 2010, and funding for road expansion, will see dividends increase only slightly from 2010 until the network is completed in 2015. Beacon / Meralco 245 375 Broadly static in the near term, beyond the effect of a full twelve months holding, as the debt in Beacon of P16.2 billion is being serviced by the dividends declared by Meralco. Hospitals 10 35 Increasing as the group expands. Sub-total 1,153 1,939 Interest and Opex Bank Debt Interest (613) (1,195) Reducing on lower debt and a rate concession on remaining debt, re-priced to 9.2 percent from 10.7 percent effective 13 February 2011. Interest received 33 313 Interest income from receivable from First Philippine Utilities Corp. collected in March 2010. Convertible Bond Interest - (149) Expected to convert into ordinary shares at P3.25 per share in second quarter of 2011 Opex and others (277) (421) Increasing with expanding management base Sub-total (857) (1,452) Pre investments, fund 296 487 raising, and dividend payment Dividends paid - (207) P0.01 interim dividend per common share and P5 million preferred dividends. Final dividend of P0.015 per common share declared in March 2011. Expected to increase significantly once Maynilad is solidly cash generating and expansion plans for MPTC and Meralco are fully funded and start contributing to cash flow

Net Debt Position 2009 2010 Commentaries Bank Debt 17,613 6,581 Reduced due to transfer of loan financing the Meralco share acquisition to Beacon Electric in March 2010. Remaining debt priced at 9.2 percent p.a. Convertible Bond - 6,314 Coupon of 4.5 percent, expected to convert into ordinary shares no later than May 2011. Cash (2,924) (1,619) Decreased due to investments in Riverside Hospital, deposit for MRTC and dividend payout in 2010. Net Debt 14,689 11,276

On the basis of the above: (i) immediate liquidity is satisfactory; and (ii) there is reasonable capacity for debt financing to support the investment in known and announced expansion plans of our subsidiaries.

18 2010 Annual Report Stand-alone Company Balance Sheet 2009 2010 Commentaries Investments Meralco 24,540 31,897 Started investing in Meralco during latter part of 2009 and switched entire holding to Beacon Electric in March 2010. Additional shareholding in Meralco funded by P6.6 Convertible bond issued in March 2010. Maynilad 12,210 12,219 Started investing in January 2007 through DMCI-MPIC Water Company “DMWC”, a 50-50 joint venture with DMCI Holdings. Obtained control over DMWC in June 2008 and acquired additional 5.88 percent direct interest in Maynilad in December 2008. MPTC 12,319 12,331 Invested in November 2008 funded in part by P6.75B of bank debt which is secured on the MPTC shares. Healthcare 1,429 1,729 Invested in Makati Med in 2007, Davao Doctors in 2008, Riverside and initial outlay for Lourdes in 2010 funded from internal sources. Total 50,498 58,176 Cash and other assets 16,385 4,555 Settlement of Receivable from First Philippine Utilities Corporation (FPUC) in March 2010. TOTAL ASSETS 66,883 62,731 Debt and other liabilities (19,488) (14,832) Principally bank debt and Convertible bond. NET ASSETS 47,395 47,899

Dividend Policy In 2010, the Company paid its first dividend. This was seen by your Board as being a matter of good discipline. For the foreseeable future, the Company is seeking new investments on its own account and supporting the expansion plans of its subsidiaries, in particular Metro Pacific Tollways Corporation, and the hospitals group.

The Maynilad concession is still cash absorbing; although Maynilad achieves an accounting profit, the sum of its capital expenditures, concession fees and debt-service still exceeds its earnings before interest, tax and depreciation.

Until such time as the Maynilad concession becomes overall cash flow positive, and the funding need of our tollways and hospital groups from MPIC is less than their dividend to the Company, our own dividends to shareholders will remain modest.

The long-term strategy is to pay a significant proportion of consolidated Core Income as cash dividends linked to the largely inflation protected earnings and dividend inflows from our investments.

David J. Nicol Chief Financial Officer

Metro Pacific Investments Corporation 19 MAYNILAD Maynilad Water Services, Inc.

20 2010 Annual Report Metro Pacific Investments Corporation 21 MESSAGE FROM THE PRESIDENT AND CEO OF MAYNILAD

“The way in which we delivered our outstanding results speaks to our focus and the investments we have made in our network, systems and people. ”

-Victorico R. Vargas, President and CEO 2010 was a year in which we overcame adversity to deliver record results in Billed Volume, Revenues and Core Income. Challenges came in the form of reduced water supply as a result of El Niño and delays in extending our primary pipe network to the Southern area of our concession due to the national and local elections held in May. The way in which we delivered our outstanding results speaks to our focus and the investments we have made in our network, systems and people.

Delivering World Class Service to Our Concession In response to El Niño, the Metropolitan Waterworks and Sewerage System (MWSS) reduced the water supplied to our concession for the year by seven percent. At its worst, during the month of July, the water levels at Angat Dam were the lowest in history and reduced our raw water allocation by 30 percent. We had to ration water and 117 barangays, representing close to 62,000 households, received water for only six hours or less each day.

Our response to the crisis focused on three main things. Firstly, we made sure to keep our customers informed of what was happening and the steps we were undertaking to alleviate the impact of the crisis on them. Secondly, we augmented our supply by purchasing surplus water from the East Zone Concessionaire, Manila Water, and mobilized transport, water tankers and fire trucks, to help us get water to the affected communities. Finally, we were able to ramp-up production at our Putatan Water Treatment Plant to 50 million liters of water per day (MLD) by August, which helped us provide water to 14,000 households in Muntinlupa, located in Southern Metro Manila.

The Putatan Water Treatment facility draws raw water from Laguna Lake. It is an important part of our plan to expand our service to the South and our strategy of reducing our reliance on Angat Dam. It is the first large scale alternative source of water, to Angat Dam, for Metro Manila.

In order to mitigate the risk of another El Niño this year, we plan to ensure the 100MLD capacity of Putatan is utilized to the fullest. Additionally, we completed in April 2011 the largest triangular reservoir, with a 23MLD storage capacity, in the Philippines. Its ability to store and conserve water during off-peak hours improves our ability to deliver the water when needed in times of water shortages.

22 2010 Annual Report “We continued to expand the reach of our We continued to expand the reach of our network by growing our network by growing our billed customer base billed customer base by 11 percent to 903,682. The environment by 11 percent to 903,682.” was not conducive to this exercise as there was an understandable reluctance from politicians to have their constituents face traffic congestion prior to voting. As such, our efforts to extend our primary pipe network to Cavite, a Southern province in our concession, were Financial Highlights (In Peso Millions) hampered and we had to focus our efforts on other parts of our 2009 2010 concession and limit large scale construction work. One big factor allowing us to proceed with our expansion to selected areas in the Revenues 10,619 12,050 South, Muntinlupa and Paranaque, was the Putatan Water Treatment Core EBITDA 6,970 7,907 Plant. This gave us the opportunity to service areas we otherwise Core Income 3,328 4,835 would not have been able to reach without digging up main roads, extending our primary pipe network and connecting them to Angat. Total Assets 38,179 42,590 Total Equity 3,762 7,944 With the decrease in water supply and the growth in customers, Contribution to MPIC 1,540 2,394 we had to rely heavily on our ability to reduce leakage and theft, collectively labelled Non-Revenue Water (NRW), to service our consumers. NRW dropped from 57 percent at the end of 2009 to 51 percent at the end of 2010. The big change from 2009 was Key Metrics the addition of the Sahara technology, which we licensed from the 2009 2010 Pressure Pipe Inspection Company of Canada. Sahara allowed us to Billed customers 814,645 903,682 survey 115 kilometers of primary pipes without having to stop the flow of water. From this technology alone, we were able to recover Service levels 73MLD of water. That, in addition to our existing NRW reduction 24 hour coverage 65% 71% efforts and more efficient pressure and supply management resulted in Over 7 psi 79% 86% recoveries of over 260MLD in 2010.

As a result, we were able to grow our Billed Volumes by seven percent to 374 million cubic meters (MCM) for 2010 along with improving service metrics such as percentage of the population receiving 24 hour service and a minimum seven pounds per square inch (PSI) water pressure.

Metro Pacific Investments Corporation 23 Operating and Financial Results The growth in billed volume was one of the primary drivers of the 13 percent increase in Revenues. Additional factors included upward tariff adjustments of 23 percent in May 2009 and four percent in January 2010. Core Income grew by a far larger rate of 45 percent due to lower amortization expense for Concession Assets which arose from the extension of the concession by 15 years to 2037.

Realizing Concession Returns Our ability to continue delivering returns going forward is based on how faithfully our concession agreement is adhered to. We rely on a review of the concession by the regulator every five years (or rate re-basing, for short) along with yearly and quarterly adjustments for inflation and foreign exchange fluctuations, respectively, to ensure we get an adequate return on our investment.

Our present government has made a commitment to honor agreements with the private sector as part of their efforts to encourage private sector participation in the development of the Country. Our recent 7.6 percent tariff adjustment in the face of wide-spread calls from various members of society to limit the price adjustments in infrastructure projects, although delayed by a month and a half to 16 February 2011, speaks to the administration’s commitment.

We have been actively selling our achievements and the scale of our investments to the public through regular press releases and discussions with our customers. The goal “The growth in billed volume is to increase public understanding of the effort and resources required to deliver the was one of the primary drivers level of service required by our regulator. We think a better understanding of that will of the 13 percent increase in lead to less knee jerk commentary on tariff adjustments. Revenues. Additional factors included upward tariff Meralco and Metro Pacific Tollways Corporation (MPTC), both sister companies, have adjustments of 23 percent in been doing this longer than we have, and we are actively working with them to make May 2009 and four percent our own efforts better. in January 2010. Core Looking Forward Income grew by a far larger 2011 is a very critical year for our concession as the operating metrics for this year rate of 45 percent due to will be used by MWSS during the negotiations in 2012 for the rate re-basing to be lower amortization expense implemented in 2013. for Concession Assets which arose from the extension of Several statistics are used by the regulator to monitor our progress but probably the the concession by 15 years to most important, from the regulator’s viewpoint, is NRW. The regulator has mandated 2037.” us to keep NRW to an average of 46 percent for the year, plus or minus two percent and we anticipate that we will be within this range.

24 2010 Annual Report STRATEGY We expect billed volume to increase by ten percent in 2011. The growth in billed volume is going to come primarily from adding eight percent Be the best clean water distribution more billed customers. The incremental customers are going to be coming and wastewater treatment from the South. We will be reaching those areas in two ways. One is by concessionaire in the Philippines: connecting some areas to our primary pipe network, which pipes in water sourced from Angat Dam, and the others to our Putatan Treatment Plant, Deliver world class service in our which we expect would maximize the usage of this facility to its 100MLD concession capacity.

Provide clean water and sewerage In line with our strategy to reduce our concession’s reliance on Angat services to all 9.3 million people Dam, we are working on two initiatives. Putatan is already the largest in the concession area alternative water source to Angat and we are laying the groundwork for its eventual expansion to 300MLD, which we expect to complete Work with state-of-the-art by 2013. We are bidding out the construction contract for the increase technology to improve our in capacity before this year ends. Additionally, we hope to be able to service delivery provide more clarity on our plans, in cooperation with Manila Water and MWSS, to develop additional sources of raw water. Our current thinking Mitigate the dependence on involves the development of smaller, 200MLD to 300MLD, geographically Angat Dam as the primary distributed projects to further minimize the risk of water disruption in the source of potable water in case of calamity events and spread the cost of development, including the Metro Manila potential tariff adjustments, over a longer period of time.

Realize contracted concession returns Staggering the development would also allow us to scale construction according to the demand for water. In order to do this effectively, we are Work with the regulator to updating our water demand forecasts through a comprehensive study that optimize the trade-off includes benchmarking with other water districts locally and abroad. between investments and In addition, we are hoping to export the skills we have developed tariff increases managing our concession to other areas in the Philippines. There are several bulk water supply opportunities in the provinces that we hope can Increase public awareness of the be developed into concessions that include clean water distribution and work and resources needed to sewerage in the agreements. deliver the services Expectations for 2011 Deploy expertise into other With all these initiatives and opportunities in front of us, we expect 2011 water projects in the country to be another good year. Revenues will grow in line with the 7.6 percent tariff increase implemented in February and the ten percent growth in billed volume. Core Income should follow a similar trajectory. Equally important, we are actively engaged in ensuring that we meet the operational metrics targeted for 2011 as these are critical to the rate rebasing negotiations scheduled in 2012.

Metro Pacific Investments Corporation 25 MPTC Metro Pacific Tollways Corporation

26 2010 Annual Report Average 159,882 Daily Traffic Average Kilometers 3.1 M Travelled of Total Operates 67% Lane kms Average Daily Traffic Average Kilometers Traveled

Class 3

Class 2

Class 1

326,098 296,551 298,574 12,244 11,338 259,544 12,298 10,525 26,055 548,280 543,825 24,308 501,820 24,846 23,485 475,576 2,245,552 121,583 2,168,519 2,145,356 109,670 107,836 114,749 1,927,725

2007 2008 2009 2010 2007 2008 2009 2010

Metro Pacific Investments Corporation 27 MESSAGE FROM THE PRESIDENT AND CEO OF MPTC

“...financial performance was better across the board with Core Income showing strong growth of 20 percent to P1.5 billion versus 2009. ” - Ramoncito S. Fernandez President and CEO

2010 was very successful. The North Luzon Expressway (NLEX) increased the number of vehicles on its roads by six percent in aggregate while keeping service levels world class. As a result, financial performance was better across the board with Core Income showing strong growth of 20 percent to P1.5 billion. We also continued to invest for the future by completing Segment 8.1, finishing the detailed engineering designs for Harbour Link, winning the concession for the Subic Clark Tarlac Expressway (SCTEX) and securing original proponent status on our unsolicited bid for the Connector Road.

Deploying Capital Where the Need is Greatest The Connector Road is a 13.5 kilometer project that was granted original proponent status by the Department of Public Works and Highways (DPWH) based on Metro Pacific Tollways Corporation’s (MPTC) unsolicited bid. It will connect the NLEX to the Southern toll road system via an elevated road over the tracks of the Philippine National Railways (PNR). This will reduce travel time, from one end of Metro Manila to the other, to 20 minutes while also (with the Harbour Link) allowing commercial traffic access to the Port Area of Manila 24 hours, seven days a week. We expect benefits to local tourism as well as improved efficiency for businesses. The routing of the road itself has several benefits: 1. Reduces impact to residents and landowners on the route by minimizing land appropriation; 2. Limits Government expenditures for right of way; and 3. Lowers traffic disruption for existing roads during construction.

Delivering Service We continued to upgrade our facilities and service levels for our motorists. Several projects were undertaken to maintain or improve our facilities with the completion of Segment 8.1, a new access point to NLEX from Mindanao Avenue, the biggest of these achievements.

Segment 8.1 is a 2.7 kilometer road that incorporates the largest cloverleaf in the country and allows motorists to safely enter or leave the tollway without stopping. It was budgeted at P2.1 billion and was completed on-time, starting operations on 5 June 2010, and below budget by approximately P200 million. Average daily vehicle entries for Segment 8.1 for the first seven months of its operations in 2010 were 5,118.

Other improvements include adding nine more CCTV systems, completion of Balintawak and Bocaue weighing sites, and relocation of illegal settlers. In addition, we stepped up training for patrol personnel and implemented a revised reward and recognition program. As a result, motorist complaints, reduced by five percent to 857, and commendations,

28 2010 Annual Report “Emphasizing safety allows increased by 62 percent to 1,132, had significant improvements for the year. All these, and us to confidently continue more, improved monitoring and road safety. As a result, traffic accidents per million of vehicle marketing for traffic growth. kilometres travelled dropped by three percent to 1,950 in 2010. Two initiatives contributed the Emphasizing safety allows us to confidently continue marketing for traffic growth. Two initiatives most to improving traffic on contributed the most to improving traffic on NLEX. In the first, we have been encouraging NLEX. In the first, we have been tourism by working with surrounding communities to publicize local destinations and festivals. encouraging tourism by working We supported 124 festivals through posters, billboards and sponsorship of major events. The with surrounding communities response has been felt through consistently higher traffic volume on weekends and increased to publicize local destinations entries by tourist buses. Secondly, we have been continuing to convince commercial vehicle and festivals. Secondly, we have operators to outfit their drivers with an Electronic Pass. We cite the experience of operators been continuing to convince who have seen an improvement in the turn-around time of their vehicles as the incentive for drivers to pocket cash and avoid our toll roads is removed. commercial vehicle operators to outfit their drivers with an Despite fuel price rises of 21 percent for unleaded and 18 percent for diesel during the year, Electronic Pass.” traffic growth was six percent for 2010 with Class 2 and Class 3 vehicles showing higher growth of seven percent and eight percent, respectively.

Operating and Financial Results The growth in traffic resulted in Revenue increasing by seven percent. Greater Core Income growth of 22 percent was due to non-toll revenues and prudent management of costs. Core income benefitted from an 11 percent increase in the stand-alone contribution of Tollways Management Corporation (TMC) to P331 million. This was due to higher Operation and Management revenues from additional services rendered for repairs and maintenance activities along with strict controls on costs and expenses.

As part of developing more synergies across the larger corporate group, approximately P50 million in revenues was received from sister company PLDT as payment for accessing fibre- optic cables.

Metro Pacific Investments Corporation 29 Financial Highlights (In Peso Millions) 2009 2010 Net revenues 5,489 5,858 Core EBITDA 3,313 3,692 Core Income 1,220 1,465 Total Assets 18,342 19,329 Total Equity 8,325 8,101 Contribution to MPIC 1,279 1,434

Operating and management costs were kept stable, even with the increase in traffic, as we implemented a new heavy maintenance program based on latest available technology. Operating expenses, on the other hand, grew by 19 percent as we booked increases in salaries, professional fees and expenses for the Connector Road unsolicited proposal – we consider bidding on new road projects a part of the core activities of the company. Our financing costs were slightly higher by two percent, as MNTC borrowed to fund the completion of Segment 8.1. The increase in interest expense was largely off-set by lower financing charges brought about by the conversion of our Asian Development Bank (ADB) loan into pesos in 2009.

Finally, Net Income grew by 71 percent as non-recurring losses for 2009 were higher due to provisions against input Value Added Tax (VAT) which had been accrued since 2005.

Realize Concession Contracted Returns Our interaction with local communities, governments and operators has provided one more benefit, aside from the growth in traffic. It has built up goodwill that we have been able to tap as we prepared for the tariff adjustment that took place on 1 January 2011.

We established a Toll Rate Management Plan at the beginning of 2010 to manage the objectives of successful implementation and public acceptance of the toll rate adjustment.

We communicated our achievements in managing and maintaining the NLEX to the Toll Regulatory Board (TRB), media, Non Government Organizations (NGOs), government officials and our road users. In addition, we intensified our focus on customer satisfaction with the establishment of a Customer Satisfaction Task Force. As a result, even with the impact of pending tariff adjustments being felt in the survey results for the fourth quarter, we maintained an average customer satisfaction rating of 8.27 out of ten for 2010 with the rating for the fourth quarter remaining above eight.

Through our efforts, our tariff was adjusted as scheduled, with motorists willing to pay on day one, most government officials supporting the increase, fair and balanced treatment from the media and, finally, support of the major transport groups.

Looking Forward 2011 will be a very busy year for us. We are preparing for the take over of SCTEX, working with the government for right-of-way acquisitions of Segment 9, and we expect the Swiss Auction for the Connector Road to be launched during the second half of the year.

30 2010 Annual Report STRATEGY The turn-over of SCTEX has been delayed by various issues but we remain confident of its Assemble the best portfolio of completion. The outlook for the road is good with kilometres travelled rising by 18 percent tolled roads in the Philippines from 2009 to 2010 and a tariff adjustment to P2.67/km on 1 January 2011 from P2.00/km. using the following guidelines: We are going to be spending approximately P300 million to integrate SCTEX to NLEX over the next 12 months from take over. This will improve convenience by reducing the number Deploy capital in areas where the of stops when traversing NLEX and SCTEX, which should facilitate traffic growth over time. need for efficient motoring is greatest With the completion of the detailed engineering studies for the first segment of Harbour Link Deliver world class service (Segment 9), we are now working with the Government for the acquisition of rights-of-way. Additionally, we have signed a Memorandum of Understanding with the Philippine National Be the most efficient operator in the Railways and North Luzon Railways Corporation to coordinate on the design of the second country half (Segment 10), of the Harbour Link, which is going to be elevated over their tracks.

Realize concession contracted returns For the Connector Road, we are working on detailed engineering and financial studies for submission to the Government by the end of the first half of the year. Terms of Reference from the Government for the Swiss Auction of the project should follow shortly thereafter.

Other projects that we are looking at include toll road projects in the provinces, on-going discussions with shareholders of both Skyway and SLEX and two of the Public Private Partnership projects announced by Government – CALA Expressway and NAIA 2 Expressway.

Expectations for 2011 The results for this year will be greatly influenced by three things. One is the final resolution of the imposition of VAT on toll fees. The second is the rapid increase in the cost of fuel as a result of the turmoil in the Middle East and North Africa. The third is the expiry of the Manila North Tollway Corporation’s (MNTC) tax holiday in 2010. While we cannot speculate on how the Supreme Court will rule on the VAT issue, the impact of a sustained increase in gas prices could be significant. Our prior experience shows growth levelling off in the face of rapid increases in fuel costs with traffic rebounding to historical growth rates as prices stabilize and consumers acclimatize to higher prices. The effect of Income Taxes on our bottom line numbers will be significant. While toll revenues should show double digit growth, even with higher gas prices, as SCTEX and the tariff increase at NLEX gets incorporated into results, Core Income should be relatively flat given the impact of Income Tax.

Metro Pacific Investments Corporation 31 BEACON ELECTRIC Beacon Electric Asset Holdings, Inc.

32 2010 Annual Report Metro Pacific Investments Corporation 33 MESSAGE FROM THE PRESIDENT AND CEO OF BEACON ELECTRIC

“Meralco’s performance in 2010 justified our substantial investment and bodes well for our strategy going forward. An 18 percent tariff adjustment coupled with a ten percent increase in electricity sales drove Distribution and Other Revenues and Core Income 25 percent and 74 percent higher than last year, respectively.” -Jose Ma. K. Lim President and CEO

Beacon Electric Asset Holdings, Inc. (Beacon) was established in March 2010 to hold the investments of PLDT Communications and Energy Ventures, Inc. (PCEV) and MPIC in Manila Electric Company (Meralco). MPIC is a 50 percent shareholder in the company, which in turn owns 34.8 percent of Meralco.

Effective control of Meralco was formalized through a Shareholders’ Agreement that allowed the remaining 6.1 percent and 6.6 percent held by PCEV and the Lopez Group, respectively, to be voted as a block with the stake held by Beacon.

Meralco is now led by Manuel V. Pangilinan, the Chairman of both MPIC and PCEV, as its President and CEO. Additional appointments to the posts of Chief Operating Officer, Human Resources Head and Customer Retail Services Head, among others, should accelerate the alignment of Meralco’s culture and customer service to the other members of the wider corporate group.

Meralco’s performance in 2010 justified our substantial investment and bodes well for our strategy going forward. A 22 percent tariff adjustment, from P1.22/kWh to P1.49/ kWh, coupled with a ten percent increase in electricity sales drove Distribution and Other Revenues and Core Income 25 percent and 74 percent higher than last year, respectively. Also in the past year, Meralco instituted a dividend policy wherein 50 percent of its recurring income would be declared as regular cash dividend. Additionally, following a “look- back policy”, the Board of Directors may choose to declare special dividends to increase the pay-out ratio.

Total dividends of P5.65/share were paid out in 2010. P3.15/share, paid out on 11 May 2010, represented a 50 percent pay-out on core earnings for 2009, while P2.50/share, paid out on 16 September 2010, represented a 50 percent pay-out on the first half earnings of Meralco for 2010.

With the improved cash flow generation at Meralco, we expect these dividends to continue even with the committed investments in the electricity distribution network and planned expenditures for power generation.

Realizing franchise contracted returns for Distribution business Meralco’s average distribution charge increased by 18 percent, from P1.22/kWh to 1.43/ kWh, last year. The tariff increase was part of a series of upward adjustments – P0.26/kWh

34 2010 Annual Report “Meralco’s cash flow has in May 2009, P0.27/kWh in April 2010 and P0.15/kWh in January 2011 – that is allowing improved with the tariff the company to recover from a period in which its tariff was insufficient to provide its adjustments in the past permitted regulated return. The increases did not come without challenges. Consumers, interest groups and other sectors all had their say in media and various evidentiary hearings two years and it now has a conducted by the Energy Regulatory Commission (ERC), Meralco’s regulator. cash surplus of P3.1 billion at the end of 2010. The Meralco is the name that consumers see on their bills and it gets a disproportionate sustained improvement in amount of the blame when the amount appearing on the bill increases. It is important its financial risk profile has to note that distribution charges made up only 16 percent, on average in 2010, of a been recognized by Standard consumer’s electricity bill. Getting that message out and keeping in contact with consumers & Poors via an upgrade to its are things that we have tried to improve last year – even opening a Twitter corporate long-term credit rating to B+ account – and we will continue to improve on this in 2011. with ‘stable’ outlook.” Entry into Power Generation Aside from managing consumer complaints through improved consumer awareness, we’re also aiming to reduce the largest component of the electricity bill - power generation, which was 58 percent of the electricity bill, on average, for 2010.

We believe we’re in a very good position to be a positive influence on the cost of generation in terms of providing power at competitive prices, while earning reasonable returns. We have advantages in forecasting electricity demand, financial flexibility, and the ability to offer off-take contracts.

Meralco’s ability to estimate the electricity demand curve in its franchise area has been developed through its dealings with the ERC. Meralco carries the market risk on electricity demand in its submissions to the regulator for the tariff setting in its distribution business. Meralco’s cash flow has improved with the tariff adjustments in the past two years and it now has a cash surplus of P3.1 billion at the end of 2010. The sustained improvement in its financial risk profile has been recognized by Standard & Poors via an upgrade to its long- term credit rating to B+ with ‘stable’ outlook.

Participation in Open Access and Retail Competition (OARC) as Local Retail Electricity Supplier (RES) OARC is one of the end goals of the Electric Power Industry Reform Act (EPIRA) and is meant to drive consumer empowerment. There are five pre-requisites that need to be met before OARC is declared by the ERC. Once it is declared, consumers with a monthly average peak demand of at least 1MW for the preceding 12 months shall become a

Metro Pacific Investments Corporation 35 “Being the largest electricity contestable market and shall have the right to directly contract with power producers or franchise by far, distributing RESs for their electricity consumption needs. The ERC envisions that by the end of seven approximately 60 percent of years from the start of OARC, all consumers down to the household demand level will be able to participate in the program. On the assumption that the five prerequisites to the total electricity consumed OARC under the EPIRA have been met, and based on the indicative schedules of the ERC in the Philippines, it has built up to complete the necessary infrastructure and rules to ensure a smooth implementation of an operational infrastructure OARC, the earliest start of OARC is on January 2012. that has billing, collection and customer service experience.” At present, Meralco passes on and collects from all consumers the generation costs of power generators. It makes no margin on this activity. However, as Meralco embarks on a Retail Electricity Supply business as Local RES upon OARC, it will have the opportunity to earn from power supply sales to contestable customers. Meralco is well positioned to excel in this field as it has established competencies and inherent advantages such as its STRATEGY financial strength and long experience in power retailing activities. Provide strategic oversight and guidance to Meralco as Actively Facilitate Cooperation Between Other Companies in the Group it pursues the following: We’ve enumerated a lot of opportunities for Meralco and there are more that we are working on as we integrate the company into the wider group that it is now a part of. We Realizing franchise contracted have discussions in place with PLDT, Maynilad and others that aim to realize synergies in returns for the Distribution billing, new business development and others that are in various stages of development. business We will share more details as these initiatives gain more traction and momentum within the organization. Entry into Power Generation Looking Forward Participation in Retail For the Distribution business, the coming months are critical as we continue to await the Electricity Sales decision of the ERC for a reasonable tariff that would justify the associated investment and operational expense schedules for the third regulatory period starting on 1 July 2011 Actively facilitate cooperation and ending 30 June 2015. There are various issues that still need to be addressed, including between companies in the wider the amount of under-recoveries incurred in the second regulatory period, and the levels group (i.e., PLDT, MPIC, Maynilad, of capital and operational expenditures needed to meet the regulatory and consumer requirements for the 3rd regulatory period. Our current plans for power generation involve etc.) construction of an aero derivative peaking power plant by the fourth quarter of 2012 with a capacity of 150MW. We are also in the final stages of negotiations for an investment, in partnership with an existing power generator for up to 600MW of coal fired base load plants to be on-line by 2015. We are looking at further opportunities in the space with

36 2010 Annual Report Financial Highlights (In Peso Millions) a view towards getting to a minimum of 1,200MW in generating 2009 2010 capacity in the medium term. Meralco has more than sufficient debt capacity to fund its entry into power generation while maintaining its Distribution and other revenues 39,439 49,775 dividend policy. Core EBITDA 16,007 24,478 Core Income 7,003 12,155 Finally, our Local RES set-up team has been continuing to prepare for open access by expanding their knowledge base. They are consulting Total Assets 172,129 178,968 with existing players in markets where this has been successfully Total Equity 61,146 63,196 implemented. Contribution to MPIC 212 1,486 At Beacon itself, we have adopted a fairly conservative financial structure. It has P55 billion in equity and only P16 billion in debt. Key Metrics The debt is collateralized by its holdings in Meralco shares, valued at P73 billion as of the end of 2010. The structure gives Beacon 2009 2010 a relatively large cushion to absorb negative swings in the price Number of Customers 4,701 4,847 of Meralco and some capacity for additional borrowing in case it (in thousands) decides to consolidate more shares. Interruption Frequency Rate 6.01 4.73 (Number of times) Expectations for 2011 Returns from power generation, Retail Electricity Supply business Cumulative Interruption Time 4.17 3.30 upon OARC, and synergies from the wider corporate group will (Number of hours) take time to develop. As such, the core income for Meralco, at least for 2011, will still rest primarily on the distribution business.

Given the timetable of the release by the ERC of the Final Determination, the document that will lay out the tariffs and obligations of Meralco for the third regulatory period, we expect to be able to provide guidance on our Revenue and Core Income expectations by the second quarter earnings release.

We are building a solid base for future revenue growth at Meralco. The results in the medium term will reflect the investments in new initiatives that we are making today.

Metro Pacific Investments Corporation 37 HOSPITALS

38 2010 Annual Report Metro Pacific Investments Corporation 39 MESSAGE FROM THE PRESIDENT AND CEO OF THE HOSPITALS GROUP

“The last three years saw the Hospital Group, particularly Makati Medical Center, Cardinal Santos Medical Center and Davao Doctors Hospital, investing heavily in the expansion and upgrade of its facilities and systems. With total Capex spend in the amount of P3.6 billion during this period, we have positioned our hospitals at the forefront of healthcare management.”

-Augusto P. Palisoc Jr. President and CEO

As with the other members of MPIC’s investee companies, we have laid out our strategy as a benchmark that our parent’s shareholders can use to determine how we have done and, more importantly, where we would like to go.

Assemble the Best Portfolio of Hospitals As part of that journey, we made significant inroads towards the goal of expanding our network by adding two more hospitals to our network this year: Riverside Medical Center and Our Lady of Lourdes Hospital. These new additions have increased our bed capacity by 569 beds to 1,599 beds. More importantly, we have extended our reach to the Visayas region, making us now truly a “nationwide” network, and widened our footprint in Metro Manila. Riverside is the largest and most prestigious hospital in Bacolod while Our Lady of Lourdes has a long track record in obstetrics and is our first hospital in the City of Manila. We expect to upgrade the infrastructure, streamline operations and improve service delivery of these hospitals. We have started our efforts by appointing new Presidents to lead the transformation of these institutions.

Financial Performance The last three years saw the Hospital Group, particularly Makati Medical Center, Cardinal Santos Medical Center and Davao Doctors Hospital, investing heavily in the expansion and upgrade of its facilities and systems. With total Capex spend in the amount of P3.6 billion during this period, we have positioned our hospitals at the forefront of healthcare management. While there is still a lot of work to be done, we have already seen some improvements in our revenues. However, these were still outpaced by the increase in cost of medical services and the additional depreciation charges arising from our investments in infrastructure and equipment. In addition, our schools have continued to suffer from the prolonged decline in demand for nurses.

40 2010 Annual Report Consolidated Financial Highlights Consolidated Revenues grew by 17 percent but Core Income dropped by 10 percent. (In Peso Millions) Revenue growth was primarily driven by the addition of Riverside and Our Lady of 2009 2010 Lourdes into the group for the first time. On a like-for-like basis, Revenues grew by six percent and Core Income dropped by 17 percent. The decline in Core Income was Revenues 5,959 6,989 mainly due to the performance of the schools. EBITDA 1,252 1,344 Core Income 528 474 All hospitals reported better revenues and we believe there’s still a lot of room for Contribution to MPIC 174 172 growth. Revenues do not fully reflect the improvements we have made at each hospital – new and upgraded facilities that are expected to increase patronage and generate higher business in due course. Capex spent, however, carry with it depreciation expense which in 2010 increased by 37 percent, and investment in personnel expenses which for the year grew by 21 percent. As a result, Core Income from the hospitals improved by only one percent in spite of the 17 percent growth in Revenues. We have anticipated that it takes time to build the patient traffic and revenue from new investments. That being said, however, we have made it a point to focus on marketing our new and improved services at Makati Med, Cardinal Santos and Davao Doctors for 2011. We look forward to updating you with the results of our efforts next year. Key Metrics 2009 2010 Our schools continue to be a significant drag on revenue and earnings growth. The schools, in aggregate, reported a decrease in Revenues of only three percent aided by Total beds available 987 1,599 the addition of Riverside College, and a decrease in Core Income to break-even levels Number of patients* from P59 million the prior year. Without RCI, same school revenues decreased by 29 Out-patient 1,046,702 996,202 percent. To help us rehabilitate these institutions, we are in the process of installing In-patient 99,126 97,991 new management particularly in our provincial colleges and have initiated joint venture discussions with education-focused conglomerates. While we do not view education as Number of enrollees* 6,099 4,545 a core business, they continue to be a good source of trained nursing and medical staff * Full year statistics and we look forward to working with a partner to rejuvenate their performance.

Metro Pacific Investments Corporation 41 “...we have been mostly Looking Forward focused on improving In the year to come, we will continue to evaluate additions to our network. Negotiations operational efficiencies and for the purchase of a significant stake or, similar to the set-up of Cardinal Santos and Our Lady of Lourdes, long-term operating contracts take a significant amount of time and effort. investing in infrastructure and As such, we always have ongoing discussions with several prospects at any one time and we equipment for each hospital will be issuing updates as we make progress. on a stand-alone basis. Moving forward, the focus As we’ve acquired hospitals, we have been mostly focused on improving operational has to change for the older efficiencies and investing in infrastructure and equipment for each hospital on a stand- companies in our portfolio alone basis. Moving forward, the focus will change for the older companies in our portfolio to taking advantage of our to start reaping the rewards of our upgrades by growing revenues and moving towards upgrades, growing revenues managing our hospitals as an integrated whole. As I have said previously, the major thrust for this year will be in raising awareness for both doctors and patients of the improvements and managing the hospitals in Makati Med, Cardinal Santos and Davao Doctors. Additionally, in order to more as an integrated whole.” effectively realize cost synergies across the hospitals, we are working to establish group procurement protocols and procedures in consultation with hospital administrators and medical staff. For both Riverside and Our Lady of Lourdes, this year will be a continuation of efforts to improve operational efficiencies while beginning the implementation of our investment plans.

As a result of all above efforts, we expect double digit growth in both Revenues and Core Income for 2011.

42 2010 Annual Report STRATEGY

Assemble the best portfolio of hospitals using the guidelines below:

Tertiary hospitals of at least 100 beds in the provinces and 200 beds in the Metro Manila area

Excellent reputation for medical service

Would benefit from our ability to provide capital for expansion projects and professional management for operational and financial functions

As part of this we would like to be able to leverage the potential synergies brought on by scale through:

Improving margins through economies of scale in backroom operations and purchasing

Sharing of expertise and better utilization of medical equipment with greater cooperation amongst the hospitals

Using the greater aggregate patient throughput of our hospitals to establish “Centres of Excellence” in certain medical fields to allow us to differentiate our standard of patient care

Metro Pacific Investments Corporation 43 Board of Directors

Manuel V. Pangilinan Jose Ma. K. Lim David J. Nicol Chairman President and Chief Executive Officer Chief Financial Officer

44 2010 Annual Report Edward A. Tortorici Robert C. Nicholson Ray C. Espinosa Executive Director Executive Director Director and Executive Advisor

Edward S. Go Chief Justice Artemio V. Lydia Balatbat-Echauz Independent Director Panganiban Independent Director Independent Director

Metro Pacific Investments Corporation 45 Ramoncito S. Fernandez Augusto P. Palisoc Jr. Amado R. Santiago III Executive Director Executive Director Director

Alfred A. Xerez-Burgos, Jr. Antonio A. Picazo Director Director, Corporate Secretary

46 2010 Annual Report Manuel V. Pangilinan Jose Ma. K. Lim Manuel V. Pangilinan, 64 years old, assumed chairmanship of the Board Our President & Chief Executive Officer, Jose Ma. K. Lim joined Fort of Metro Pacific Investments Corporation in March 2006 and remain as Bonifacio Development Corporation (FBDC) in 1995 as Treasury Vice such up to the present. He was appointed as Chairman of the Board of President and was later on appointed as its Chief Finance Officer. With the Philippine Long Distance Telephone Company (PLDT) after serving as its divestment in FBDC, Mr. Lim assumed the position of Group Vice President President and Chief Executive Officer from November 1998 to February and Chief Finance Officer of FBDC’s then parent company, Metro Pacific 2004 and became Chairman of the Board of PLDT Communications and Corporation, from 2001 to 2003. He was appointed President and CEO of Energy Ventures Inc. (PCEV, formerly Piltel) on 3rd November 2004. He MPC in June 2003 where he continues to serve as Director to this day. also holds chairmanship in Smart Communications, Inc., ePLDT, Inc., Landco Pacific Corporation, Maynilad Water Services Corporation, Philex Mining In 2006, Metro Pacific Investments Corporation (MPIC) was established Corporation, Metro Pacific Tollways Corporation, Manila North Tollways and Mr. Lim was appointed as President and CEO, a position he continues Corporation, Medical Doctors, Inc. (Makati Medical Center), Colinas Verdes, to hold. He is also currently a Director in the following MPIC subsidiary Inc. (Cardinal Santos Medical Center) and Davao Doctors, Inc. He is also and/or affiliate companies: Beacon Electric Asset Holdings, Inc, Metro a director and the President and Chief Executive Officer of Manila Electric Pacific Tollways Corporation, Manila North Tollways Corporation, Tollways Company (Meralco). Management Corporation, Maynilad Water Services, Inc., Medical Doctors, Inc. (owner and operator of the Makati Medical Center), Davao Doctors Mr. Pangilinan founded First Pacific Company, Limited in 1981 and served as Hospital (Clinica Hilario) Inc., and Landco Pacific Corporation ) (including its Managing Director until 1999. He was appointed as Executive Chairman several Landco subsidiaries). Mr. Lim likewise serves as President of Metro until June 2003, when he was named CEO and Managing Director. He Strategic Infrastructure Holdings, Inc., which holds a minority ownership also holds the position of President Commissioner of P.T. Indofood Sukses interest in Citra Metro Manila Tollways Corp. (Skyway). Makmur Tbk, the largest food company in Indonesia. He is active in the Management Association of the Philippines and has Outside the First Pacific Group, Mr. Pangilinan was a member of the served as Vice-Chair of the Corporate Governance Committee from 2007 Board of Overseers of the Wharton School of Finance & Commerce, to 2009. Mr. Lim graduated from the Ateneo de Manila University, with University of Pennsylvania. He is Chairman of the Board of Trustees of San a Bachelor of Arts degree in Philosophy. He received his MBA degree in Beda College. He also serves as Chairman of PLDT-Smart Foundation, 1978 from the Asian Institute of Management. Inc. and the Philippine Business for Social Progress. He also serves as Vice Chairman of the Foundation for Crime Prevention, a private sector group David J. Nicol organized to assist the government with crime prevention, and a member Mr. Nicol joined MPIC as Chief Financial Officer on the 6th May 2010 and of the Board of Trustees of Caritas Manila and Radio Veritas Global is responsible for leading and developing MPIC’s overall financial strategy, its Broadcasting Systems, Inc. In February 2007, he was named the President systems and processes, and treasury function. of the Samahang Basketball ng Pilipinas (SBP), a newly formed national sport association for basketball, and effective January 2009, he assumed the Mr. Nicol’s expertise comes from a consistent record of building chairmanship of the Amateur Boxing Association of the Philippines (ABAP), shareholder value through operational improvement, restructuring, mergers the governing body of the amateur boxers in the country. and acquisitions and entering new markets in a wide range of businesses in listed and PE backed environments. His 4 -year appointment as Chief Mr. Pangilinan has received numerous prestigious awards including the Ten Financial Officer and subsequent 4 years as Group Chief Executive Outstanding Young Men of the Philippines (TOYM) Award for International Officer of Berli Jucker Plc., an affiliate of First Pacific Company Ltd., drove Finance (1983), the Presidential Pamana ng Pilipino Award by the Office of shareholder value growth and steered the company through the South-East the President of the Philippines (1996), Honorary Doctorate in Humanities Asian Financial crisis. by the San Beda College (2002), Best CEO in the Philippines by Institutional Investor (2004), CEO of the Year (Philippines) by Biz News Asia (2004), Prior to joining MPIC, Mr. Nicol was Director and CFO of Reconomy People of the Year by People Asia Magazine (2004), Distinguished World (Holdings) Ltd. where he led the acquisition of nine businesses in UK’s Class Businessman Award by the Association of Makati Industries, Inc. waste management and recycling sector. Prior to this, he held positions as (2005), Management Man of the Year by the Management Association of President and CEO of Sirva, Inc. for Europe and Asia Pacific and Interim the Philippines (2005), Order of Lakandula (Rank of a Komandante) by the CEO of Pinnacle Regeneration Group, a leading privately owned social Office of the President of the Philippines (2006), and Honorary Doctorate housing infrastructure manager and refurbishment provider. in Humanities by the Xavier University (2007). He was voted as Corporate Executive Officer of the Year (Philippines) and Best Executive (Philippines) at the 2007 and 2008 Best-Managed Companies and Corporate Governance Polls conducted by Asia Money.

Mr. Pangilinan graduated cum laude from the Ateneo de Manila University, with a Bachelor of Arts Degree in Economics. He received his Master’s degree in Business Administration from Wharton School of Finance and Commerce, University of Pennsylvania, Philadelphia.

Metro Pacific Investments Corporation 47 Edward A. Tortorici Ray C. Espinosa Age 71, born in the United States. Mr. Tortorici received a Bachelor of He is the President and Chief Executive Officer of Mediaquest Holdings, Science from New York University and a Master of Science from Fairfield Inc., ABC Development Corporation (TV5), Mediascape, Inc. (Cignal TV), University. Mr. Tortorici has served in a variety of senior and executive Nation Broadcasting Corporation, and other subsidiaries of Mediaquest management positions, including Corporate Vice President for Crocker Holdings Inc. He is also a member of the Board of Trustees of the PLDT Bank and Managing Director positions at Olivetti Corporation of America Beneficial Trust Fund. He is also a director of Philippine Long Distance and Fairchild Semiconductor Corporation. Telephone Company, Manila Electric Company and Meralco PowerGen Corporation, an Independent Director of Lepanto Consolidated Mining Mr. Tortorici subsequently founded EA Edwards Associates, an international Corporation, and the Vice Chairman of Philweb Corporation. He also management and consulting firm specializing in strategy formulation and serves as General Counsel of Manila Electric Company and Head of productivity improvement with offices in USA, Europe and Middle East. Regulatory Affairs and Policy of Philippine Long Distance Telephone Company. In 1987, Mr. Tortorici joined First Pacific as an Executive Director for strategic planning and corporate restructuring, and launched the Group's Prior to joining the PLDT group in 2000, Mr. Espinosa was a law partner entry into the telecommunications and technology sectors. Presently, in SyCip Salazar Hernandez & Gatmaitan from Dec. 1982 to June 2000, he oversees corporate strategy for First Pacific and guides the Group's the largest law firm in the Philippines, and was a member of the firm’s strategic planning and corporate development activities. Mr. Tortorici serves Executive Committee. He was a law lecturer in Ateneo de Manila School of as a Commissioner of PT Indofood Sukses Makmur Tbk and as Director Law from 1983 to 1985 and in 1989. of Metro Pacific Investments Corporation, Philex Mining Corporation, Maynilad Water Services, Inc., Medical Doctors, Inc., Landco Pacific Mr. Espinosa finished his Bachelor of Laws degree at the Ateneo de Manila Corporation, FEC Resources Inc. of Canada and AIM-listed Forum Energy University (and graduated Salutatorian of his graduating class) and his Plc. Mr. Tortorici serves as a Trustee of the Asia Society Philippines and is Master of Laws degree at the University of Michigan Law School. After on the Board of Advisors of the Southeast Asia Division of the Center finishing his Master of Laws degree, he worked as a foreign associate in for Strategic and International Studies, a Washington D.C. non-partisan Covington & Burling from Sept 1987 to Aug 1988, the largest law firm in think tank. He also serves as a Commissioner of the U.S. ASEAN Strategy Washington, D.C., USA. He placed first in the Philippine Bar examinations Commission. of 1982.

Robert C. Nicholson Age 55, born in Scotland. Mr. Nicholson is a graduate of the University of Edward S. Go (Independent Director) Kent, qualified as a solicitor in England and Wales and in Hong Kong. He is Edward S. Go retired in 2003 as Chairman & CEO of United Coconut an Executive Chairman of Forum Energy Plc and an Independent Non- Planters Bank (UCPB). Currently, he serves as Chairman of the Board of executive Director of India Capital Growth Fund Limited, both of which are Hyundai Asia Resources, Inc. and of ASA Philippine Foundation. He is an listed on the AIM market of the London Stock Exchange. Mr. Nicholson is Independent Director of Metro Pacific Investments Corporation, Metro also an Independent Non-Executive Director of QPL International Holdings Pacific Corporation, Pilipino Telephone Corporation and Filipino Fund Limited and Pacific Basin Shipping Limited, serves as a Commissioner Inc. He is also a director of Laperal Builders, Inc. He has over 40 years of PT Indofood Sukses Makmur Tbk, and is a Director of Metro Pacific of management experience in banking and finance, starting as Executive Investments Corporation, Philex Mining Corporation and Pitkin Petroleum Trainee with Citibank N.A. and became President of Philippine Bank of Plc. Previously, he was a senior partner of Richards Butler from 1985 to Communications in 1974 and Chairman and Chief Executive Officer of 2001 where he established the corporate and commercial department, Chinabank in 1985. Mr. Go is also Chairman of the Audit Committee and was also a senior advisor to the board of directors of PCCW Limited of MPIC and PILTEL. He obtained his Bachelor of Arts Degree, magna between August 2001 and September 2003. He has wide experience in cum laude, and underwent postgraduate studies at the Ateneo de Manila corporate finance and cross-border transactions, including mergers and University, where he currently serves as member of the Board of Trustees. acquisitions, regional telecommunications, debt and equity capital markets, corporate reorganizations and privatization in China. Mr. Nicholson joined Chief Justice Artemio V. Panganiban First Pacific’s Board in 2003 (Independent Director) A consistent scholar, Chief Justice Panganiban obtained his Associate in Arts “With Highest Honors” and later his Bachelor of Laws with “Cum Laude” and “Most Outstanding Student” honors. He founded and headed the National Union of Students of the Philippines. He is also the recipient of several honorary doctoral degrees and placed sixth among 4,200 candidates who took the 1960 bar examinations.

In 1995, he was appointed Justice of the Supreme Court, and in 2005, Chief Justice of the Philippines. On his retirement on December 7, 2006, his colleagues acclaimed him unanimously as the “Renaissance Jurist of the 21st Century.” Aside from being a prodigious decision writer, he also authored eleven books while serving on the highest court of the land. His judicial philosophy is “Liberty and Prosperity Under the Rule of Law.” A much sought-after independent director and adviser of business firms, he also writes a column in the Philippine Daily Inquirer. Prior to entering public service, Chief Justice Panganiban was a prominent practicing lawyer, law professor, business entrepreneur, civic leader and Catholic lay worker. He was the only Filipino appointed by the late Pope John Paul II to be a member of the Vatican-based Pontifical Council for the Laity for the 1996- 2001 term.

48 2010 Annual Report Lydia Balatbat-Echauz (Independent Director) Amado R. Santiago III Lydia Echauz is a distinguished member of the Academe. She is currently Amado R. Santiago III is the Managing Partner of the Santiago & Santiago the President of Far Eastern University, FEU-East Asia College and FEU- Law Offices and is engaged in the general practice of law. He specializes FERN College. Prior to joining FEU in 2002, she served as the Dean of De in corporate litigation, which includes corporate rehabilitation proceedings La Salle University Graduate School of Business, Associate Director of the under the Securities and Exchange Commission Rules on Corporate MBA program of the Ateneo Graduate School of Business (GSBAA) and Recovery, Interim Rules of Procedure on Corporate Rehabilitation and the also served as an Associate Professor of the University of the East, College Rules of Procedure on Corporate Rehabilitation. He is also engaged in of Business Administration. She is currently a member of the Board of the practice of taxation law. He acts as director, corporate secretary, and/ Trustees of various Foundations and served as President of the Association or corporate counsel of various corporate clients. He graduated from the of Southeast Asian Institutions of Higher Learning, RP Council from 2006 Ateneo de Manila School of Law in 1992 and passed the Philippines Bar to 2008. She was awarded Most Outstanding Alumna of Ateneo GSBAA in Examinations given in the same year. He received his degree of Bachelor 1992 and DLSU GSB in 2003. of Science in Legal Management in 1988 from the Ateneo de Manila University. Ramoncito S. Fernandez Ramoncito S. Fernandez was appointed as President & Chief Executive Alfred A. Xerez-Burgos, Jr. Officer of Metro Pacific Tollways Corp. (MPTC) and Tollways Management Alfred A. Xerez-Burgos, Jr. is presently Vice Chairman and Executive Corporation (TMC) under Metro Pacific Investments Corporation Director of Landco Pacific Corporation (position assumed as of March (MPIC) effective in January 2009. He holds directorships in Metro Pacific 2009). He assumed the position of President and CEO and Chairman of Investments Corporation (MPIC), Metro Pacific Tollways Corporation the Executive Committee of Landco Pacific Corporation in 1990 after (MPTC), Tollways Management Corporation (TMC), Manila North Tollways previously working with a major property company for nearly 20 years. Corporation (MNTC), Smart Communications, Inc. and some subsidiaries He is President of the Muntinlupa Development Foundation, a 20 year of PLDT including PLDT Subic Telecom, Inc., PLDT Clark Telecom, Inc., old Foundation helping the poor people of Muntinlupa. He is also the PLDT Global Corporation and TAHANAN. President of Club Punta Fuego, Inc., a world class development in Nasugbu, Batangas as well as Chairman and CEO of Forest Lake Development Inc. He is the 2009 PISM GAWAD SINOP Awardee, an award conferred by and Chairman of Philippine Red Cross, Rizal Chapter, the largest Red Cross the Foundation of the Society of Fellows in Supply Management and the chapter in the country. He graduated with Distinction, Master in Business Philippine Institute for Supply Management to outstanding achievers in the Management, from the Asian Institute of Management in 1971. Prior to this, field of supply management. he graduated among the top 25 percent of his class (Bachelor of Science in Mechanical Engineering) from the De La Salle University in 1969. Mr. Fernandez has varied experiences in international carrier business, administration and materials management, industrial marketing and sales. Antonio A. Picazo He was the Head of International and Carrier Business of PLDT and Antonio A. Picazo is currently the Managing Partner of Picazo Buyco Tan Smart and Global Access Group of Smart from 2007 until December 31, Fider & Santos Law Offices. He serves as a Director and/or Corporate 2008. He was the Administration and Materials Management Head of Secretary of several large Philippine corporations, including Metro Pacific Smart from 2000, and of PLDT from 2004, until December 31, 2007. He Investments Corporation, a position he has held since 2006. Mr. Picazo was was the Executive Vice President in charge of marketing, sales and logistics born in Manila in August of 1941 and obtained his Bachelor of Laws degree of Starpack Philippines, Inc. until June 2000. Mr. Fernandez obtained his from the University of the Philippines. He passed the 1964 Philippine Bar Bachelor of Science Degree in Industrial Management Engineering from the Examinations with the 5th highest rating. In 1967, he obtained a Master of De La Salle University and Master’s Degree in Business Management from Laws degree, Major in Taxation from the University of Pennsylvania. He is the Asian Institute of Management. currently also a member of the Board of the PGH Medical Foundation and of the Haribon Foundation, as well as the Market Governance Board of the Philippine Dealing and Exchange Corporation (PDEX). Augusto P. Palisoc Jr. Augusto P. Palisoc Jr. has been with the First Pacific group of companies for over 27 years. He is currently an Executive Director of Metro Pacific Investments Corporation (MPIC) and is the Chief Executive Officer of the MPIC Hospital Group. He is a Director of Medical Doctors, Inc. (owner and operator of the Makati Medical Center), Makati Medical Center College of Nursing Inc., Colinas Verdes Hospital Managers Corporation (operator of the Cardinal Santos Medical Center), East Manila Hospital Managers Corporation (operator of Lourdes Hospital), Riverside Medical Center Inc. and Riverside College Inc. in Bacolod, Davao Doctors Hospital (Clinica Hilario) Inc., Davao Doctors College, Inc., Lepanto Consolidated Mining Company, and Pacific Plaza Towers Condominium Corporation. Prior to joining MPIC, he was the Executive Vice President of Berli Jucker Public Company Limited in Thailand from 1998 to 2001. Mr. Palisoc served as President and CEO of Steniel Manufacturing Corporation in the Philippines from 1997 to 1998. He has held various positions within First Pacific as Group Vice President for Corporate Development of First Pacific Company Limited in Hong Kong, and Group Managing Director of FP Marketing (Malaysia) Sdn. Bhd. in Malaysia. Before he joined First Pacific in 1983, he was Vice President of Monte Real Investors, Inc. in the Philippines. Mr. Palisoc earned his Bachelor of Arts Degree, Major in Economics (with Honors) from De La Salle University, and his Master’s in Business Management (MBM) Degree from the Asian Institute of Management. Mr. Palisoc was born in January 1958. Metro Pacific Investments Corporation 49 Senior Executives

Jose Noel C. de la Paz Maida B. Bruce Robin Michael L. Velasco Director for Business Development Vice President Vice President Hospital Group Group Controller Human Resources

Melody M. del Rosario Albert W. L. Pulido Vice President Vice President Media and Corporate Communications Investor Relations

50 2010 Annual Report Ferdinand G. Inacay Reymundo S. Cochangco CRIS Noel E. Torres Vice President Chief Financial Officer Assistant Vice President Business Development Hospital Group Business Development

Atty. Jose Jesus G. Laurel Vice President Legal

Metro Pacific Investments Corporation 51 Jose Noel C. de la Paz Albert W. L. Pulido As MPIC’s Director for Corporate Development, Jose Noel C. de la Paz joined Prior to joining the Company in July of 2009 as the Head of Investor Relations, MPIC in 2007 and is responsible for the acquisition and investment initiatives on Albert Pulido spent his whole career in the field of finance. From 2002 to 2008, the healthcare sector, beginning with the identification of projects, preliminary Albert was with the New York office of Lehman Brothers (Now Barclays Capital evaluation, due diligence, investment structuring, negotiations and execution, up to US) in various capacities related to Relationship Management, Capital Budgeting, participation in management. In 2008, he deal managed the takeover of Cardinal Financial Planning, Sales and Business Development. He also worked in the Santos Medical Center, was a key member of its interim operating management, Philippines for a foreign bank with their business development group focusing on and has been serving as its board member in 2009. As part of the MPIC healthcare originating Corporate Clients. team, he helps oversee the management of the other hospitals, Makati Medical Center and Davao Doctors Hospital. He has over 20 years of investment banking Ferdinand G. Inacay experience, arranging debt and equity financings and rendering financial advisory Ferdinand G. Inacay joined MPIC in November 2009 as the Chief Operating Officer services. He was the Philippine Deputy Country Head for New York-based Bankers for Manila North Harbour Port, Incorporated until June of 2010. In this position, Trust Company that originated and lead managed global bond offerings and bank Mr. Inacay was responsible for overseeing the improvement of operations at the loan syndications, and worked on advisory engagements for major project financings North Harbor and protecting MPIC’s interest in the JV company. In July 2010, he in the country. He brings this Corporate Finance experience to MPIC in arranging was absorbed by MPIC as head of business development and special projects. His the bank loan syndication and equity rights offering of Makati Medical Center in assignment is to undertake operations evaluation and analysis, formulate operational 2009. take-over strategies that include management interface on the target companies. He has over 20 years experience in transport, logistics, ports and shipping Maida B. Bruce industry. Prior to joining MPIC, he was with Asian Terminals, Incorporated for 14 Maida B. Bruce joined MPIC in November 2009 as Group Controller. In this years managing international ports and inter-island passenger terminals. He was position, Maida is responsible for strengthening and overseeing MPIC’s Financial responsible for developing and implementing turn-around strategies for various Reporting, Budgeting & Forecasting and System enhancements processes. Prior negative performing businesses of his previous company. Mr. Inacay was a Director to joining MPIC, Maida held a Chief Financial Officer role with the top real estate of the Philippine Corn Board, an organization established under the office of the company in the Philippines. She was responsible for overseeing the financials of President of the Philippines, whose task was to develop a modern food logistics Ayala Land’s Strategic Landbank Management Group including its other subsidiaries. chain and transport network from Mindanao to Luzon. She also has more than thirteen years of extensive experience in the banking industry under Citigroup Australia and Manila. She was Vice President for Special Reymundo S. Cochangco Purpose Vehicles under the Financial Control Department of Citigroup Australia Reymundo S. Cochangco is the Company’s CFO for Hospital Group. He is also and has handled several roles and responsibilities also in Citibank Manila. She was the CFO of Mabuhay Satellite Corporation, a subsidiary of PLDT. He has over part of a pioneer team that implemented, supported and continuously upgraded a 20 years of experience in finance, treasury, controllership, audit and business proprietary global financial reporting system to multiple countries in the Asia-Pacific operations and held various senior positions within the Metro Pacific and PLDT region. Groups such as CFO of Colinas Verdes Hospital Managers Corporation, VP for Corporate Development of Fort Bonifacio Development Corporation, CFO of SPI Robin Michael L. Velasco Technologies, Inc., President and CFO of Stradcom Corporation, and Comptroller Robin Michael L. Velasco joined the company in July 2009 as Vice President for & Treasurer of Philippine Cocoa Corporation. He also worked at SGV & Co. He Human Resources. In this role, he ensures that MPIC and all its subsidiaries and holds a Bachelor of Science degree in Business Administration from the Philippine future acquisitions have the right People Strategies to support the growth required School of Business Administration and is a Certified Public Accountant. to achieve business plans. He has also strengthened the Performance Management and Rewards system of MPIC to ensure a culture of performance driven CRIS Noel E. Torres meritocracy. Mr. Velasco brings with him 19 years of management experience Noel Torres joined MPIC in January 2011. In his role, Mr. Torres is responsible garnered from Global Multinationals such as Procter & Gamble, Johnson & Johnson for originating and executing business development projects at the MPIC level and Synovate. He has been exposed to various facets of management which and among its respective subsidiaries and affiliates. Prior to MPIC, he worked in includes Finance, Supply Chain, Manufacturing, Research & Development, Technical investment banking in San Francisco where he was involved in a variety of debt Services, Market Research, Quality Assurance and Human Resources Management. and equity financing transactions as well as M&A. Mr. Torres has an MBA in Finance He spent the last five years of his career in Singapore as HR Director for Asia from The Wharton School at the University of Pennsylvania and a bachelor’s degree Pacific, Talent Management for Johnson & Johnson, and then as HR Director for Asia in engineering from the University of the Philippines. for Synovate, leading 12 Asian countries in all HR aspects. Mr. Velasco has also spent 6 years of his career as a Professor of the Graduate School of Business (MBA) and Atty. Jose Jesus G. Laurel the Business Management Dept. of La Salle where he taught Strategic Management, Prior to joining MPIC, Atty. Laurel was Vice President, General Counsel and Ethics, Stock Market Trading, Production Management and HR Management. Corporate Secretary for Petron Corporation. Before working for Petron, he was . Vice President for Corporate Services of Energy Development Corporation where Melody M. del Rosario he headed Legal, HR, Purchasing, Planning and Finance. He graduated from Ateneo Melody M. Del Rosario has been with the Metro Pacific Group since 1993, and has de Manila with degrees in A.B. Economics and Law. He also has a Masters of Laws over 16 years of experience in the field of public and media relations, corporate from Yale University. communications, advertising and corporate social responsibility. Ms. del Rosario is in charge of strengthening the credibility and corporate public image of MPIC by planning and overseeing the implementation of strategic corporate communication programs, reputation and crisis management as well as working closely with the corporate communication team of the group. Ms. del Rosario is also the Corporate Information Officer of MPIC and Metro Pacific Tollways Corporation for the Philippine Stock Exchange and Executive Vice President of the MPIC Foundation.

52 2010 Annual Report Key Officers of Portfolio Companies

MAYNILAD

Victorico P. Vargas Randolph T. Estrellado President and Chief Financial Officer Chief Executive Officer

MERALCO

Manuel V. Pangilinan Oscar C. Reyes Betty Siy-Yap President and Chief Operating Officer Chief Financial Officer Chief Executive Officer

TOLLWAYS GROUP

Ramoncito S. Fernandez Rodrigo E. Franco christopher c. lizo President and President Chief Financial Officer Chief Executive Officer MNTC MPTC MPTC, TMC Metro Pacific Investments Corporation 53 MAKATI MEDICAL CENTER CARDINAL SANTOS MEDICAL CENTER

Rosalie R. Montenegro Ronald G. Basas Dr. Maria Corazon C. ELIZABETH D. DANTES President and Chief Financial Officer Consunji Vice President, Finance Chief Executive Officer President and Chief Executive Officer

DAVAO DOCTORS HOSPITAL RIVERSIDE MEDICAL CENTER

Andres M. Licaros Jr. Grace M. Aba Arlene P. Ledesma Socorro Victoria L. President and Chief Financial Officer President and De Leon Chief Executive Officer Chief Executive Officer Chief Financial Officer

OUR LADY OF LOURDES HOSPITAL

Ma. Jacinta Victoria Ramon H. Diaz Lualhati Chief Financial Officer President and Chief Executive Officer

54 2010 Annual Report Corporate Governance

“In MPIC, the highest standards of business ethics and the promotion of a culture of good governance are always on top of its agenda. From the onset, it has operationalized the principles of governance and has integrated its salient points and ideals in all of the Company’s undertakings.”

Fortifying commitment to good governance Signing up to a global network Standards and principles of good corporate governance which have MPIC recognizes the importance of integrating global perspective been adopted as the fundamental policy of the Company are reflected in handling its business, streamlining its governance practices and in in all of Metro Pacific Investments Corporation (MPIC)’s undertakings. addressing issues that confront its operation. In 2010, MPIC became a These permeate and influence the operation of every department as member of the Ethics and Compliance Officers Association (ECOA); well as the corporate acts of individual directors, officers, employees, which is the oldest and most-established organization of ethics, agents and representatives. compliance and integrity practitioners in the world.

In MPIC, the highest standards of business ethics and the promotion ECOA was founded in 1992 and since then has earned a sterling of a culture of good governance are always on top of its agenda. reputation for aiding its 1,200 members from over 30 countries in fully From the onset, it has operationalized the principles of governance understanding and aptly responding to the demands of their significant and has integrated its salient points and ideals in all of the Company’s roles. Among the advantages of being enlisted as an ECOA member is undertakings. having the opportunity to build global connections with a diversified group of practitioners in a unique and specialized community that Efforts were made to attune corporate goals and practices in share the goal of advancing ethics, compliance and integrity. Through accordance with the demand of progress and of the changing times. interaction, cooperation and collaboration with co-members, the Without deviating from the principles that founded the company, company is exposed to wide-ranging systems and practices prevalent MPIC strengthened its commitment to good governance by adopting in different countries thus making MPIC globally informed and three initiatives that demonstrate our full commitment to operate competitive. responsibly and sustainably for the benefits of our stakeholders: customers, employees, business partners and the general public. These With its ECOA membership, MPIC has access to the following services, initiatives include membership in a global association of ethics and among others, that address distinctive needs of the company: compliance officers, active participation in a local good governance • Global Business Interest Group – implements a bi-monthly initiative and full compliance with governance guidelines from meeting of members all over the world through teleconference to government regulators. discuss important ethics, compliance and integrity issues that are encountered in the regular course of meeting responsibilities. Positive inputs derived from worthy memberships in both international • ECOA Connects – this features ECOA’s online portal available to and local governance associations strengthened the integrity and members only for them to access a database of resources which ethical make-up of the company and the same is reflected in its overall showcase surveys, research, articles and reports pertaining to operation, especially its strategic acquisitions. governance matters. • ECOA Daily News and ECOA Weekly News Watch – Provides Earning the reputation as an efficient and well-run company, MPIC was easy, free access to up-to-date ethics, compliance and integrity able to gain genuine public trust and was able to expand its portfolio news articles written by journalists from the most highly regarded of investments with the recent acquisition of Riverside Medical publications around the world. Center Inc. and the execution of an agreement for the operation and management of Our Lady of Lourdes Hospital in 2010. The foregoing transactions, along with all other previous acquisitions, were all done Collaborating with good governance practitioners with utmost transparency, while observing highest ethical values and and initiators keeping in mind the best interest of its shareholders. Recognizing the importance of active involvement in the local good governance drive, MPIC became a member of the Good Governance Adherence to good governance is not just an obligation imposed Advocates of the Philippines (GGAP) - an organization of domestic upon companies. It is first and foremost, a commitment to the ideals corporate governance practitioners, united and brought together that champion shareholders rights, protection of non-controlling by their genuine desire to effect governance reforms in the country. owners, transparency, accountability and the rule of law. In MPIC, this GGAP is a relatively young organization with a mature and serious commitment is taken to heart as the Company’s guiding principle that commitment to popularize and integrate good governance in dictates its operation and all its dealings. corporate systems nationwide.

Metro Pacific Investments Corporation 55 By this membership, MPIC takes on the challenge to actively promote The Board still maintains a clear delineation of functions through a good governance, apply best practices and progressive insights, and separate position of the Chairman of the Board and President and implement governance programs at the company level. Chief Executive Officer to foster appropriate balance of power, increased accountability and better capacity for independent decision Advocating the professional practice of corporate directorship, MPIC making. became actively involved with the Institute of Corporate Directors in order to align itself with the global principles of modern corporate The Board constituted four working committees to act judiciously governance. on matters brought before the board relating to Audit, Nomination, Compensation and Corporate Governance. Each committee is Adopting the corporate governance guidelines composed of three members, two of whom are Independent The commendable undertaking of the Philippine Stock Exchange (PSE) Directors to ensure legal and ethical behaviors are implemented while to improve corporate governance practices in the Philippines is well strengthening the integrity of the reports and recommendations made supported by the Company. The corporate governance interventions by the committee. The chairman of each committee is an independent by the PSE along with other key regulators such as the Securities director. and Exchange Commission (SEC) in collaboration with governance advocacy groups like the Institute of Corporate Directors (ICD) are The Audit Committee is composed of three directors who positively met and supported by MPIC. possess financial and legal backgrounds. The primary purpose of the committee is to assists the Board in fulfilling its oversight One of the most recent programs of the Exchange that was met with responsibilities over the Company’s external auditor’s qualification full support by the Company is the Corporate Governance Guidelines and independence, the Company’s financial reporting process, internal (PSE Guidelines) for publicly-listed companies. The PSE Guidelines control system and policies, and the integrity of its financial statements. aim to clarify for the benefit of all listed companies the corporate governance standards which the PSE believes all well-governed, In 2010 the committee held four meetings. Among the matters publicly-listed companies adopt. The guidelines as presented were taken up by the committee are the following: review the external developed after a thorough review and assessment of internationally auditor’s report pertaining to the 2009 financial statements and recognized corporate governance codes and best practices as well as 2010 quarterly financial statements - that is prepared in accordance a rigorous local and regional stakeholder engagement process. with the Philippine Financial Reporting Standards (PFRS), review of internal controls over the financial reporting, nomination of external As shown in the report submitted by the Company to the Exchange, auditors for 2010 and evaluation of the Company’s risk profile and MPIC was able to comply with the recommendations of the PSE to management structure. the extent practicable. Processes are in place to gather and analyze information for proper disclosure about the company which could The members of the various committees of the Board of Directors affect its viability or the interest of the stockholders. Such information are as follows: which are included on MPIC’s corporate/investor relations Web sites are disclosed through appropriate Exchange mechanisms and A. Nominations Committee Attendance submissions to the Commission through: Chairman: • all SEC filings, management’s quarterly and annual evaluations Edward S. Go (Independent Director) 1/1 of disclosure controls and procedures and internal controls and Members: procedures for financial reporting; Lydia B. Echauz (Independent Director) 1/1 • all press releases providing financial information or guidance, Albert F. Del Rosario 1/1 information about material acquisitions or dispositions or other Jose Ma. K. Lim (non-voting member) 1/1 events that are material to the company; • correspondence broadly disseminated to shareholders; B. Audit Committee Attendance • presentations to investor conferences or analysts Chairman: Edward S. Go (Independent Director) 4/4 Board of Directors Members: Providing oversight, direction and leadership to MPIC are 15 Board Lydia Echauz (Independent Director) 4/4 members elected by shareholders that consists of seven executive Amado R. Santiago III 4/4 directors and eight non-executive directors of whom three are independents. They bring together a wealth of invaluable expertise C. Compensation Committee Attendance and successful business experience that has led MPIC to exercise Chairman: business judgment in good faith and act in what they believe is to be Lydia B. Echauz (Independent Director) 2/2 for the best interest of the Company. Members: Albert F. Del Rosario 2/2 Edward S. Go (Independent Director) 2/2

56 2010 Annual Report D. Corporate Governance Committee Attendance Last 13 December 2010, a majority of the Board members attended Chairman: a corporate governance enhancement session arranged by sister Artemio V. Panganiban (Independent Director) 1/1 company, PLDT. The session provided an understanding of the Board’s Members: responsibility in ensuring effective Risk Governance in the organization Robert C. Nicholson 0/1 and how to set an organization’s risk inclination in line with its Business Edward S. Go (Independent Director) 1/1 Model and Organizational capabilities.

Board Performance Abiding by our core values The Board, at the beginning of each year, approves the frequency of Responsible management of environmental, social and governance meetings after taking into consideration the recommendations of issues creates a business ethos and environment that builds a management. The Board believes that five to six regular meetings a company’s integrity within the society and the trust of its shareholders. year are appropriate; however, the Board and each Committee meets More than the Company’s goal to be profitable, ensuring long-term as frequently as needed for the Directors to properly discharge sustainability and creating shareholder value, good business practices their responsibilities. In consultation with the principal Officers of the that integrate environmental and social responsibilities has greatly Company, the Chairman sets the place, time, and length of meetings contributed to MPIC’s improved reputation, higher employee retention and may, depending upon the circumstances, call additional special rates, greater productivity, and cost benefits through operational Board meetings. improvements and innovation in products and services.

The Chairman of the Board, in consultation with the Chief Executive The Company’s strong set of core values are key elements on which Officer and the Chief Finance Officer approves the agenda. Meeting MPIC performs and conducts its business to accomplish its vision materials, including presentations on specific subjects, are sent to the of becoming the leading infrastructure investment company in the Directors in advance for their review. The meeting materials should be Philippines.Teamwork and Empowerment, Integrity and Transparency, as focused as possible while still providing the necessary information. Financial Discipline and Accountability, and Entrepreneurship not only guide our everyday relationships with our clients, employees, Regular attendance is essential so that decisions will represent the shareholders and the communities the Company serves, but also opinions of the board as a whole. In addition, regular attendance provide the foundation for good corporate governance. enables board members to keep abreast of board concerns and helps ensure that issues are examined from a variety of perspective. As MPIC continually seeks to improve its corporate governance The board member’s attendance through a sworn certification of system, many factors will come into play. Perseverance in linking sound the board’s active participation in its meetings was submitted to the corporate governance to effective control activities and building public Commission last 26 January 2011. confidence is the greater call that MPIC recognizes as an imperative for growth. DIRECTORS Special Regular Organizational Total (8) (5) (1) (14) Manuel V. Pangilinan 8 5 1 14 Jose Ma. K. Lim 8 5 1 14 David J. Nicol 8 5 1 14 Antonio A. Picazo 8 5 1 14 Amado R. Santiago III 8 5 1 14 Artemio V. Panganiban 8 5 1 14 Edward S. Go 8 5 1 14 Ambassador Albert F. del Rosario* 8 5 1 14 Ramoncito S. Fernandez 7 5 1 13 Lydia B. Echauz 7 5 1 13 Ray C. Espinosa 8 3 1 12 Augusto P. Palisoc, Jr. 5 5 1 11 Edward A. Tortorici 6 4 - 10 Robert C. Nicholson 5 5 - 10 Alfred A. Xerez-Burgos, Jr. 5 5 - 10 Rogelio L. Singson** 3 2 - 5

Metro Pacific Investments Corporation 57 Risk Management

As an investment and management company MPIC undertakes risk Risk Management within the Operating management at a number of distinct levels: Company Investments Each of the operating companies has a full management team which is 1. on entering new investments; responsible for having their own plan to manage risk which is reviewed 2. ongoing management of the financial stability of the holding by MPIC and each of the respective operating companies’ board of company itself; and directors. 3. within the operating company investments. Regulatory On entering new investments The majority of our invested capital is deployed into businesses which MPIC’s geographic focus is the Philippines within which its are directly regulated by arms of the state: electricity distribution; management team has extensive experience. water supply and distribution; and tollroads. Each of these businesses has concession and / or franchise agreements which involve a degree Prior to making a new investment any business to be acquired is of operating performance obligation in order to retain our rights and subject to an extensive due diligence including financial, operational, earn our expected returns. In some cases these agreements provide regulatory and risk management. Risks to investment returns are then for retrospective assessment of the extent of our overall operational calibrated and specific measures to manage these risks are determined. and financial performance sometimes over a period of years.

MPIC’s investments involve - to varying degrees - a partnership Risks arising from these types of businesses include the potential for approach with key operating partners providing operational and differences with regulators involving interpretation of the relevant technological input and thereby mitigating risks associated with concessions – either during the period in question or in retrospect. To investing in new business areas. These partners are equity partners - manage these risks the investee companies have established dedicated and having co-invested with the Company in a particular opportunity regulatory management groups with experienced personnel. Their they will participate in the risks and rewards of the business alongside duty is to manage the relationship with regulators, keep management MPIC. up-to-date on the status of the relationship and ensure companies are well prepared for any forthcoming regulatory changes or challenges. Financing of new investments is through a combination of debt and/or equity by reference to the underlying strength of the cashflow of the Competition and Market target business and the overall financing position of MPIC itself. Competitive and market-driven demand risks are most pronounced in Meralco, MPTC and the Healthcare group. Meralco carries a degree of Financial Stability of the Holding Company market risk and its returns may be impacted by consumers who elect As dealt with in the CFO’s report, MPIC does not guarantee the to self-generate and disconnect from the distribution grid. We are borrowings of its investee companies and there are no cross default mitigating that risk by improving efficiencies to the point that makes it provisions from one investee company to another. uneconomic to self-generate.

Financial stability of the holding company is managed by reference At MPTC we set tariffs on new road projects based on traffic to the ability of the investee companies to remit dividends to MPIC projections agreed with the regulator. Rising fuel prices, alternative to cover operating costs and service borrowings. We avoid currency means of transport and existing or prospective alternative routes are and investment cycle mismatches by borrowing only in Pesos using all factors that can affect the number of vehicles that use our roads. primarily long term instruments with fixed rates. We alleviate this risk by choosing our projects carefully. Existing high traffic density, difficulty in securing competing routes, a high potential for growth given demographic changes and conservative growth estimates, even with the prior factors included in the assessment, are the important variables we consider when committing to traffic projections with the regulator.

58 2010 Annual Report For the Hospitals group, investment is taking place to enable more • Liquidity Risk qualified personnel to better serve patients more efficiently and Each business monitors its cash position using a cash forecasting effectively in upgraded facilities and with better equipment. The system wherein all expected collections, check disbursements primary risk is that investment runs ahead of demand and patient and other payments are determined to arrive at the projected ability to pay. Additionally, there are other operators in the market cash position to cover its obligations. that offer competitive and complementary services. We mitigate that risk by ensuring we know our target market very well and scale our • Credit Risk improvements to their ability to pay. Credit risk is managed by setting limits on the amount of risk a business is willing to accept for individual counterparties and by The water company has some supply side risk in that: (i) it has a monitoring exposures in relation to such limits. single source of water – the Angat dam; and (ii) this water source is shared by another water concessionaire, a hydroelectric plant, and • Equity Price Risk the needs of farmers for irrigation. A water usage protocol is in place Our investee companies are generally not faced with equity to ensure all users receive water as expected within the available price risk beyond that normal for any listed company, where supply constraint. Following significant water losses in late 2009 relevant. MPIC’s investment in Meralco, through Beacon Electric, arising indirectly from typhoons, the business entered 2010 with less is part financed by borrowings which require a certain security water supply than the supply allowed for in its concession. We have cover based on the price of Meralco’s shares on the PSE on a been working to moderate our reliance on Angat by developing the volume weighted 30 trading day average calculation. Meralco’s Putatan Water Treatment Plant and other alternative water sources in share price would have to decline by 63 percent from its price partnership with our regulator and Manila Water. as at 3 March 2011 before Beacon Electric would be required to top-up collateral with cash or pay-down debt. Financial MPIC’s investee companies’ financial risks are primarily: interest rate risk, foreign currency risk, liquidity risk, credit risk and equity price risk. The Board of Directors of each company reviews and approves policies for managing each of these risks as follows.

• Interest Rate Risk Interest rate exposure is managed by using a mix of fixed and variable rate debt.

• Foreign Currency Risk In general the investee companies will place some degree of reliance on their regulated return mechanisms to pass through foreign currency risk. The current liquidity and depth of the Philippine credit market is such that there should be little need for raising new borrowings in foreign currency.

Maynilad has some foreign currency borrowing but there is a mechanism in place wherein it can recover currency fluctuations as approved by its Regulator.

MPTC swapped all its foreign currency borrowings in to Pesos prior to 2010.

Metro Pacific Investments Corporation 59 Corporate Social Responsibility

Meralco Sibol School MPIC Mano Amiga

“MPIC’s increasing profitability has MPIC: Aligning Businesses and Social Outcomes paved the way for the company to more actively be involved in making an Corporate Social Responsibility (CSR) is an integral part of the company’s philosophy, with a impact to alleviate poverty by providing scope that is clearly defined in the various infrastructure businesses MPIC holds. high quality education to children and by acting as a steward of our natural MPIC’s increasing profitability has paved the way for the company to more actively be involved resources. ” in making an impact to alleviate poverty by providing high quality education to children and by acting as a steward of our natural resources.

Strengthening Communities with Quality Education

Recognizing that changing societal needs and rapid population growth have contributed to the problem of providing education, MPIC through Mano Amiga Pilipinas, awarded five deserving students with scholarships intended to equip them with the intellectual, social, human and spiritual formation needed to break out from the vicious cycle of poverty. For the past three years, MPIC has devoted a day of outreach by spending time with the school children, handing out school supplies and contributing towards facility improvements. In January of this year, MPIC Volunteers, stimulated the imagination of the kids by creatively participating and presenting the customs and traditions of four countries - the United States, China, Spain and Japan.

With the potential impact of education bringing a brighter future, MPIC has committed to investing more in quality education through an MPIC Annual Educational Excellence Fund which will provide Mano Amiga with an annual stipend to ensure the continued excellence of its teachers, students and academic program.

Education was also at the core of Meralco’s Corporate Social Responsibility activities in 2010. Twelve Meralco Sibol Schools, preschools for children from families residing in GawadKalinga villages, were established in 2010. Aside from the school facilities, Meralco provided books and school supplies for the Sibol children and trained volunteer teachers. Meralco’s Computer Training Project extends computer training/literacy activities for public school teachers, Local Government Units and the Philippine National Police. In 2010, 140 individuals benefited from the program while 23 organizations received computer equipment donations.

60 2010 Annual Report MPTC Tullahan River Clean-up MPIC Shore It Up

“MPTC is focused on preserving A Greener Business biodiversity in the areas around its road network while Maynilad and Meralco MPIC’s businesses ensure their activities and operations are environmentally responsible. MPTC are encouraging consumers to conserve is focused on preserving biodiversity in the areas around its road network while Maynilad and valuable resources.” Meralco are encouraging consumers to conserve valuable resources.

Environmental protection and awareness for MPIC has been institutionalized in “Shore It Up”, a coastal and underwater clean-up campaign. With the year 2010 declared as the International Year of Biodiversity, MPIC chose Puerto Galera as the venue for its community day activity. Its five kilometer foreshore is a protected area and a marine sanctuary that gave a unique opportunity for volunteers of Shore It Up 2010 to understand the vital role that biodiversity plays in sustaining life on Earth. Surrounding communities made up of families, academic institutions, environmentalists and local government units participated in the campaign to clean up the coastline of debris. Over a hundred of these volunteers came and joined the sweep of non-biodegradable waste that littered the area.

MPTC is protecting wildlife habitats by promoting identified bird sanctuaries along the length of the North Luzon Expressway and the Subic-Clark-Tarlac Expressway. One of these, the Candaba Swamp surrounding the long viaduct that connects Bulacan to Pampanga, has always been a vital haven for migratory birds.

In addition, MPTC, through its subsidiary Manila North Tollways Corporation, initiated and launched “TULLAHAN RIVER: CLEANING IT UP, KEEPING IT CLEAN” to rehabilitate the 500-meter pilot section of Tullahan River that runs through adjacent communities on either side of the NLEX-Mindanao Avenue Link.

A two-pronged approach was adopted for this program: 1) a major surface cleanup of the Pilot Area and the installation of flexible garbage restrainers at the upstream and downstream endpoints (trash traps, constructed from heavy-duty fishnet and nylon rope, are regularly cleaned and maintained); and 2) a social mobilization program for the communities of Barangay Ugong in Valenzuela and Barangay Talipapa in Quezon City.

Metro Pacific Investments Corporation 61 Maynilad Lingkod Eskwela Maynilad Volunteer Program (MVP)

“The Hospital group recognizes that the In July 2010, MNTC partnered with the Center for Community Transformation to lay the quality of human life is improved through groundwork by first conducting a sociological survey among households within the 500-meter a healthy environment. Various efforts are Pilot Area, then by holding stakeholder consultations among community residents. The data being implemented as doctors, nurses and collected were used to design a program to engage the Tullahan River communities to seek medical staff engage in corporate social creative, practical and economically gainful solutions to the pollution problem -- and thus make responsibility efforts by volunteering their the CSR program sustainable. time and resources for their programs.” Maynilad’s corporate social responsibility expanded its flagship programs in 2010 and encouraged stronger collaboration with different Maynilad groups in order to provide better living conditions to its communities.

With the success of the SamahangTubigMaynilad (STM) program that garnered an Anvil award of Excellence, eight new STMs benefiting 1,182 households are now enjoying affordable drinking water. With capital coming from managing their own water distribution system, the pilot project of STM-Tondo has expanded into the soap making business and other livelihood projects.

A Healthy Environment

The Hospital group recognizes that the quality of life is improved through health. Various efforts are being implemented by doctors, nurses and medical staff volunteering their time and resources for the treatment and prevention of illnesses in the country.

Makati Medical Center understands that along with meeting the company’s business objectives, an even greater deal of its essence lies in extending its expertise in healthcare to those in need regardless of race, creed and status. True to this principle to which its founding fathers built the institution, MakatiMed provided compassionate health services to indigent Filipinos through numerous outreach and hospital programs.

For the year 2010, Cardinal Santos Medical Center (CSMC) engaged in CSR activities such as Operation Tuli and Operation Bukol, both one-day events. The first provided free circumcision while Operation Bukol, a free breast check-up, is part of CSMC’s efforts to spread awareness about breast cancer. The CSMC Department of Ophthalmology also conducted several in- house and off-site cataract missions in partnership with Ephata, Chi Liam Tong, and Tzu Chi.

Davao Doctors Hospital as part of its effort to reduce carbon footprint in line with environmental concerns, has gone digital in their radiological facility by discarding the use of

62 2010 Annual Report Makati Med Parañaque Medical Mission

“Aligning the CSR activities with the x-ray film cassettes and utilizing digital archiving that guarantees zero-waste transactions and business strategies in each of the companies up to the minute results. In October of 2010, “I am Alive, I survive” a breast Cancer Awareness reinforces the group’s social commitment in Forum with a Free Consultation for 180 beneficiaries was organized in cooperation with making its corporate vision a reality. “ SMILES Support ng may K, Philippine Cancer Society of Davao, Philippine Society of Medical Oncology and Davao Doctors College for the benefit of the cancer patients, survivors, caregivers, Volunteers and the St. Jude Community.

Riverside Medical Center Inc. continuously dedicates a portion of its resources to improving the lives of impoverished but deserving Negrenses. Through the Dr. Pablo O. Torre Foundation and other charitable organizations such as GawadKalinga, the Hospital has aided thousands of beneficiaries all over Negros through free clinics, medical missions, community welfare services, scholarship, and housing programs. Additionally, the Hospital is in the forefront of environmental awareness and advocacy in the province, with a fully functional Sewage Treatment Plant that recycles used water, and a fully implemented Solid Waste Management program.

Our Lady of Lourdes Hospital (OLLH) stays true to being a Christ-centered community of professional healthcare providers, who, apart from healing at work, reach out thru medical undertakings primarily to serve indigent children, mothers and mothers-to-be. Regularly timed with the Lourdes Feast day in February, OLLH Foundation Day in July, and Florence Nightingale Celebration in October, these outreaches teach mothers how to breastfeed newborns and care for their toddlers to achieve maximum growth. For children, these CSR trips range from running an operation-tuli to a simple fun-filled educational day for indigent children in the neighborhood and barangays where the Missionary Sisters Servants of the Holy Spirit community are engaged in mission work.

MPIC and the Philippine Business for Social Progress

Working with a commitment towards economic development that improves the quality of life for all Filipinos, MPIC plans to leverage its operational competencies through an active partnership with the Philippine Business for Social Progress. The goal is to create small-scale business enterprises to stimulate community growth and development.

Aligning the CSR activities with the business strategies in each of the companies reinforces the group’s social commitment. In the long term, being able to build relevance and trust in the communities in which we operate not only generates substantial support, but also helps differentiate and define our existence not just for profit but also as responsible corporate citizens.

Metro Pacific Investments Corporation 63 Financial Review

65 Management’s Discussion and Analysis 96 Statement of Management’s Responsibility for Financial Statements 97 Independent Auditors’ Report 98 Consolidated Balance Sheets 100 Consolidated Statements of Income 102 Consolidated Statements of Comprehensive Income 103 Consolidated Statements of Changes in Equity 106 Consolidated Statements of Cash Flows 108 Notes to Consolidated Financial Statements

64 2010 Annual Report

Manage ment’s Discussion and Analysis of Financial Condition Item 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD & A) and Results of Operations

Financial Highlights and Key Performance Indicators

The following discussion and analysis of the Group’s financial condition and results of operations should be read in conjunction with the accompanying audited consolidated financial statements and the related notes for the years ended December 31, 2010, 2009, and 2008 and as of the years ended December 31, 2010 and 2009 included in this Report. Key performance indicators of the Group are as follows:

Increase (Decrease) 2010 2009 Amount % (in PhP millions) Consolidated Income Statements Revenues 18,564 16,108 2,456 15.25 Expenses 10,491 10,071 420 4.17 Other expenses (income) 2,661 1,705 956 56.07 Income before income tax 5,412 4,332 1,080 24.93 Net income attributable to owners of the Parent Company 2,871 2,300 571 24.83 EBITDA (Core) 12,705 10,103 2,602 25.75 Core income 3,856 2,047 1,809 88.37 Nonrecurring income (loss) (985) 252 (1,237) (490.87) Net income margin 15% 14% 1% 7.14 EBITDA margin 68% 63% 5% 7.94

Overview

Year 2010 underscored another milestone for MPIC as it reaffirms its position as one of the country’s leading infrastructure companies. Highlights for the year are as follows:

 Combined Meralco holdings of MPIC and PCEV under Beacon. On March 30, 2010, Beacon agreed to purchase 154.2 million and 163.6 million Meralco shares from PCEV and MPIC, respectively, for a consideration of Pesos 150 per share or a total of Pesos 24,540 million for the MPIC Meralco shares and Pesos 23,130 million for the PCEV Meralco shares. The consolidation of Meralco holdings into Beacon gave it a 28.2% interest in Meralco, making it the single, largest shareholder of Meralco. This also allowed Beacon to access debt financing for any additional purchases of Meralco shares, using its Meralco shares as security. Also, on same date, Beacon purchased additional 74.7 million shares from First Philippine Holdings Corporation in exercise of the Call Option assigned by MPIC, for the price of Pesos 300 per share or the total purchase price of Pesos 22,410 million. This brought the total ownership of Beacon in Meralco to 34.8%.

 Term extension of Maynilad’s concession to additional 15 years to 2037. On March 17, 2010, the Department of Finance transmitted to Maynilad the signed Letter of Consent and Undertaking on behalf of the Republic of the Philippines, relative to the extension of the Concession Agreement from May 6, 2022 to May 6, 2037. The term extension is beneficial for both Maynilad and its stakeholders because it will enable it to take full advantage of long-term strategies for better water supply reliability and continued expansion in unserved and under-served areas. It will also address critical environmental issues through intensified sewerage and sanitation services customers.

 Divestment of Manila North Harbour Port Inc. MPIC divested in favor of Harbour Center Port Terminal, Inc. (HCPTI) all of its shares of common stock of Manila North Harbour Inc. (MNHPI) representing 35% of the outstanding capital stock of MNHPI, with the prior approval of the Philippine Ports Authority. The total amount of Pesos 350,000,000.00 received from HCPTI

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represents the 35% of the outstanding capital stock of MNHPI worth Pesos 245,000,000 and a repayment of a loan in the amount of Pesos 105,000,000.

 Award of the Connector Road Project to MPTDC. The Department of Public Works and Highways (“DPWH”) acknowledged receipt of the unsolicited proposal submitted by MPTDC for the Connector Road project. The Connector Road Project involves an estimated cost of Pesos 17 billion for the construction of a 13.2-kilometer elevated road via the PNR tracks within the Manila Central Business District, from the end of NLEX at C3 to the beginning of Skyway 1 at Buendia and is projected to start in 2012 after Segments 9 and 10 are completed.

 Operations of the Maynilad Putatan Water Treatment Plant. Maynilad Water Services, Inc. announced on June 4, 2010 that it started operating its state-of-the-art Putatan Water Treatment Plant to supply potable water to an initial 4,585 households in Muntinlupa. The West Zone concessionaire’s Putatan Plant is the first water treatment facility that taps into Laguna Lake as an alternative water source to Angat Dam in Bulacan. The Putatan plant uses microfiltration and reverse osmosis to treat raw water from Laguna Lake. It has 14 units of microfiltration assemblies and six reverse osmosis assemblies. The Putatan water treatment facility came on-stream in July 2010 with an initial production capacity of 25MLD. This is expected to be built up to 100MLD within the year. Communities in Muntinlupa, Las Piñas and portions of Cavite are expected to benefit from the additional water supply. The treatment plant in Putatan is in line with Maynilad’s plan to develop alternative sources of water to ensure long- term water security for its customers.

 Acquisition of Riverside Medical Center, Inc. MPIC acquired a 51% equity interest in Riverside Medical Center, Inc., the largest hospital in Bacolod City, Negros Occidental on May 31, 2010. RMCI is the 4th to join MPIC’s premier league of hospitals namely, Makati Medical Center and Cardinal Santos Medical Center in Metro Manila, and Davao Doctors Hospital in Mindanao.

 Acquisition of Our Lady of Lourdes Hospital through a Lease Agreement. East Manila Hospital Managers Corp., a wholly owned subsidiary of MPIC, was incorporated on October 15, 2010 to operate and manage Our Lady of Lourdes Hospital, a non-tertiary hospital previously managed by the Missionary Sister Servants of the Holy Spirit congregation (SSpS) through the Our Lady of Lourdes Hospital, Inc. (“OLLHI”). With the decision of SSpS to turn over the operations and management to a professional group, OLLHI has signed a 20-year lease of the hospital land and facilities in favor of EMHMC. As discussed in Note 3 of the accompanying Audited Financial Statements, the lease agreement between EMHMC and OLLHI constitutes an acquisition of business.

Operating segment information

Operating segments are components of the Group that engage in business activities from which they may earn revenues and incur expenses, whose operating results are regularly reviewed by the chief operating decision-maker to make decisions about how resources are to be allocated to the segment and to assess their performances, and for which discrete financial information is available.

Management assesses the performance of the operating segments based on a measure of recurring profit or core income contribution. This measurement basis is determined as profit attributable to owners of the Parent Company excluding the effects of foreign exchange and derivative gains/losses, one-off provisions and other nonrecurring or non-core items. Nonrecurring items represent certain items, through occurrence or size, that are not considered as part of the usual operating items of the businesses of the Group.

In 2010, the Group organized its businesses into five major business segments, namely water utilities, toll operations, power, healthcare, and others as enumerated below:

 Water Utilities – The water utilities business segment primarily relates to the operations of DMCI-MPIC Water Company and Maynilad as the largest water concessionaire in terms of customer base.

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66 2010 Annual Report

 Toll Operations – The toll operations business segment primarily relates to the operation and maintenance of toll facilities by MPTC and its subsidiary, Manila North Tollways Corporation and associate, Tollways Management Corporation.

 Healthcare – The healthcare business segment primarily relates to the operation and management of hospitals, medical and chemical clinics and/or laboratories and other similar undertakings provided for by MPIC’s associates, Medical Doctors, Inc. and Davao Doctors Hospital and the newly acquired subsidiaries Riverside Medical Center and East Manila Hospital Managers Corp.

 Power - The power business segment primarily relates to the investment in Beacon.

 Others – This represents operations of subsidiaries involved in the provision of services and, primarily, holding companies. This includes the real estate segment which primarily relates to the operations of Metro Pacific Corporation and Landco Pacific Corporation and its subsidiaries, which are involved in the business of real estate of all kinds. Following the decision of MPIC to divest its investment in Landco, MPIC’s share in its net assets is presented under “Available for Sale Financial Assets” as of December 31, 2010 and under “Asset Held for Sale” as of December 31, 2009.

Please refer to Note 5 of the accompanying Audited Financial Statements.

Adoption of New Standards and Interpretations

Our accounting policies are consistent with those followed in the preparation of the Company’s most recent annual consolidated financial statements, taking into account the changes in accounting policies and the adoption of the new and amended Philippine Accounting Standards (“PAS”) and Philippine Interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”), which became effective on January 1, 2010. Please refer to Note 2 of the accompanying Audited Financial Statements.

Operational Review

Management monitors the operating results of each business unit separately for purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on net income for the year; EBITDA; EBITDA margin; and core income.

EBITDA is measured as net income excluding depreciation and amortization of property and equipment and intangible assets, asset impairment on noncurrent assets, financing costs, interest income, equity in net earnings (losses) of associates and joint ventures, net foreign exchange gains (losses), net gains (losses) on derivative financial instruments, provision for (benefit from) income tax and other nonrecurring gains (losses). EBITDA margin pertains to EBITDA divided by service revenues.

Core income is measured as net income attributable to owners of the Parent Company excluding foreign exchange (gains) losses-net, gains (losses) on derivative financial instruments, asset impairment on noncurrent assets, and other nonrecurring gains (losses), net of tax effect of aforementioned adjustments. Nonrecurring items represent gains or losses that, through occurrence or size, are not considered usual operating items.

The following section includes discussion of the Company’s results of its operations as presented in its consolidated financial statements as well as management’s assessments of the performance of the Group which is translated to core (or recurring) profit and non-core (or nonrecurring) profit.

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2010 versus 2009

MPIC CONSOLIDATED STATEMENTS OF INCOME

Audited Increase (Decrease) 2010 2009 Amount % (in Php millions) Revenues 18,564 16,108 2,456 15.25 Cost of services 6,846 7,121 (275) (3.86) General and administrative expenses 3,645 2,950 695 23.56 Construction revenue 8,932 4,879 4,053 83.07 Construction costs 8,859 4,771 4,088 85.68 Interest expense 4,544 4,012 532 13.26 Foreign exchange losses (gains) - net (1,440) 985 (2,425) (246.19) Interest income 574 499 75 15.03 Share in net earnings of associates and joint ventures - net 499 432 67 15.51 Dividend income 375 - 375 - Other income 1,434 2,829 (1,395) (49.31) Other expenses 2,513 577 1,936 335.53 Provision for (benefit from) income tax 102 (70) 172 (245.71) Income (loss) from discontinued operations - (32) 32 (100.00) Net income attributable to owners of the Parent Company 2,871 2,300 571 24.83

Revenues

The Company’s revenues increased by 15% to Pesos 18,564 million in 2010, reflecting improved performance of the Company’s major operating subsidiaries, Maynilad and MPTC. Maynilad posted a 13% increase in revenues brought about by 7% billed volume and average tariff growth. MPTC likewise posted 7% higher revenues in light of the 6% increase in traffic volume and contributions from Segment 8.1. Contributions from newly acquired hospitals Riverside Medical Center and East Manila Hospital Managers’ Corporation also contributed to the increase in revenues.

Cost of Services

Despite the increase in revenues, cost of services declined by 4% to Pesos 6,846 million in 2010. This is in line with the full year impact of the extension of the Concession term in Maynilad by an additional 15 years which lowered the amortization expense of the concession assets in 2010. The decline in MPTC’s cost of services, which is attributable to lower provisions for heavy maintenance, also contributed to the decline in the consolidated cost of services.

General and Administrative Expenses

General and administrative expenses increased by 24% to Pesos 3,645 million in 2010. The increase came mainly from the following: (a) increased personnel costs; (b) increased administrative supplies; (c) increased depreciation and amortization in relation to additional capital expenditure made during the year; and, (d) increase in other expenses.

Construction margin

Construction margin (construction revenues less construction costs) decreased by Pesos 35 million in 2010 due mainly to Maynilad’s higher construction costs during the year.

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68 2010 Annual Report

Interest expense

Interest expense increased by 13% in 2010 due to higher accretion of concession fees payable at Maynilad, additional interest on the convertible note to MPHI and the three-month amortization of debt issue cost related to the Pesos 11.2 billion loan. The higher accretion of concession fees payable is principally due to the new projects in 2010 in line with the extension of the Concession term obtained from MWSS during the last quarter of 2009 and signed by DOF in 1st quarter of 2010.

Foreign exchange (“Forex”) gains (losses) – net

From a loss of Pesos 985 million in 2009, the Company recognized Pesos 1,440 million of forex gains in 2010. This is mainly attributable to the decreased levels of both debt and other foreign currency denominated liabilities in light of the appreciation of the Philippine Peso against the US Dollar in 2010. The USD:PHP exchange rate closed at Pesos 43.84 in 2010, a Pesos 2.46 decrease from Pesos 46.20 in 2009. The majority of this forex gain is reversed through the consolidated statements of income as “Other Expenses” at Maynilad as dealt with below.

Interest income

Interest income increased by 15% this year due mainly to interest-bearing receivables issued end of 2009, partially offset by lower level of cash maintained at Maynilad resulting from higher capital expenditure.

Share in net earnings of associates and joint ventures

The 15% increase in MPIC’s share in the cumulative net earnings of associates and joint ventures in 2010 is mainly attributable to the full year contribution of Meralco through Beacon partly offset by decreased contribution from equity accounted hospitals.

Dividend income

In 2010, MPIC recognized dividend income from preferred shares held at Beacon. This represents dividend earned for the last eight months of 2010 at 7% coupon rate.

Other income

The 49% decline in other income in 2010 was brought about by the one-time recognition of the gain from the rate rebasing exercise at Maynilad in 2009.

Other Expenses

The 335% increase in other expenses is generally attributable to the Foreign Currency Differential Adjustment (“FCDA”) recorded at Maynilad. The FCDA is a mechanism to recover foreign exchange losses or gains by the operator, based on the Concession Agreement.

Provision for (benefit from) income tax

The increase in current provision for income tax mainly represents increased regular corporate income tax contributed by MPIC, RMCI and EMHMC and higher final taxes on interest income for the period.

The decline in benefit from deferred income tax is mainly due to gain from reversal of deferred tax made in 2009 in light of the award of the six-year income tax holiday to Maynilad from 2010 to 2015. Both Maynilad and MNTC, the major subsidiaries of the Company, enjoyed income tax holidays during the year. MNTC’s ITH status expired at end of 2010 and Maynilad’s will expire at end of 2015.

Income from Discontinued Operations

The Pesos 32 million loss from discontinued operations recorded in 2009 pertains to Landco’s operations. Landco has been discontinued following management’s decision to focus on its operations

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in infrastructure and healthcare. See Note 6 of the accompanying Audited Financial Statements for more details.

Consolidated reported net income attributable to equity holders of the Parent Company

The 25% increase from Pesos 2,300 million to Pesos 2,871 million for the period is attributable mainly to the generally higher profit contribution of the major businesses. In summary: the first full-year contribution from Meralco; increase in Maynilad’s contribution due mainly to increased in billed volume, partially offset by last year’s one-time gain from rate rebasing exercise; increased traffic volume in MPTC; all partly offset by the decrease in contribution of the Healthcare group due to lower nursing school enrollees.

Consolidated Core Income

Consolidated core income increased by 88% from Pesos 2,047 million in 2009 to Pesos 3,856 million in 2010 mainly reflecting the following:

 55% increase in contribution from Maynilad from Pesos 1,540 million in 2009 to Pesos 2,394 million in 2010

 12% increase in contribution from MPTC from Pesos 1,279 million in 2009 to Pesos 1,433 million in 2010

 Full year contribution from Meralco of Pesos 1,486 million in 2010 from the 3-month contribution of Pesos 212 million in 2009

The above was partly negated by Healthcare businesses’ contribution to core net income which declined by 1% to Pesos 172 million in 2010 from Pesos 174 million in 2009.

These represent MPIC’s share in the stand-alone core income of the operating companies, net of consolidation adjustments.

Maynilad, MPTC, Meralco and healthcare accounted for 44%, 26%, 27% and 3% respectively of MPIC’s core profit from operations.

Nonrecurring items

Nonrecurring expenses amounted to Pesos 985 million in 2010, a turnaround from the Pesos 252 million nonrecurring gains last year. Net foreign exchange gains declined from Pesos 105 million last year to a gain of Pesos 9 million this year. This was mainly due to Peso appreciation for the year of Pesos 2.36 from Pesos 46.20 in end-2009 to Pesos 43.84 which resulted to the recognition of forex gain from the restatement of foreign currency denominated liabilities. The lower foreign exchange gains this year was a result of lower level of foreign currency denominated debts from MPTC due to the refinancing agreement made in latter part of the year, partly offset by foreign exchange losses arising from the restatement of Maynilad’s US Dollar denominated cash and cash equivalents. The foreign exchange gains classified per consolidated statements of income is offset by Foreign Currency Differential Adjustment (FCDA) classified as other expenses.

Foreign exchange differentials relating to the restatement of concession fees payable are deferred in view of the automatic reimbursement mechanism as approved by the MWSS Board of Trustees (BOT) under Amendment No. 1 of the Concession Agreement of Maynilad. Net foreign exchange losses are recognized as deferred FCDA and net foreign exchange gains are recognized as deferred credits in the consolidated balance sheet. The write-off of the deferred FCDA or reversal of deferred credits will be made upon determination of the new base foreign exchange rate as approved by the Regulatory Office during every Rate Rebasing exercise, unless indication of impairment of the deferred FCDA would be evident at an earlier date. For Maynilad, foreign exchange differentials arising from other foreign currency denominated transactions are credited or charged to operations.

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70 2010 Annual Report Other nonrecurring losses of Pesos 994 million in 2010 consist principally of actuarial losses and provisions at Meralco, provision for unrecoverable input VAT and prepayment charges at MPTC.

Water utilities

Operational highlights

Increase (Decrease) Maynilad Water Services, Inc. 2010 2009 Amount % (in Php Millions, unless otherwise stated) Revenue 12,050 10,619 1,431 13.48 EBITDA (Core) 7,907 6,970 937 13.44 EBITDA margin (Core) 66% 66% 0% - Core income 4,835 3,328 1,507 45.28 Net income 4,780 2,825 1,955 69.20 Capital expenditure 7,679 4,559 3,120 68.44 Volume of water supplied (MCM) 804 868 (64) (7.43) Volume of water billed (MCM) 374 350 24 6.78 Water billed to supply % 47% 40% 7% 17.50 Non-revenue water % (average) 53% 60% -7% (11.67) Non-revenue water % (year end) 51% 57% -6% (10.53) Billed customers (period end) 903,682 814,645 89,037 10.93 Customer mix (% based on billed volume) Domestic (residential and semi business) 77% 76% 1% 1.29 Nondomestic (commercial and industrial) 23% 24% -1% (4.08)

Maynilad was able to increase the volume of water billed to its customers by 7% in 2010 largely as a result of continuing success in reducing Non Revenue Water (“NRW”) resulting from leakage and theft even as the water level in the Angat Dam dipped to the critically-low level of 157.57 meters compared with 190.20 meters a year earlier.

NRW declined to 51% at the end of last year from 57% at the end of 2009 as a result of aggressive leak repairs. Maynilad eliminated 40,392 leaks in 2010 compared with 18,149 leaks in 2009. The leak repair program, coupled with pipe rehabilitation and more efficient pressure and supply management resulted in the recovery of over 260 million liters per day (“MLD”) of water Maynilad continues to push forward with an ambitious NRW reduction program by allocating Pesos 2.6 billion this year for NRW diagnostics, leak repairs and establishment and maintenance of District Metered Areas.

The Putatan water treatment facility came on-stream in July 2010 with an initial capacity of 25 MLD which has since been quadrupled to 100 MLD. It is the first water treatment facility to tap into Laguna Lake as an alternative water source to the Angat Dam and is the largest membrane-based water treatment plant in the Philippines. As the first water treatment plant in the country to use large-scale microfiltration and reverse osmosis, the facility is a vital part of Maynilad’s plan to develop alternative sources of water to ensure long-term water security for its customers.

The improved performance of Maynilad as discussed above increased its core contribution to MPIC in 2010. The billed volume increase of 7% posted an all-time high of 373.8 million cubic meters (or MCM) from 350.1 MCM last year mainly coming from the increase in domestic consumption. The approval by Metropolitan Waterworks and Sewerage System of the 15 year-extension of Maynilad's Concession has also enhanced the Company's core results as the full year impact of the reduction in amortization of concession assets was reflected in 2010.

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Revenues

Audited Increase (Decrease) 2010 2009 Amount % (in Php Millions) Water Services 9,905 8,576 1,329 15.50 Sewer Services 1,739 1,624 115 7.08 Others 406 419 (13) (3.10) Total Revenues 12,050 10,619 1,431 13.48

Revenues for 2010 reached Pesos 12,050 million, representing 13.48% growth from last year, pushed by billed volume growth of 7% and higher average tariff of 7%. The number of serviced customers for the year increased by 11%. Percentage increases in the components of Maynilad’s revenues are set out below:

Cost and expenses

Audited Increase (Decrease) 2010 2009 Amount % (in Php Millions) Salaries, wages and benefits 1,284 1,351 (67) (4.96) Amortization of service concession assets 1,059 1,323 (264) (19.95) Contracted services 599 462 137 29.65 Utilities 565 417 148 35.49 Materials and supplies 367 247 120 48.58 Provision for doubtful accounts - 226 (226) (100.00) Repairs and maintenance 321 221 100 45.25 Depreciation and amortization 135 119 16 13.45 Regulatory costs 13 98 (85) (86.73) Collection charges 103 96 7 7.29 Taxes and licenses 85 90 (5) (5.56) Rental 160 77 83 107.79 Business meetings and representations 31 64 (33) (51.56) Transportation and travel 81 59 22 37.29 Insurance 28 23 5 21.74 Advertising and promotion 18 21 (3) (14.29) Others 85 80 5 6.25 Total cost and expenses 4,934 4,974 (40) (0.80)

Cost and expenses in total went down by 0.8% due mainly to (a) 19.9% drop in amortization of concession assets in light of the extension; (b) drop in provision for doubtful accounts in light of the improvement in collections; (c) 86.7% drop in regulatory costs and 51.6% drop in representation expense. Cost and expenses would have increased by 6% disregarding the effect of the reduced amortization.

Other income and expenses

2010 other expense (net of other income) versus other income (net of other expense) last year is due mainly to the recognition of income from rate rebasing in 2009.

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Net income

Net income increased by 69% in 2010 due to higher revenues and lower cost and expenses posted for the year.

Core income

Maynilad’s core income increased by 45% to Pesos 4,835 million in 2010 from Pesos 3,328 million in 2009 due to increased billed volume and higher average tariff as discussed above.

Nonrecurring items

Foreign exchange loss was recorded in 2010, representing net realized gain from US dollar transactions and holdings.

Toll Roads

Operational highlights

Metro Pacific Tollways Corporation Increase (Decrease) 2010 2009 Amount % (In Php Millions unless otherwise stated) Revenue 5,858 5,489 369 6.72 EBITDA (Core) 3,692 3,313 379 11.44 EBITDA margin (Core) 63% 60% 3% 5.00 Core income 1,465 1,220 245 20.08 Net income attributable to equity holders of MPTC 996 582 414 71.13 Share in net earnings of an associate 163 174 (11) (6.32) Capital expenditure 1,281 968 313 32.33

Average Daily Vehicle Entries - NLEX & Seg 8.1 159,882 150,395 9,488 6.31 Average Daily Vehicle Entries - NLEX 120,003 117,527 2,477 2.11 Average Daily Vehicle Entries - Seg 7 7,669 7,049 621 8.81

Average Daily Vehicle Entries - NLEX Open System 128,732 117,527 11,205 9.53 Average Daily Vehicle Entries - NLEX Closed System 38,819 39,917 (1,098) (2.75)

Average Kilometers Travelled - Closed System 3,115,475 2,945,750 169,725 5.76 Average Kilometers Travelled - Seg 7 65,189 59,914 5,276 8.81

Expansion and improvement of MPTC’s tollroad network continued apace, enabling increased and safer travel and trade in central Luzon.

Segment 8.1, a 2.7-kilometer stretch of tollroad from Mindanao Avenue to the North Luzon Expressway (“NLEX”) at Valenzuela City, opened in June 2010 and is already recording an average of 8,729 entries a day, thereby helping to decongest the Balintawak entry point.

Completion of a detailed engineering study in December 2010 for the building of Segments 9 and 10 – collectively called the Harbour Link – paves the way for connection of NLEX to the Port Area of Manila, which starts by the end of 2011 and expected to be completed in 2014. The Harbour Link will allow 24- hour access to the Port Area to and from NLEX, thus promoting commercial traffic while reducing the travel time for motorists accessing NLEX from Western Metro Manila, and opening the possibility of eliminating the truck ban in northbound traffic.

The Connector Road Project aims to connect the Northern and Southern toll road systems. Detailed engineering drawing and design are currently underway ahead of the beginning of construction next year. The Company expects the Connector Road to increase commercial traffic by enabling commercial

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vehicles to traverse Metro Manila without violating the truck ban. Equally important to private motorists, the project will improve convenience for all motorists by slashing the travel time between the Northern and Southern toll road systems to no more than 20 minutes from well over an hour today.

In detail, the Connector Road is a 13-kilometer, four-lane elevated expressway using a new construction technology that will connect the Harbour Link to South Luzon Expressway/Skyway at Buendia Avenue, Makati City.

The Harbour Link and Connector projects will see MPTC invest a total of Pesos 25 billion to complete construction, all of which MPTC and MPIC can fund from internal sources. For its part, the Government will invest a further Pesos 7.7 billion to secure the Right of Way access necessary to enable construction of each project to commence.

The take-over of the Subic-Clark-Tarlac Expressway (“SCTEX”) concession is now expected to be completed before the end of April. Once SCTEX is integrated with NLEX, for an investment of Pesos 300 million motorists traveling between the two tollroads will enjoy seamless travel to Northern Luzon.

Toll Roads' stand-alone operations improved from last year due mainly to the increase in traffic volume and the additional contribution from Segment 8.1. Average daily traffic rose 6% to 159,882 vehicle entries per day in 2010 from 150,395 a year earlier as a result of marketing initiatives and stable fuel prices leading to longer average journeys as well as increases in the number of vehicles entering the toll road system.

Revenues

Audited Increase (Decrease) 2010 2009 Amount % (in Php Millions) Toll fees 5,857 5,487 370 6.74 Sale of transponders and magnetic cards 1 2 (1) (50.00) Total Revenues 5,858 5,489 369 6.72

Net toll revenues amounted to Pesos 5,858 million, 7% higher year-on-year. Daily average toll revenues correspondingly increased from Pesos 15.03 million last year to Pesos 16.05 million this year, as the Company recorded all-time highs in traffic volume in 2010. Average daily traffic along NLEX reached 159,882 vehicle entries in 2010, 6% higher than in 2009. Despite the increase in fuel prices, traffic volume improved due to the traffic growth in Subic-Clark-Tarlac Expressway, the opening of Segment 8.1, the election-related activities, the influx of tourists during the summer season and weekends, the continuous efforts to make NLEX a better and safer travel route than alternative free roads.

Sales of transponders and magnetic cards declined 50% due to the outsourcing of the supply, sales and marketing of transponders to Easytrip Services Corporation.

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Cost and expenses

Audited Increase (Decrease) 2010 2009 Amount % (in Php Millions) Cost of services 2,584 2,623 (39) (1.49) Provision for potential losses on input VAT 334 1,105 (771) (69.77) Salaries and employee benefits 243 211 32 15.17 Write-off of input VAT - 94 (94) (100.00) Taxes and licenses 64 57 7 12.28 Professional fees 73 49 24 48.98 Advertising and marketing expenses 50 44 6 13.64 Outside services 39 42 (3) (7.14) Depreciation and amortization 30 34 (4) (11.76) Representation and travel 33 26 7 26.92 Management fees 21 19 2 10.53 Provisions 29 10 19 190.00 Communication, light and water 10 7 3 42.86 Collection charges 7 7 - - Office supplies 5 6 (1) (16.67) Repairs and maintenance 6 5 1 20.00 Donations and contributions - 2 (2) (100.00) Training and development costs 3 1 2 200.00 Rentals 1 1 1 100.00 Miscellaneous 39 14 25 178.57 Total cost and expenses 3,571 4,357 (785) (18.02)

Decline in cost of services is mainly attributable to: (a) lower provisions for heavy maintenance expenditures brought about by the revision of the program in 2010; (b) lower repairs and maintenance for the period; and, (c) lower cost of inventories in relation to outsourcing of the supply, sales and marketing of transponders to Easytrip Services Corporation.

General and administrative expenses decreased primarily because of the decrease in provision for potential losses on input VAT, outside services, depreciation, office supplies, donations and contributions, and input VAT write-off partly offset by higher salaries and employee benefits, professional fees, taxes and licenses, advertising and marketing, representation and travel, provisions and other operating expenses.

Other income and expense

Increase in interest expense and other finance costs is mainly due to the acceleration of unamortized debt issue costs in 2010 resulting from the prepayment notice submitted by MNTC to its long-term debt creditors informing the prepayment of all US dollar-denominated loans on January 14, 2011.

Other income decreased due to the combined effects of the following: (i) foreign exchange gains were higher in 2010 in light of the appreciation of the Philippine peso against the US dollar; (ii) interest income grew due to increased excess cash invested in short-term time deposits and available for sale securities; and, (iii) other expenses rose due to the loss on swap termination resulting from the termination of hedging agreements related to the US dollar-denominated loans.

Net income

Net income increased by 71% in 2010 due to higher revenues and lower costs and expenses posted during the year.

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Core income

Increase in core net income for the year of Pesos 245 million is mainly due to the increase in traffic volume and the fresh contributions from Segment 8.1, higher non-toll revenues and prudent management of operating costs and expenses.

Nonrecurring items

Net income increased by Pesos 414 million due to the Pesos 638 million nonrecurring losses recognized last year compared to only Pesos 469 million nonrecurring losses recognized this year. The decline in nonrecurring losses is due to the higher provisions for probable losses on disallowance of input VAT recognized in 2009 (Pesos 741 million in 2009 compared to Pesos 224 million in 2010). 2009 provisions for input VAT disallowances included 2008 and prior years’ input VAT. The decline was partially offset by the termination fee incurred in the refinancing of some of its loans.

Power

Increase (Decrease) 2010 2009 Amount % (in Php millions unless otherwise stated) Revenue 245,461 184,550 60,911 33.01 EBITDA (Core) 24,478 16,007 8,471 52.92 EBITDA margin (Core) 10% 9% 1% 11.11 Core income 12,155 7,003 5,152 73.57 Net income 9,685 6,005 3,680 61.28 Capital expenditure 10,096 8,889 1,207 13.58

Volume Sold (in mln kwh) 30,247 27,516 2,731 9.93 System Loss (12 month moving average) 7.94% 8.61% -0.67% (7.78) Average Distribution Revenue per kWh YTD 1.43 1.22 0.21 17.21 Distribution Revenues 43,391 33,575 9,816 29.24 Distribution EBITDA 17,330 12,368 4,962 40.12 Distribution EBITDA Margin 40% 37% 3% 8.11

Operational highlights

The volume of electricity sold by Meralco rose 10% to 30,247 kWh, driven by strong growth from all sectors led by the industrial sector. Revenues rose 33% in 2010 to Pesos 245.46 billion due mainly to the volume growth and higher power charges. The overall core net income for the full year increased 74% to Pesos 12.16 billion.

System loss declined to a 36-year low of 7.94% from 8.61% last year, largely on the strength of energy sales to the industrial sector. Large industrial customers are served at the primary distribution voltage- level, with the result that an increase in their share of electricity consumption reduces the possibility of technical losses, which account for the bulk of total system loss. Meralco continues to institutionalize loss-reduction initiatives through improving pilferage management and expanding its partnership with local government units as part of system loss management in high-density residential areas.

Capital expenditures for the year amounted to Pesos 10.1 billion, with electric capital projects accounting for 51% of the total, consisting largely of increased volumes of new service applications, improvement of distribution facilities and major replacements of meters and transformers.

Two significant measures of service reliability included a 21% improvement in Interruption Frequency Rate and a 21% improvement in Cumulative Interruption Time.

Looking ahead, Meralco is focused on capturing a greater share of the electricity business and providing greater service efficiency to all consumers – residential, commercial and industrial. This will

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be achieved through its relentless pursuit of efficiency as an electricity distributor and entry into power generation and retail electricity supply. Meralco has announced it is initially targeting 900MW-1,500MW of generating capacity in conjunction with various partners. The requisite investment for these projects can be funded without recourse to Meralco shareholders.

Core income

The Company recognized a full-year contribution from Meralco to MPIC's core income of Pesos 1,486 million in 2010 compared with Pesos 212 million in 2009 (partial year only). This represents MPIC’s 17.4% effective ownership in Meralco through Beacon compared with 14.67% share in net income of Meralco recognized for the quarter ended December 31, 2009. This is net of fair value amortization for the intangible asset recognized upon acquisition of Meralco. On a stand-alone basis, Meralco's core income for the year was Pesos 12.2 billion in 2010 compared with Pesos 7.0 billion in 2009 of which core income for the last quarter of 2009 was at Pesos 1.5 billion.

Nonrecurring items

Nonrecurring losses for the year include provisions for long outstanding items. At the MPIC consolidated level, actuarial losses related to Meralco’s pension plan assets were recognized.

Healthcare

Increase (Decrease) 2010 2009 Amount % (in Php Millions, unless otherwise stated) Revenue 6,989 5,959 1,030 17.28 EBITDA (Core) 1,344 1,136 208 18.31 Net Profit 381 543 (162) (29.83) Core income 474 528 (54) (10.23)

Hospital's core income 474 469 5 1.07 School's core (losses) - 74 (74) (100.00)

Enrollment statistics 4,746 6,276 (1,530) (24.38)

The Pesos 172 million attributable profits for Healthcare came from its total core income of Pesos 474 million which is Pesos 54 million lower than last year. This was due mainly to the higher operating and maintenance expenses of MDI reflecting investments in personnel, security equipment and buildings combined with lower than planned for in and out-patient levels and the reduced earnings of the schools' operations.

The decrease in core contributions of hospitals was partly offset by the contributions of newly acquired hospital companies – Riverside Medical Center, Inc. (RMCI) and East Manila Hospital Managers Corporation (EMHMC). RMCI’s core income contributions for 2010 amounted to Pesos 16 million representing 51% MPIC share in RMCI’s seven-months core income in 2010. EMHMC, a 100%-owned subsidiary of MPIC, added Pesos 3 million core income contributions representing two months operations in 2010. EMHMC was incorporated on October 15, 2010.

Medical Doctors, Inc. or MDI, a 35%-owned associate of MPIC, the operator of Makati Medical Center and Cardinal Santos, contributed Pesos 113 million to core income. This is 12% lower than previous year’s contribution due to higher operating costs and depreciation as a result of expansion projects and the underperformance of the schools. Net income of MDI however declined by 44% in 2010 due to nonrecurring losses incurred in relation to the impairment of some of its receivables.

Davao Doctors Hospital or DDH, also a 35%-owned associate of MPIC, the operator of Davao Doctors Hospital, the biggest hospital in Davao, contributed Pesos 40 million in 2010. Net income decreased by

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Metro Pacific Investments Corporation 77

23% compared with last year due to the weak performance of Davao Doctors College and higher operating costs.

Manila North Harbour Port, Inc.

Manila North Harbour Port, Inc. (MNHPI), a joint venture between MPIC and Harbour Centre Port Terminal, Inc. (HCPTI) was incorporated on November 5, 2009 for the purpose of developing, maintaining and operating the Manila North Harbor and other port facilities.

In June 2010, as a result of inconclusive negotiation of agreements with the proposed partner, MPIC divested its entire 35% interest in Manila North Harbour Port, Inc., for a full recovery of its investment, from its joint venture partner Harbour Center Port Terminal, Inc.

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78 2010 Annual Report

MPIC CONSOLIDATED BALANCE SHEETS

The changes in the Company’s financial position are explained below:

Audited Increase (Decrease) 2010 % 2009 % Amount % (in Php Millions) ASSETS Current assets Cash and cash equivalents 4,942 43.84 6,380 24.72 (1,438) (22.54) Short-term deposits 6 0.05 2,433 9.43 (2,427) (99.75) Receivables - net 2,381 21.12 13,475 52.22 (11,094) (82.33) Advances to contractors and consultants 288 2.56 528 2.05 (240) (45.45) Inventories - at cost 159 1.41 96 0.37 63 65.63 Real estate for sale 187 1.66 187 0.72 - - Due from related parties - net 439 3.89 501 1.94 (62) (12.38) Derivative assets 3 0.03 - - 3 - Available-for-sale financial assets 546 4.84 283 1.10 263 92.93 Noncurrent asset held for sale - - 329 1.27 (329) - Other current assets 2,321 20.59 1,594 6.18 727 45.61 11,272 100.00 25,806 100.00 (14,534) (56.32)

Noncurrent Assets Investments in associates and interest in joint ventures 34,872 29.04 27,370 26.42 7,502 27.41 Investment in bonds - - 401 0.39 (401) (100.00) Goodwill 12,751 10.62 12,552 12.12 199 1.59 Receivables 675 0.56 - - 675 - Due from related parties 65 0.05 65 0.06 - - Service concession assets 69,348 57.74 62,185 60.03 7,163 11.52 Property and equipment - net 1,423 1.18 634 0.61 789 124.45 Derivative assets 32 0.03 39 0.04 (7) (17.95) Available for sale financial assets 513 0.43 - - 513 - Deferred tax assets 275 0.23 215 0.21 60 27.91 Other noncurrent assets 149 0.12 132 0.13 17 12.88 120,103 100.00 103,593 100.00 16,510 15.94

 Cash and cash equivalents and short-term deposits – (Decrease) This is mainly the result of cash outlays for capital expenditures by Maynilad and MPTC, transaction costs by the Parent Company in relation to investment in Beacon, and the effect of Peso appreciation against the Dollar on Maynilad dollar holdings from Pesos 46.20 in December 31, 2009 to Pesos 43.84 in December 31, 2010.

 Receivables – current portion – (Decrease) This is mainly due to the collection of the Pesos 11.2 billion loan extended to First Philippine Utilities Corporation (“FPUC”).

 Advances to contractors and consultants – (Decrease) This is mainly due to the application against progress billings received for the construction of Segment 8.1.

 Inventories – (Increase) This is mainly due to the additional purchase of inventories, net of utilization/expense and the consolidation of inventories of RMCI and EMHMC.

 Real estate for sale – (No movement) This is composed of condominium units pertaining to conveyed properties in settlement of ABHC Note. See discussion in Note 6 of the accompanying Audited Financial Statements.

 Noncurrent asset held for sale – (Zeroed Out) This account represents investments in Landco previously classified as assets and liabilities of disposal group in 2008’s Balance Sheet and

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Metro Pacific Investments Corporation 79

was shown as a noncurrent asset held for sale as of December 31, 2009. A portion representing 15% of the equity in Landco was sold to AB Holdings Corp. in 2010 while the remaining 19% shareholding in Landco was reclassified to Available-for-Sale financial assets. See discussion in Note 6 of the accompanying Audited Financial Statements.

 Available-for-sale financial assets – current portion – (Increase) This is due to reclassification of the remaining investments in Landco to this account. Landco shares were previously reflected under Asset held for Sale and reclassified upon reduction of shareholding to 19% consistent with strategy of seeking to exit equity participation in Landco. The other components of this account represent shares of stock which are unquoted consisting of NE Pacific Shopping Center (NEPSCC) shares, and Bonifacio Land Corporation (BLC) shares. NEPSCC is the operator of a shopping mall while BLC and Landco are real estate companies. NEPSCC shares were conveyed to MPIC in 2009 as a settlement for the ABHC Note and partial settlement of the MPIC loan as discussed in Note 6 of the accompanying Audited Financial Statements.

 Derivative assets – current portion – (Increase) This is due to cross currency swap transactions at MPTC.

 Due from related parties- current portion – (Decrease) This is due to payments of intercompany advances for the period.

 Other current assets – (Increase) This represents additional sinking fund in Maynilad and Head Office to fund scheduled payments of interest on existing loans plus higher input VAT and prepayments at Maynilad and other deposits related to the Cooperation Agreement as discussed in Note 11 of the accompanying Audited Financial Statements.

 Investments in associates and joint ventures – (Increase) This is mainly attributable to the following: (a) investment in Beacon to fund acquisition of additional Meralco shares; and (b) equity in net earnings of the associates and joint ventures for the year. This was partly offset by the sale of the investments in MNHPI on June 28, 2010.

 Investment in Bonds – (Zeroed out) This pertains to MNTC’s partial sale of its investments in retail treasury bonds prior to their maturity. As discussed in Note 10 of the accompanying Audited Financial Statements, the pre-termination of these bonds precludes the Company from classifying any existing and new investments as “Investment in Bonds – Held to Maturity”, hence it was reclassified to “Available-for-Sale Financial Assets” as of December 31, 2010.

 Goodwill – (Increase) Due to the provisional goodwill related to the acquisition of Riverside Medical Center Inc. (RMCI) which happened in May 31, 2010 and provisional goodwill related to OLLHI recorded upon acquisition by EMHMC which was incorporated in October 2010. See Note 4 of the accompanying Audited Financial Statements for further details.

 Due from related parties - noncurrent – (Decrease) This reflects partial collection of the long- term receivable of MPTDC from a financial guarantee obligation of TMC. The receivable is equivalent to the financial guarantee obligation recorded as the present value of the guaranteed portion of the liability of TMC by MPTDC.

 Receivable – noncurrent – (Increase) This pertains to the noncurrent portion of receivables in relation to the term sheet executed between MPIC, ABHC and Landco. See Note 6 of the accompanying Audited Financial Statements for more details.

 Service concession assets – (Increase) The increase is mainly due to the additional concession fees related to the extension of concession term and capital expenditures for the year, net of amortization.

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80 2010 Annual Report

 Property and equipment, net – (Increase) This is mainly due to additional PPE from RMCI and EMHMC which were consolidated for the first time upon acquisition last May 31, 2010, and November 2010, respectively, net of depreciation for the period.

 Derivative Assets - noncurrent – (Decrease) This represents MPIC’s option to convert the preferred shares of Landco to common shares. Such derivative asset will be carried at cost until such time the option will be exercised or has expired. See Note 6 of the accompanying Audited Financial Statements for further details.

 Deferred Tax Assets – (Increase) This mainly represents the tax asset recorded in Maynilad’s books related to its pension movement for the period.

 Other noncurrent assets – (Increase) This is due to MPTC’s additional deferred financing charges, deferred charges for PNR project and miscellaneous deposits for the period.

Audited Increase (Decrease) 2010 % 2009 % Amount % (in Php millions) Current Liabilities Accounts payable and other current liabilities 7,711 52.09 6,218 53.34 1,493 24.01 Unearned toll revenues 31 0.21 21 0.18 10 47.62 Unearned tuition and other school fees 29 0.20 - - 29 - Income tax payable 31 0.21 11 0.09 20 181.82 Due to related parties 469 3.17 430 3.69 39 9.07 Derivative liabilities 212 1.43 - - 212 - Current portion of: Provisions 2,188 14.78 1,870 16.04 318 17.01 Service concession fees payable 1,179 7.96 1,208 10.36 (29) (2.40) Long-term debts 2,954 19.95 958 8.22 1,996 208.35 Deferred credits and other long-term liabilities - - 942 8.08 (942) (100.00) 14,804 100.00 11,658 100.00 3,146 26.99

Noncurrent Liabilities Noncurrent portion of: Provisions 309 0.60 416 0.72 (107) (25.72) Service concession fees payable 7,951 15.50 9,072 15.79 (1,121) (12.36) Long-term debts 29,569 57.65 41,828 72.79 (12,259) (29.31) Deferred credits and other long-term liabilities 4,162 8.11 3,433 5.97 729 21.24 Due to related parties 6,314 12.31 - - 6,314 - Derivative liabilities - - 44 0.08 (44) (100.00) Accrued retirement costs 49 0.10 - - 49 - Deferred tax liabilities 2,938 5.73 2,673 4.65 265 9.91 51,292 100.00 57,466 100.00 (6,174) (10.74)

Equity Capital stock 20,205 37.27 20,178 39.36 27 0.13 Additional paid-in capital 27,508 50.74 27,860 54.35 (352) (1.26) Deposit for future stock subscriptions 12 0.02 - - 12 - Other reserves 629 1.16 451 0.88 178 39.47 Retained earnings 5,954 10.98 2,886 5.63 3,068 106.31 Other comprehensive income reserve (90) (0.17) (110) (0.21) 20 (18.18) Total equity attributable to owners of the Parent Company 54,218 100.00 51,265 100.00 2,953 5.76

Non-controlling interest 11,061 9,010 2,051 22.76

 Accounts payable and other current liabilities - (Increase) Net increase is a result of increases in trade payables, accounts payable and accrued expenses both for MPTC and Maynilad

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related to capital expenditures and operating expenses which was partially offset by decrease in MPTC’s withholding taxes payable.

 Unearned toll revenues - (Increase) This came from MPTC’s sale of magnetic cards and transponders (prepaid cards).

 Unearned tuition and other school fees - (Increase) This came from Riverside’s school operations consolidated for the first time since its acquisition on May 31, 2010.

 Income tax payable - (Increase) This is due to accrual of additional income taxes of the Group, net of payment for the period.

 Due to related parties - current portion – (Increase) Due to intercompany advances for the period, net of payments.

 Derivative Liabilities – (Increase) This is due to cross currency swap transactions at MPTC.

 Provisions - current portion – (Increase) This pertains to MPTC’s periodic provision for heavy maintenance related to construction costs for full blown construction of Phase 2 Segment 8 as well as claims and potential claims against a subsidiary and estimated liabilities for certain fees under the STOA and Operation and Maintenance Agreement entered into by MNTC.

 Service Concession Fees payable - current portion – (Decrease) This is mainly due to actual payments made for the period, net of additional concession fees related to the extension of concession term. The appreciation of peso against the foreign denominated loans contributed to the decline in this account.

 Long-term debt - current portion – (Increase) This came from the first time consolidation of RMCI’s loans in 2010 and acceleration of some of MNTC’s loans made payable during the first quarter of 2011.

 Deferred credits and other long-term liabilities - current portion – (Zeroed Out) Relates to settlement of payables from rate rebasing exercise of Maynilad which was offset against customers’ accounts receivable.

 Provisions noncurrent portion – (Decrease) This pertains to MPTC’s periodic provision for heavy maintenance related to construction costs for full blown construction of Phase 2 Segment 8.

 Service concession fees payable - noncurrent portion – (Decrease) This is due to actual payments made for the period by Maynilad and appreciation of peso for the period.

 Long-term debt - noncurrent portion – (Decrease) Interest-bearing debt decreased as a result of the transfer to Beacon of the Pesos 11.2 billion loan taken on by MPIC in relation to acquiring shares in MERALCO and the effect of Peso appreciation in the restatement of foreign currency denominated long-term debts.

 Deferred credits and other long-term liabilities - noncurrent portion – (Increase) The change principally reflects the effect of the restatement of Maynilad’s USD $125 million loan and foreign currency denominated concession fees payable charged to deferred credits account.

 Due to related parties - noncurrent portion – (Increase) This is due to the issuance of a Pesos 6.6 billion convertible bond payable to Metro Pacific Holdings Inc.

 Derivative liabilities – (Zeroed out) This represents the reclassification to current portion of the remaining MPTC cross currency swap (fair value of derivative payment) expected to be settled in 2011.

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82 2010 Annual Report

 Accrued retirement costs - noncurrent – (Increase) Due to actuarial losses recognized in pension plan assets of Maynilad, MNTC and RMCI.

 Deferred tax liabilities – (Increase) This represents MPTC’s and Maynilad’s tax liabilities relating to the acceleration of project completion, net of capital expenditure for the year, as well as deferred tax on the convertible bond issued to MPHI.

 Capital stock – (Increase) This reflects the 27.3 million ESOP shares exercised during the year.

 Additional paid-in capital – (Decrease) This reflects the equity restructuring approved in July to apply deficit against additional paid-in capital, partially offset by the premium on the issuances from ESOP shares exercised for the year.

 Deposit for future stock subscription – (Increase) This pertains to exercise of ESOP shares, the certificates for which were released in January 2011.

 Other reserves – (Increase) This pertains to the value of the convertibility feature of the Pesos 6.6 billion loan due to MPHI and expenses related to new ESOP grant charged to equity.

 Retained earnings – (Increase) The movement is attributable to the net income earned and equity restructuring, net of dividends declared in 2010.

 Other comprehensive income – (Decrease) This represents the downward movement in the fair value of MPTC cross currency swap (fair value of derivative receipt) due to appreciation of the Peso during the period.

 Non-controlling interest – (Increase) This is related to minority’s share in the net income for the year and the minority interest of RMCI which is consolidated for the first time upon acquisition in May 2010.

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Metro Pacific Investments Corporation 83

Liquidity and Capital Resources

During the year, MPIC invested a total of Pesos 7.1 billion (2009: Pesos 24.9 billion) to expand its core business portfolio mainly consisting of additional investments in Meralco through Beacon, RMCI and EMHMC.

The following table shows a summary of the Group’s audited statements of cash flows for the years ended December 31, 2010 and 2009 as well as our consolidated capitalization as of December 31, 2010 and 2009:

Audited Increase (Decrease) 2010 2009 Amount % (in Php Millions)

Cash Flows Net cash provided by operating activities 14,187 12,678 1,509 11.90 Net cash used in investing activities (5,066) (26,346) 21,280 (80.77) Capital expenditures 9,009 4,942 4,067 82.29 Net cash (used in) provided by financing activities (10,558) 17,844 (28,402) (159.17) Net increase (decrease) in cash and cash equivalents (1,438) 4,174 (5,612) (134.45)

Capitalization Long-term debt net of current portion 29,569 41,828 (12,259) (29.31) Current portion of long-term debt 2,954 958 1,996 208.35 Total 32,523 42,786 (10,263) (23.99) Total equity attributable to owners of the Parent Company 54,218 51,265 2,953 5.76

Cash and cash equivalents 4,942 6,380 (1,438) (22.54) Short-term deposits 6 2,433 (2,427) (99.75)

As of December 31, 2010, MPIC’s consolidated cash and cash equivalents and short-term investments totaled Pesos 4,948 million. This declined by Pesos 3,865 million from Pesos 8,813 million in 2009. Principal sources of consolidated cash and cash equivalents in 2010 were cash flows before income taxes paid from operating activities amounting to Pesos 14,187 million compared to net cash used for operations of Pesos 12,678 million in 2009. The increase is mainly attributable to improved operational performance of subsidiaries as discussed previously. Cash flows used for financing activities contributed to the net decline in cash for 2010 consisting of settlement of loans and dividends paid for the year as well as cash used for additional investments in associates and joint ventures during the year.

Operating Activities

MPIC’s consolidated net operating cash flow in 2010 posted a 12% increase from Pesos 12.68 billion to Pesos 14.19 billion. This was primarily due to increased net income for the year and more prudent cash management.

A large portion of the Group’s cash flow from operating activities is generated by the water utility which accounted for 65% of the Group’s total revenues in 2010 and 66% in 2009. Revenues from the toll roads business accounted for 32% in 2010 and 34% in 2009.

Cash flow from operating activities of the water utility amounted to Pesos 11.61 billion in 2010, a Pesos 7.96 billion increase from net cash outflow of Pesos 3.65 billion in 2009. The increase is attributable to higher net income (increased billed volume and tariff) for the period. For the toll roads business, cash flow from operating activities increased by 13% to Pesos 3.01 billion in 2010 from Pesos 2.66 billion in 2009 due mainly to higher income for the year driven by increased traffic volume.

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84 2010 Annual Report

Investing activities

Net of dividends received, net cash used in investing activities amounted to Pesos 5.07 billion in 2010 which is summarized below:

Meralco. From July 2009 through October 2009, MPIC acquired a total of 163,602,961 common shares of Meralco for an aggregate purchase price of Pesos 24.5 billion representing 14.67% of the issued and outstanding share capital of Meralco through series of transactions and open market purchases. In March 2010, MPIC and PCEV decided to consolidate their shareholdings in Meralco to Beacon, a 50%- 50% joint venture company of MPIC and PCEV. During the year, Beacon purchased additional shareholdings in Meralco reaching 34.8% by the first quarter of 2010. MPIC invested Pesos 6.6 billion in Beacon Preferred Shares to fund the acquisition of additional shares in Meralco.

Riverside Medical Center Inc. In May 2010, MPIC acquired a 51% interest in RMCI, the biggest hospital in Bacolod with 272-bed capacity.

East Manila Hospital Managers Corporation. On October 23, 2010, East Manila Hospital Managers Corporation entered into a lease agreement with Our Lady of Lourdes Hospital, Inc. and Servants of the Holy Spirit over Our Lady of Lourdes Hospital (OLLH). The intent of MPIC, similar to its previous investments in hospitals, is to operate, manage and improve the hospital.

Capital expenditures of the Group amounted to Pesos 9,009 million in 2010, compared with Pesos 4,942 million in 2009. The increase is mainly attributable to increased construction costs at Maynilad.

Collection of the Pesos 11.2 billion Notes Receivable from First Philippine Utilities Inc. in March 2010 also contributed to the significant decline in the investing activities outflow.

Financing Activities

The Company’s consolidated cash flows from financing activities turned around from a source of Pesos 17,844 million in 2009 to an outflow of Pesos 10,558 million in 2010. This is due mainly to capital and loans raised in 2009. The transfer of the investments in Meralco and related borrowings to Beacon contributed to lower debt level in 2010.

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Comparison of Other Financial Years

2009 versus 2008

MPIC CONSOLIDATED STATEMENTS OF INCOME

Audited Increase (Decrease) 2009 2008 Amount % (in Php millions) Revenues 16,108 5,041 11,067 219.54 Cost of services 7,121 2,371 4,750 200.34 General and administrative expenses 2,950 1,443 1,507 104.44 Construction revenue 4,879 4,159 720 17.31 Construction costs 4,771 4,092 679 16.59 Interest expense 4,012 1,161 2,851 245.56 Foreign exchange losses (gains) - net 985 500 485 97.00 Interest income 499 279 220 78.85 Share in net earnings of associates and joint ventures 432 144 288 200.00 Other income 2,829 1,659 1,170 70.52 Other expenses 577 789 (212) (26.87) Provision for (benefit from) income tax (70) (63) (7) 11.11 Income (loss) from discontinued operations, net of tax (32) 42 (74) (176.19) Net income attributable to owners of the Parent Company 2,300 526 1,774 337.26

Revenues

The Company’s revenues increased 2.2 times from Pesos 5,041 million to Pesos 16,108 million. This reflects 11.3% increase in billed volume of Maynilad and the first full year contribution from MPTC which was acquired in November 2008.

Cost of services

The growth in cost of services is consistent with that of revenues as it increased 2 times from Pesos 2,371 million in 2008 to Pesos 7,121 million in 2009. This is mainly attributable to full year consolidation of MPTC as compared to its 1.5 months share in cost of services in 2008. Such increase, however, was offset by lower amortization of concession assets from the extension of MNTC’s concession to 2037 from 2030.

General and administrative expenses

General and administrative expenses increased by 104% in 2009 from Pesos 1.442 million in 2008 to Pesos 2,950 million in 2009. The increase is mainly coming from the following: (a) increased personnel costs;(b) increased provision for doubtful accounts; (c) increased depreciation and amortization in relation to additional capital expenditure made during the year; (d) provision for corporate initiatives; (e) increased maintenance and operating expenses in light of the extension of the concession term of Maynilad; and, (f) increase in other expenses.

Construction margin

Construction margin increased by 62% in 2009 from 2008 due to higher construction revenue recognized at Maynilad.

Interest expense

Interest expense increased by 245% in 2009 due mainly to higher level of long-term debt in 2009 compared with 2008.

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86 2010 Annual Report

Foreign exchange gains (losses) – net

Forex losses in 2009 posted a huge increase from 2008 due to significant forex losses incurred at Maynilad.

Interest income

The 79% increase in interest income in 2009 was brought about by the higher cash levels maintained at Maynilad as well as by the additional interest earned on the receivable from FPUC.

Share in net earnings of associates and joint ventures – net

The 200% increase in MPIC’s cumulative share in net earnings of associates and joint ventures is due mainly to: (a) first time contribution of Meralco for the last quarter of 2009; and, (b) increased shareholdings in the hospital group.

Other income

Other income increased by 71% in 2009 due to the one-time recognition of income from the rate rebasing exercise and FCDA to offset forex losses at Maynilad.

Other expenses

Other expenses declined by 27% in 2009 due to lower provision for decline in value of assets versus 2008.

Provision for (benefit from) income tax

Increase in current income tax is due to higher final taxes for 2009 compared with 2008.

The recognition of higher benefit from deferred income tax in 2009 was brought about by the reversal of deferred tax in light of the award of a five-year income tax holiday to Maynilad from 2011-2015.

Income (loss) from discontinued operations

The Pesos 32 million loss from discontinued operations recorded in 2009 pertains to Landco’s operations. Landco has been discontinued following management’s decision to focus on its operations in infrastructure and healthcare investments.

Consolidated Reported Income Attributable to Parent Company

The increase in reported income by 337% from Pesos 526 million restated income in 2008 to Pesos 2,300 million in 2009 is attributable to the increase in core net income referred to above and nonrecurring gain of Pesos 252 million, partly offset by higher interest expenses incurred by the Parent Company.

Consolidated Core Income

Consolidated core income increased 4.9 times more in 2009 than 2008 reflecting the following:

 Four times increase in contribution from Maynilad to Pesos 1,540 million from Pesos 308 million

 Meralco’s 3-month contribution of Pesos 212 million

 MPTC’s first full year contribution of Pesos 1,279 million in 2009 compared to 1.5 months core contribution in 2008

 Healthcare businesses’ contribution to core net income increased 58% to Pesos 174 million

SEC Form 17- A 2010 Page 45

Metro Pacific Investments Corporation 87  Maynilad, MPTC, Meralco and healthcare accounted for 48%, 40%, 7% and 5% respectively of MPIC’s core profit from operations

Nonrecurring income

Nonrecurring income increased to Pesos 252 million in 2009 from Pesos 179 million in 2008. Net foreign exchange and derivative items made a huge turnaround from a loss of Pesos 453 million in 2008 to a gain of 134 million in 2009. This was mainly due to Peso appreciation for the period of Pesos 1.32 from Pesos 47.52 in end-2008 to Pesos 46.20 in end-2009 which resulted to the recognition of forex gain from the restatement of foreign denominated concession fees payable and debts, partly offset by forex loss arising from the restatement of Maynilad’s US Dollar denominated cash and cash equivalents.

Other nonrecurring gains of Pesos 118 million consist principally of Maynilad's income from rate rebasing of Pesos 806 million, excess of fair value over acquisition cost of additional stake of MPIC in MDI of Pesos 16 million and actuarial gains for Maynilad, MPTC and MDI amounting to a total of Pesos 122 million. This was partially offset by Pesos 610 million tax adjustments on Maynilad related to its income tax holiday from 2010 to 2015 and in part to the extension of its concession term from 2022 to 2037, MPTC's provision for Input VAT of Pesos 207 million not provided for in MPIC's financial statements at the point of acquisition, and Pesos 137 million nonrecurring loss from Meralco resulting from various provisions of customer accounts, net of write-off of refunds.

Water utilities

Increase (Decrease) Maynilad Water Services, Inc. 2009 2008 Amount % (in Php Millions, unless otherwise stated) Revenue 10,619 8,245 2,374 28.79 EBITDA (Core) 6,970 4,981 1,989 39.93 EBITDA margin (Core) 66% 60% 6% 10.00 Core income 3,328 2,323 1,005 43.27 Net income 2,825 1,994 831 41.68 Capital expenditure 4,559 6,375 (1,816) (28.49) Volume of water supplied (MCM) 868 869 (1) (0.10) Volume of water billed (MCM) 350 315 35 11.14 Water billed to supply % 40% 36% 4% 11.11 Non-revenue water % (average) 60% 64% -4% (6.25) Non-revenue water % (year end) 57% 60% -3% (5.00) Billed customers (period end) 814,645 762,315 52,330 6.86 Customer mix (% based on billed volume) Domestic (residential and semi business) 76% 74% 2% 0.03 Nondomestic (commercial and industrial) 24% 26% -2% (0.08)

The Water Utilities business improved from 2008's contribution due mainly to improved performance of Maynilad and the higher effective tariff rate in 2009 as a result of the rate rebasing exercise. Billed volume increased to an all-time high of 350.1 million cubic meters from 315 MCM in 2008 mainly coming from the increase in domestic consumption. Non revenue water likewise continued to decline from 2008's average of 63.8% to 2009's 60%. The approval by Metropolitan Waterworks and Sewerage System of the 15 year-extension of Maynilad's Concession has also enhanced the Company's core results. At MPIC consolidated level, MPIC's increased ownership in water utilities from effective ownership of 42.0% to 58.0% likewise contributed substantially to the positive variance.

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Revenues

Audited Increase (Decrease) 2009 2008 Amount % (in Php Millions) Water Services 8,576 6,420 2,156 33.58 Sewer Services 1,624 1,387 237 17.09 Others 419 438 (19) (4.34) Total Revenues 10,619 8,245 2,374 28.79

Water and sewer services combined grew 30.6% to Pesos 10.2 billion from Pesos 7.81 billion in the same period in 2008. The increase was due to the 11.3% increase in billed volume coupled with an average effective tariff increase of around 17.4%.

The approved tariff increase for the year was composed of a 12.2% CPI or inflationary increase (Pesos 2.42 per cubic meter) implemented on February 20, 2009, and a rate rebasing increase of 22.6% (Pesos 7.44 per cubic meter) effective May 4, 2009. On a weighted average basis, such rate increases should have resulted in a price increase of approximately 25.5%. The effective increase, however, was dampened by higher billed volume growth coming from domestic consumption whose rates are subsidized. As a percentage of billed volume, domestic customers accounted for 76% of total compared to 74.4% in 2008.

Also reducing the growth rate was the 20% discount to “lifeline” customers or those consuming less than 10 cubic meters per month that had been in place since the start of this year but only took effect in April 2008.

Including other contracts and services, total revenue from operations grew at a slightly lower rate of 28.8% to Pesos 10.62 billion from Pesos 8.24 billion in 2008. The lower growth rate was due to the decline in other fees and services as Maynilad, on orders of the regulator, stopped collecting late payment penalty charges beginning April 2008.

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Metro Pacific Investments Corporation 89

Cost and expenses

Audited Increase (Decrease) 2009 2008 Amount % (in Php Millions) Salaries, wages and benefits 1,351 1,234 117 9.48 Amortization of service concession assets 1,323 1,283 40 3.12 Contracted services 462 489 (27) (5.52) Utilities 417 373 44 11.80 Materials and supplies 247 174 73 41.95 Provision for doubtful accounts 226 102 124 121.57 Repairs and maintenance 221 175 46 26.29 Depreciation and amortization 119 112 7 6.25 Regulatory costs 98 81 17 20.99 Collection charges 96 87 9 10.34 Taxes and licenses 90 85 5 5.88 Rental 77 67 10 14.93 Business meetings and representations 64 67 (3) (4.48) Transportation and travel 59 106 (47) (44.34) Insurance 23 18 5 27.78 Advertising and promotion 21 12 9 75.00 Others 80 67 13 19.40 Total cost and expenses 4,974 4,532 442 9.75

Cost and expenses in total went up in total by 9.7% due mainly to (a) increased provision for doubtful accounts; (b) increased repairs and maintenance; (c) increased cost of materials and supplies; and (d) increased advertising and promotions.

Other income and expense

On April 16, 2009, the MWSS Board of Trustees approved a rate rebasing increase for Maynilad of 22.6% of the average basic charge effective fifteen days from publication in a newspaper of general circulation or on May 4, 2009. Incorporated in the approval of the rebasing increase is the final determination on the treatment of certain collections that until recently had been classified as deferred credits pending their resolution.

The net effect of the resolution of these issues is an extraordinary gain of Pesos 1.16 billion. (Note that the estimated tax effect has been eliminated compared to previous estimates as Maynilad obtained a BIR ruling that effectively clarified that gains related to the rate rebasing is covered by Maynilad’s ITH.)

Net income

Net income increased at a relatively slower pace of 41.7% to Pesos 2.82 billion from Pesos 1.99 billion last year, primarily due to the impact of the write-off of approximately Pesos 1.72 billion in deferred tax assets following the approval of Maynilad’s new 6-year income tax holiday.

Core income

Excluding the impact of extraordinary gains and charges, as well as nonrecurring foreign exchange gains or losses, Maynilad’s 2009 core income of Pesos 3,328 million is 37% higher than 2008’s Pesos 2,433 million on account of the increase in billed volume by 11% and effective tariff rate by 7%.

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90 2010 Annual Report

Nonrecurring items

Nonrecurring items recognized for the year include a one-off loss of Pesos 1.72 billion mainly coming from tax write-offs related to the ITH extension. However, this was partially offset by Pesos 1.39 billion income from rate rebasing. Net foreign exchange loss of Pesos 83 million was also recorded for the year representing net realized loss from US dollar transactions and holdings.

Toll Roads

Metro Pacific Tollways Corporation Increase (Decrease) 2009 2008 Amount % (In Php Millions unless otherwise stated) Revenue 5,489 5,198 291 5.60 EBITDA (Core) 3,313 2,996 317 10.58 EBITDA margin (Core) 60% 58% 0 4.10 Core income 1,220 987 233 23.61 Net income attributable to equity holders of MPTC 582 784 (202) (25.77) Share in net earnings of an associate 174 113 61 53.98 Capital expenditure 968 81 887 1,095.06

Average Daily Vehicle Entries - NLEX & Seg 8.1 150,395 141,846 8,549 6.03 Average Daily Vehicle Entries - NLEX 117,527 113,204 4,323 3.82 Average Daily Vehicle Entries - Seg 7 7,049 5,948 1,101 18.50

Average Daily Vehicle Entries - NLEX Open System 117,527 113,204 4,323 3.82 Average Daily Vehicle Entries - NLEX Closed System 39,917 34,589 5,328 15.40

Average Kilometers Travelled - Closed System 2,945,750 2,662,845 282,905 10.62 Average Kilometers Travelled - Seg 7 59,914 50,556 9,358 18.51

MPTC’s 2009 core income attributable to MPIC of Pesos 1,220 million was 23% higher than 2008’s Pesos 990 million, mainly due to 6% increase in traffic volume brought about by lower average fuel prices as discussed above, marketing efforts promoting use by Class 1 and 3 vehicles, continued emphasis on customer service and the full opening of the Subic-Clark Tarlac expressway.

Nonrecurring loss increased by 208% from Pesos 207 million in 2008 to Pesos 638 million in 2009. The increase is mainly coming from the provision for input VAT amounting to Pesos 1.10 billion.

Revenues

Audited Increase (Decrease) 2009 2008 Amount % (in Php Millions) Toll fees 5,487 5,198 289 5.56 Sale of transponders and magnetic cards 2 - 2 - Total Revenues 5,489 5,198 291 5.60

MPTC posted consolidated revenues of Pesos 5,489 million during 2009, Pesos 291 million higher than 2008’s Pesos 5,198 million, as the annual average daily traffic in the NLEX recorded an all-time high of 150,395 vehicle entries. This represents 6% traffic volume growth from 2008 attributable to lower average fuel prices (reduction of 23% and 33.6% for gas and diesel, respectively), opening of SCTEX which extended journeys within NLEX of Subic- and Clark-bound vehicles, marketing efforts promoting entry of roads by Class 1 and 3 vehicles , and continued emphasis on customer service. In addition, the ongoing bridge construction and rehabilitation works along EDSA-Balintawak and Maharlika Highways diverted some of the heavy vehicles to NLEX. Local tourism is continuously promoted

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Metro Pacific Investments Corporation 91

through various initiatives and a high quality of customer service to NLEX motorists is consistently delivered.

Cost and expenses

Audited Increase (Decrease) 2009 2008 Amount % (in Php Millions) Cost of services 2,623 2,642 (19) (0.72) Provision for potential losses on input VAT 1,105 - 1,105 - Salaries and employee benefits 211 229 (18) (7.86) Write-off of input VAT 94 - 94 - Taxes and licenses 57 27 30 111.11 Professional fees 49 78 (29) (37.18) Advertising and marketing expenses 44 38 6 15.79 Outside services 42 34 8 23.53 Depreciation and amortization 34 27 7 25.93 Representation and travel 26 27 (1) (3.70) Management fees 19 6 13 216.67 Provisions 10 - 10 - Communication, light and water 7 8 (1) (12.50) Collection charges 7 7 - - Office supplies 6 6 - - Repairs and maintenance 5 4 1 25.00 Donations and contributions 2 3 (1) (33.33) Training and development costs 1 10 (9) (90.00) Rentals 1 2 (1) (66.67) Miscellaneous 14 12 2 16.67 Total cost and expenses 4,357 3,160 1,197 37.88

Cost of services went down by .7% to Pesos 2.62 billion in 2009 from Pesos 2.64 billion in 2008. The slight increase operating and maintenance costs was offset by the lower amortization of concession assets from the extension of MNTC’s concession to 2037 from 2030.

General and administrative expenses increased to Pesos 1.73 billion from Pesos 517.9 million as the Company recognized a one-time charge amounting to Pesos 1.20 billion for provision for a potential write-off of input VAT. MNTC accumulated such amount as input VAT for its purchases of goods and services. The provision is in light of the Bureau of Internal Revenue’s pending order to impose VAT on toll revenues. Excluding this one-time non-cash charge, the increase in general and administrative expenses was at a manageable 3.4%.

Excluding the effect of expenses relating to VAT, MPTC was able to improve its cost and expenses through prudent cost management. A more thorough review of resource allocations to capital and operating expenditures was implemented to promote better fiscal discipline. Various initiatives were also pursued with aim of promoting operating efficiency. Existing policies and business processes were examined to determine opportunities to rationalize costs related to outsourced services, fuel, supplies and inventories.

Share in net earnings of an affiliate

Equity in net earnings of affiliate, Tollways Management Corporation increased its income contribution to MPTC to Pesos 174 million, 54% greater than 2008. The increase is mainly attributable to the incremental income derived by TMC from the interim O&M agreement with BCDA for SCTEX and NLEX while efficiently managing operating costs.

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92 2010 Annual Report

Other income and expense

Interest expense and other finance cost increased by 6% or Pesos 56 million due to higher nominal interest rate for hedged loans in 2009. MNTC hedged its US Dollar-denominated debts with the change in the toll rate formula to take out adjustments related to foreign currency fluctuations. The hedging transactions substantially eliminated the foreign exchange risk of MNTC. Net foreign exchange and derivative items made a huge turnaround from a loss of Pesos 399 million last year to a gain of Pesos 9 million in 2009. This was mainly due to Peso appreciation in 2009 of Pesos 1.32 from Pesos 47.52 in end-2008 to Pesos 46.20 which resulted to the recognition of forex gain in the restatement of long-term debts.

Net income

Net income attributable to equity holders of MPTC for 2009 reached Pesos 581.7 million, 25.8% lower than the same period of the previous year after a one-time charge amounting to Pesos 741.2 million for provision for write-off of input VAT. MNTC accumulated such amount as input VAT for its purchases of goods and services. The provision is a conservative approach with the Bureau of Internal Revenue’s pending order to impose VAT on toll revenues. Excluding this one-time non-cash charge, net income would have been Pesos 1.32 billion, 68.7% higher than 2008.

Core income

MPTC’s 2009 core income attributable to MPIC of Pesos 1,220 million was 23% higher than 2008’s Pesos 990 million, mainly due to 6% increase in traffic volume brought about by lower average fuel prices as discussed above, marketing efforts promoting use by Class 1 and 3 vehicles, continued emphasis on customer service and the full opening of the Subic-Clark Tarlac expressway.

Nonrecurring items

Nonrecurring loss increased by 208% from Pesos 207 million in 2008 to Pesos 638 million in 2009. The increase is mainly coming from the provision for input VAT amounting to Pesos 1.10 billion.

Power

For the first time, the Company recognized its share in Meralco which contributed Pesos 212 million to the Company's core income. This represents the Company's 14.67% share in net income of Meralco for the quarter ended December 31, 2009. This is net of Pesos 25 million fair value amortization for the intangible asset recognized upon acquisition of Meralco. On a stand-alone basis, Meralco's core income for 2009 is at Pesos 7 bilion of which core income for the quarter was at Pesos 1.5 billion. The Company started to equitize Meralco in October 2009 upon completion of the additional block of shares acquisition that resulted to the Company's ownership in Meralco of 14.67%.

Notwithstanding challenges and developments in its business and the industry, power distributor Manila Electric Company recorded significant gains in its financial results and achieved excellent performance in its operations.

Consolidated revenues, where electricity accounted for 97% of the total, slightly dipped by 3.6% due to a Pesos 0.69 per kilowatthour (kWh) decrease in average generation and transmission charges, as well as adjustment to the estimated amount of electricity distributed but unbilled after scheduled meter readings of the various bill groups.

Total energy sales for the year rose 1.7% to 27,516 GWh over the same period in 2008. The growth in residential consumption, the robust performance of the service sector and the return of self-generating customers to the grid were major factors in the energy sales growth. Meralco served 3.1% more customers in 2009 as their number increased to 4,715 from 4,572 in 2008.

The Consolidated Reported Net Income was Pesos 6.0 billion, better by 114% from 2008. Basic earnings per share on reported net income amounted to Pesos 5.42 or 114% better than in 2008.

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Metro Pacific Investments Corporation 93

Consolidated costs and expenses at Pesos 175.6 billion, 6% lower than 2008 due to lower generation and transmission costs

Following the approval by the ERC, Meralco implemented its first rate adjustment under Performance Based Regulation (PBR) in 2009 at Pesos 1.227 per kWh, with a zero reduction for Corporate Income Tax (CIT) component. Meralco’s last rate adjustment was in June 2003.

In December 2009, the ERC approved Meralco’s Maximum Average Price (MAP) and rate translation for Regulatory Year 2010, which was implemented in January 2010. However, on January 26, 2010, Meralco manifested that it was voluntarily suspending the adjustment effective immediately, until the regulator has resolved a Motion for Reconsideration filed by an intervenor and until all other issues raised by other intervenors have been addressed.

Along with these significant financial results, Meralco showed excellent performance in its operations.

Exceptional was its system loss performance recorded at 8.61% which, for the second consecutive year, is below the 9.5% cap imposed by the Energy Regulatory Commission (ERC). It was also the lowest since 1981 and as a result of this unprecedented achievement, Meralco had no unrecoverable purchased power in 2009.

Likewise excellent was Meralco’s performance in system reliability and efficiency as it established new highs during a year marked by natural catastrophes, economic and transmission grid instability.

Complementing the excellence in operations was Meralco’s performance in customer service delivery, either meeting or exceeding regulatory customer service performance standards and gaining a high level of satisfaction from its customers.

Core income

Consolidated Core Net Income for 2009, which excludes one-time, exceptional charges was at Pesos 7 billion, rising 169% from the Pesos 2.6 billion realized in 2008. Core earnings per share likewise rose at Pesos 6.33, 168% higher than in 2008. The slightly higher volume of energy sold and an adjustment in distribution rates effective May 2009 were the main reasons for the improvement.

Nonrecurring items

Nonrecurring items in 2009 included ERC approved recoveries, adjustments to unbilled electricity, provision for double payment of refund, other provisions and forex.

Healthcare

The Pesos 174 million attributable profit for Healthcare came from its total core income of Pesos 528 million which is Pesos 191 million higher than 2008's core income. This was due mainly to the favorable hospitals operations of both MDI and DDH (Pesos 220 million higher core income than 2008) which was partly offset by the deterioration of the schools' operations (Pesos 29 million decline from 2008).

The increase in core contributions of hospitals resulted from higher occupancy for the period brought about by the increase in bed capacity to 707 from 655 due to the completion and renovation of the new building of MDI this year. The increase in rates in both bed and ancillary services also contributed to the favorable variance. The move to the new building also contributed to the increase in outpatient services and higher mark up for supplies and medicines. On the schools’ core income, the decline is brought mainly by the decrease in number of enrollees for 2009 to 3,396 from 4,527. The shift in preferred courses of the general public from medical-related courses such as nursing to information technology and short-term courses contributed to the decline in revenues and core results in 2009 compared with 2008. On October 21, 2009, MPIC subscribed for an additional 139,983 shares of MDI

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94 2010 Annual Report

for a total subscription of approximately Pesos 160 million, thereby raising MPIC’s ownership in MDI from 32.39% to 34.79%.

The core net income of Davao Doctors Hospital, Inc. increased by 19% from Pesos 120 million in 2008 to Pesos 143 million in 2009. DDH contributed Pesos 46 million of core profitability to MPIC for the period compared with Pesos 37 million in 2008. The increase was due to the excellent results of its hospital operations as a result of new equipment, services and higher bed occupancy of 204 in 2009 compared with 192 in 2008. This more than made up for the reduced enrollment and profitability of its wholly-owned subsidiary, Davao Doctors College, Inc. MPIC equity accounted the results of DDH starting June 2008 and owns 34.85% of DDH as of December 31, 2009.

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Metro Pacific Investments Corporation 95 96 2010 Annual Report INDEPENDENT AUDITOR’S REPORT

Metro Pacific Investments Corporation 97 METRO PACIFIC INVESTMENTS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in Thousands)

December 31 2010 2009

ASSETS

Current Assets Cash and cash equivalents (Notes 7 and 38) P=4,941,693 P=6,379,731 Short-term deposits (Notes 7 and 38) 6,138 2,433,418 Receivables - net (Notes 8 and 38) 2,380,660 13,475,300 Advances to contractors and consultants (Note 11) 288,285 527,571 Inventories - at cost (Note 9) 158,817 96,012 Real estate for sale (Notes 9 and 17) 187,010 187,010 Due from related parties - net (Notes 21 and 38) 439,427 501,080 Derivative assets (Note 38) 2,902 – Available-for-sale financial assets (Notes 6, 10, 17 and 38) 546,424 282,787 Noncurrent asset held for sale (Note 6) – 329,570 Other current assets - net (Notes 11, 19 and 38) 2,320,904 1,593,832 Total Current Assets 11,272,260 25,806,311

Noncurrent Assets Investments in associates and interest in joint ventures (Notes 12, 19 and 38) 34,871,657 27,370,023 Investment in bonds (Notes 10 and 38) – 400,600 Goodwill (Note 4) 12,751,001 12,551,750 Receivables (Notes 8 and 38) 675,029 – Due from related parties (Notes 21 and 38) 65,413 65,569 Service concession assets - net (Notes 13 and 19) 69,348,123 62,185,407 Property and equipment - net (Notes 14 and 19) 1,423,235 634,405 Derivative assets (Notes 6 and 38) 31,713 39,212 Available-for-sale financial assets (Notes 6, 10, 17 and 38) 513,234 – Deferred tax assets - net (Note 31) 275,288 214,992 Other noncurrent assets (Notes 15 and 38) 149,170 131,566 Total Noncurrent Assets 120,103,863 103,593,524

P=131,376,123 P=129,399,835

LIABILITIES AND EQUITY

Current Liabilities Accounts payable and other current liabilities (Notes 16, 17, 36 and 38) P=7,711,053 P=6,217,967 Unearned toll revenues 30,986 21,135 Unearned tuition and other school fees 29,306 – Income tax payable 30,940 10,818 Due to related parties (Notes 21 and 38) 469,495 429,718 Derivative liabilities (Note 38) 211,912 – Current portion of: Provisions (Notes 16 and 17) 2,188,156 1,870,111 Service concession fees payable (Notes 13, 18 and 38) 1,179,026 1,208,467 Long-term debt (Notes 11, 12, 13, 14, 19 and 38) 2,953,944 958,095 Deferred credits and other long-term liabilities (Notes 20, 27 and 38) – 942,279 Total Current Liabilities 14,804,818 11,658,590

(Forward)

98 2010 Annual Report - 2 -

December 31 2010 2009

Noncurrent Liabilities Noncurrent portion of: Provisions (Notes 16 and 17) P=308,343 P=415,827 Service concession fees payable (Notes 13, 18 and 38) 7,951,199 9,071,673 Long-term debt (Notes 11, 12, 13, 14, 19 and 38) 29,569,056 41,828,305 Deferred credits and other long-term liabilities (Notes 20, 27 and 38) 4,162,157 3,432,643 Due to related parties (Notes 21 and 38) 6,314,141 – Derivative liabilities (Note 38) – 44,467 Accrued retirement cost (Note 27) 49,429 – Deferred tax liabilities - net (Note 31) 2,937,618 2,672,692 Total Noncurrent Liabilities 51,291,943 57,465,607

Total Liabilities 66,096,761 69,124,197

Equity (Note 22) Capital stock 20,205,465 20,178,155 Additional paid-in capital 27,508,008 27,860,033 Deposit for future stock subscriptions 12,125 – Other reserves 628,721 451,091 Retained earnings 5,953,705 2,885,936 Other comprehensive income reserve (Note 30) (89,691) (109,743) Total equity attributable to owners of the Parent Company 54,218,333 51,265,472 Non-controlling interest (Note 23) 11,061,029 9,010,166 Total Equity 65,279,362 60,275,638

P=131,376,123 P=129,399,835

See accompanying Notes to Consolidated Financial Statements.

Metro Pacific Investments Corporation 99 METRO PACIFIC INVESTMENTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in Thousands)

Years Ended December 31 2010 2009 2008

OPERATING REVENUES Water and sewerage services revenue P=12,049,524 P=10,618,544 P=4,326,071 Toll fees 5,858,494 5,489,190 715,079 Hospital revenue 577,075 – – School revenue 79,385 – – 18,564,478 16,107,734 5,041,150

COST OF SERVICES (Note 24) (6,845,823) (7,120,665) (2,371,015)

GROSS PROFIT 11,718,655 8,987,069 2,670,135

GENERAL AND ADMINISTRATIVE EXPENSES (Note 25) (3,644,727) (2,949,684) (1,442,717)

OTHER INCOME AND EXPENSES Construction revenue (Note 13) 8,931,922 4,879,072 4,158,922 Construction costs (Note 13) (8,858,619) (4,771,041) (4,092,059) Interest expense (Notes 19 and 28) (4,543,584) (4,012,258) (1,161,430) Foreign exchange gains (losses) - net 1,440,122 (985,448) (499,943) Interest income (Note 28) 574,382 499,221 278,833 Share in net earnings of associates and joint ventures (Note 12) 498,513 432,239 143,934 Dividend income (Note 12) 375,378 – – Other income (Note 29) 1,434,280 2,829,423 1,659,277 Other expenses (Note 29) (2,513,493) (576,705) (789,386) (2,661,099) (1,705,497) (301,852)

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX 5,412,829 4,331,888 925,566

PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 31) Current 102,903 35,559 7,420 Deferred (749) (105,429) (70,498) 102,154 (69,870) (63,078)

INCOME FROM CONTINUING OPERATIONS AFTER INCOME TAX 5,310,675 4,401,758 988,644

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX (Note 6) – (31,895) 42,056

NET INCOME P=5,310,675 P=4,369,863 P=1,030,700

100 2010 Annual Report - 2 -

Years Ended December 31 2010 2009 2008 Net Income (Loss) Attributable to Owners of the Parent Company from: Continuing operations (Note 5) P=2,871,152 P=2,306,253 P=532,633 Discontinued operations (Note 6) – (6,601) (7,088) 2,871,152 2,299,652 525,545 Non-controlling interest (Note 23) 2,439,523 2,070,211 505,155 P=5,310,675 P=4,369,863 P=1,030,700

EARNINGS PER SHARE (Note 32)

Basic Earnings Per Share, Attributable to Owners of the Parent Company Income from continuing operations P=0.142 P=0.194 P=0.154 Loss from discontinued operations – (0.001) (0.002) P=0.142 P=0.193 P=0.152

Diluted Earnings Per Share, Attributable to Owners of the Parent Company Income from continuing operations P=0.142 P=0.181 P=0.103 Loss from discontinued operations – (0.001) (0.002) P=0.142 P=0.180 P=0.101

See accompanying Notes to Consolidated Financial Statements.

Metro Pacific Investments Corporation 101 METRO PACIFIC INVESTMENTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Thousands)

Years Ended December 31 2010 2009 2008

NET INCOME P=5,310,675 P=4,369,863 P=1,030,700

OTHER COMPREHENSIVE INCOME (LOSS) (Note 30) Transaction on cash flow hedges - net of tax (Note 38): Fair value changes of cash flow hedges 19,199 29,393 (52,069) Income tax (5,760) (8,818) 15,621 13,439 20,575 (36,448) Revaluation increment - net of tax: Revaluation increment – – (141,561) Income tax – – 42,468 – – (99,093) Change in fair value of available-for-sale (AFS) financial assets - net of tax (Note 10): Change in fair value of AFS financial assets 23,493 – (14,060) Income tax (7,048) – – 16,445 – (14,060) 29,884 20,575 (149,601)

TOTAL COMPREHENSIVE INCOME P=5,340,559 P=4,390,438 P=881,099

Total Comprehensive Income Attributable to Owners of the Parent Company from: Continuing operations P=2,891,204 P=2,320,060 P=395,023 Discontinued operations – (6,601) (7,088) 2,891,204 2,313,459 387,935 Non-controlling interest 2,449,355 2,076,979 493,164

P=5,340,559 P=4,390,438 P=881,099

See accompanying Notes to Consolidated Financial Statements.

102 2010 Annual Report

– – =60,275,638 =65,279,362 Total Equity Total Equity

– – 77,648 – – 33,465 – – (482) – – – – 280,612 – – (513) – – (206,964) Non- Interest Interest (Note 23) (Note =9,010,166 P controlling controlling =11,061,029 P

– – – – 201,888 201,888 – – (810,578) (810,578) Total Total =51,265,472 P =54,218,333 P

e e – – 77,648 – – 33,465 – – (482) – – – – 280,612 – – – (122,109) 210,198 (513) 88,089 – – – – (206,964) – – Other Other =89,691) P Income Income (Note 30) (Note Reserve Reserve =109,743) P Comprehensiv

– – – – – – – – – – – – – – – (Note 22) (Note Retained Retained Earnings Earnings =2,885,936 (P =5,953,705 (P

– – 2,871,152 20,052 2,891,204 2,449,355 5,340,559 – – – – 403,581 – – – – (206,964) – – Other Other (Note 22) (Note =451,091 P =628,721 P rs of the Parent Company rs of Parent the Reserves Reserves

– – – – 33,465 – – – – – – 280,612 – – – (122,109) (513) – – – – – – =– P P =12,125 P (Note 22) (Note Deposit for Deposit Future Stock Future Year Ended December 31, 2010 31, December Year Ended Subscriptions Subscriptions Attributable to Owne Attributable

– – – – – – – – – – – – – – – Paid-in Paid-in Capital (Note 22) (Note Additional Additional =27,860,033 =27,508,008 P

– – – – – – (482) – – (403,581) – – – – – – – – – – – 27,310 27,310 52,038 12,125 (13,825) (Note 22) (Note =20,178,155 P =20,205,465 P P P Capital Stock Capital lling lling lling lling (Note 33): (Note net of tax (Note 21) (Note of tax net (Note 4) (Note 4) interest (Note business combinations (Note 4) 4) (Note business combinations stockholders stockholders t January 1, 2010 1, 2010 t January METRO PACIFIC INVESTMENTS CORPORATION AND SUBSIDIARIES SUBSIDIARIES AND INVESTMENTS CORPORATION PACIFIC METRO IN EQUITY CHANGES OF STATEMENTS CONSOLIDATED in Thousands) (Amounts A forperiod income the comprehensive Total (ESOP) Plan Stock Option Executive

stock option of Exercise Cost of ESOP costs Transaction Equity restructuring restructuring Equity Equity component of a financial instrument – – instrument financial of a component Equity Loss on disposal of non-controlling interest of non-controlling disposal Loss on of non-contro acquisition Loss on Non-controlling interest arising from from interest arising Non-controlling Cash dividends declared declared dividends Cash At December 31, 2010 31, December At Dividends paid to non-contro paid Dividends Metro Pacific Investments Corporation 103

– – =60,275,638

– – – – 33,637 – – 50,036 – – (628,395) – – 30,611,837 – – 50,000 Interest Interest (Note 23)(Note Equity Total =7,854,107 26,705,886 =9,010,166 P Non-controlling Non-controlling

– – (472,620) (472,620) – – =51,265,472 P =18,851,779 P

– – – – (16,881) (448,300) (465,181) – – – – 33,637 – – (628,395) – – 50,036 – – 30,611,837 – – 50,000 e e Other Other Income Income Reserve Reserve (Note 30)(Note Total =109,743) P =123,550) P Comprehensiv

– – – – – – – – – – – – – (Note 6) (Note (Deficit) (Deficit) Earnings Earnings Retained Retained =1,034,645) (P =2,885,936 (P

– – – – 1,620,929 – – – – – – – – 2,299,652 13,807 2,313,459 2,076,979 4,390,438 – – – =– P P Group Group (Note 6) (Note =16,881 (P Disposal Disposal Reserve of Reserve Classified as Classified Held for Sale Held

– – – – (16,881) – – – – – – – – –

209) - 2 - - - 2 Other Other (Note 22) (Note Reserves Reserves =404,264 P =451,091

– – – – – – (3, – – – – – – 50,036 – – – – =– P P Year Ended December 31, 2009 31, December Ended Year Attributable to Owners of the Parent Company Company Parent of the to Owners Attributable (Note 22) (Note Deposit for Deposit =6,807,293 P Future Stock Future Subscriptions Subscriptions

– – – – – – – – – – Paid-in Paid-in Capital (Note 22) (Note Additional Additional =5,753,809 P =27,860,033

– – – – – – (1,620,929) – – (628,395) – – – – 13,945 13,945 22,901 50,000 50,000 (Note 22) (Note 13,086,483 13,086,483 24,332,647 (6,807,293) =7,027,727 P P =20,178,155 P P Capital Stock Stock Capital

lling lling (Note 33): (Note for the year for year the stockholders stockholders t January 1, 2009 t January 2009 31, t December Dividends paid to non-contro paid Dividends Disposal of Landco (Note 6) (Note of Landco Disposal stock option of Exercise Cost of ESOP Equity restructuring (Note 22) 22) (Note restructuring Equity Executive Stock Option Plan (ESOP) (ESOP) Plan Stock Option Executive 22) (Note costs Transaction shares Preferred shares Common A income comprehensive Total period: the shares during Issuance of A

104 2010 Annual Report

– – =26,705,886

– – – – (58,620) – – 16,400,907 Interest Interest (Note 23)(Note Equity Total =965,388 3,070,064 =7,854,107 P Non-controlling Non-controlling

– – (863,141) (863,141) – – (181,134) (181,134) – – – – 7,886,593 7,886,593 =2,104,676 P =18,851,779 P

– – – – – – – – – – (58,620) – – 16,881 (446,763) (429,882) e e – – 16,400,907 Other Other Income Income =14,060 P Reserve Reserve (Note 30)(Note Total =123,550) P Comprehensiv

– – – – – – – – – – – – – – Deficit Deficit (Note 6) (Note =1,034,645) (P =1,560,190) P

– – – – – – – – 525,545 (137,610) 387,935 493,164 881,099 – – – – – – =– (P P Group Group (Note 6) (Note =16,881 (P Disposal Disposal Reserve of Reserve Classified as Classified Held for Sale Held

– – – – – – – – – – – – 16,881 – –

- 3 - - - 3 Other Other (Note 22) (Note Reserves Reserves =404,264 P =2,307,888

– – – – – – (1,903,624) – – – – – – – – =– P P Year Ended December 31, 2008 31, December Ended Year Attributable to Owners of the Parent Company Company Parent of the to Owners Attributable (Note 22) 22) (Note Deposit for Deposit =6,807,293 P Future Stock Future Subscriptions Subscriptions

– – – – – – – – – – =– P (Note 22) (Note Additional Additional =5,753,809 P Paid-in Capital Capital Paid-in

– – – – – – 1,903,624 – – – – – – (58,620) – – (Note 22) (Note =1,342,918 =7,027,727 P P P Capital Stock Stock Capital lling lling lling interest interest lling ccompanying Notes to Consolidated Financial Statements. Financial Statements. to Consolidated Notes ccompanying business combinations (Note 4) 4) (Note business combinations instruments (Note 19) 19) (Note instruments stockholders stockholders for the year for year the t January 1, 2008 t January cquisition of non-contro 2008 31, t December Non-controlling interest arising from from interest arising Non-controlling Other equity transactions transactions equity Other Equity component of a financial financial of a component Equity Dividends paid to non-contro paid Dividends Transaction costs costs Transaction A income comprehensive Total period the shares during Issuance of 5,684,809 3,908,805 6,807,293 A A a See

Metro Pacific Investments Corporation 105 METRO PACIFIC INVESTMENTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands)

Years Ended December 31 2010 2009 2008 CASH FLOWS FROM OPERATING ACTIVITIES Income from continuing operations before income tax P=5,412,829 P=4,331,888 P=925,566 Loss from discontinued operations before income tax (Note 6) – (77,623) 52,023 5,412,829 4,254,265 977,589 Adjustments for: Interest expense (Notes 6 and 28) 4,543,584 4,012,258 1,297,978 Amortization of service concession assets (Notes 13 and 24) 2,275,835 3,105,386 1,286,456 Interest income (Notes 6 and 28) (574,382) (499,221) (501,183) Share in net earnings of associates and joint ventures (Note 12) (498,513) (432,239) (152,296) Reversal of contingent liabilities (Note 29) (496,935) – – Dividend income (Note 12) (375,378) – – Unrealized foreign exchange loss (gain) - net (309,535) (115,264) 499,943 Mark-to-market loss on derivatives (Note 29) 292,997 19,219 12,832 Reversal of provision for ESOP (Note 29) (259,336) – – Depreciation and amortization (Notes 13 and 14) 259,280 185,130 120,472 Reversal of accruals (Note 29) (204,888) – – Actuarial loss (gain) (Note 29) 152,704 11,860 (19,898) Gain on sale of investments (Notes 6 and 29) (147,073) (25,202) (51,333) Long-term Incentive Plan expense (Notes 20 and 27) 133,009 – – Gain on remeasurement from step up acquisition (54,400) – – Retirement costs (Note 27) 53,223 112,645 59,603 Provision for ESOP (Notes 26 and 33) 34,375 50,036 183,440 Deferred toll revenue realized (21,135) (19,344) (26,910) Day 1 loss (Notes 8 and 29) 20,100 – – Deferred tuition fees realized (3,056) – – Gain on sale of property and equipment (Note 29) (1,920) (13) (409) Income from rate rebasing resolutions - net (Note 29) – (1,404,059) – Provision for decline in value of assets (Note 29) – 68,618 367,251 Provision for contingencies (Note 29) – 54,847 35,830 Reversal of provision for decline in value of assets – (57,086) (262,461) Loss (gain) on debt settlement - net (Note 29) – 9,896 (173,025) Gain on dilution of non-controlling interest (Note 29) – – (757,591) Gain on sale of available-for-sale financial assets – – (4,644) Operating income before working capital changes 10,231,385 9,331,732 2,891,644 Decrease (increase) in: Short-term deposits 2,427,280 4,115,048 (6,715,588) Receivables 191,453 (705,819) (592,435) Advances to contractors and consultants 239,286 (339,160) – Inventories (19,466) (11,607) (57,427) Real estate for sale – – 280,404 Due from related parties 43,706 (206,561) 503,803 Other current assets (763,839) (976,302) 321,102 Increase (decrease) in: Accounts payable and other current liabilities 1,442,179 1,021,183 33,600 Provisions 210,561 223,277 48,538 Accrued retirement cost (108,497) (15,575) (5,331) Net cash generated from (used for) operations 13,894,048 12,436,216 (3,291,690) Unearned toll revenue 30,986 21,135 23,603 Unearned tuition fees 29,306 – – Income tax paid (84,881) (25,825) (16,769) Interest received 317,224 246,535 501,183 Net cash provided by (used in) operating activities 14,186,683 12,678,061 (2,783,673)

(Forward)

106 2010 Annual Report - 2 -

Years Ended December 31 2010 2009 2008

CASH FLOWS FROM INVESTING ACTIVITIES Dividends received from associates (Notes 8 and 12) P=181,507 P=403,104 P=55,200 Dividends received from investment in Beacon Electric’s preferred shares (Note 12) 375,378 – – Interest received 204,051 – – Increase (decrease) in other noncurrent assets (25,471) 49,607 72,108 Collection of or proceeds from sale/disposal of: Notes receivables (Note 8) 11,230,127 – – Investment in bonds (Note 10) 300,000 – – Interest in a joint venture (Note 12) 245,000 – 173,627 Noncurrent asset held for sale (Note 6) 50,000 – – Property and equipment (Note 14) 20,485 17,424 19,576 Available-for-sale financial assets (Note 10) – 411,286 – Investment properties – – 32,479 Acquisition/issuance of: Notes receivables (Note 8) (725,000) (11,205,000) – Available-for-sale financial assets – – (31,356) Investments in associates and interest in joint ventures (Notes 12 and 40) (7,147,188) (10,677,166) (1,327,104) Service concession assets (Notes 13 and 40) (8,931,922) (4,854,556) (2,809,838) Investment in bonds (Note 10) (300,000) (300,000) – Property and equipment (Notes 14 and 40) (270,932) (190,773) (243,993) Investments in subsidiaries, net of cash acquired (Note 4) (272,261) – (10,002,901) Non-controlling interest (Note 4) – – (7,575,700) Net cash used in investing activities (5,066,226) (26,346,074) (21,637,902)

CASH FLOWS FROM FINANCING ACTIVITIES Decrease in deferred credits and other long-term liabilities – (1,114,122) (622,725) Receipt of or proceeds from: Advances from related parties 6,603,646 36,294 2,377,134 Short-term loan (Note 19) – 4,500,000 – Long-term debt (Note 19) 1,523,000 11,777,000 30,392,376 Issuance of shares (Notes 22 and 40) 65,523 14,342,775 3,791,525 Deposit for future stock subscriptions 12,125 – 6,807,293 Payments of/for: Advances from related parties (42,436) (445,158) (9,292,765) Concession fees payable (2,133,958) (1,346,983) (3,744,386) Short-term loan (Note 19) – (4,500,000) (210,814) Long-term debt (Note 19) (11,924,459) (676,700) (1,837,123) Transaction costs on issuance of shares (482) (627,532) (77,911) Transaction costs on issuance of convertible bonds (33,000) (230,032) – Dividends paid to non-controlling stockholders (Notes 16 and 23) (772,690) (330,731) (181,134) Dividends paid to owners of the Parent Company (Note 22) (206,967) – – Interest paid (3,647,886) (3,540,967) (1,004,240) Net cash (used in) provided by financing activities (10,557,584) 17,843,844 26,397,230

EFFECT OF CHANGE IN EXCHANGE RATES ON CASH AND CASH EQUIVALENTS (911) (2,243) (17,593)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,438,038) 4,173,588 1,958,062

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,379,731 2,206,143 248,081

CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 7) P=4,941,693 P=6,379,731 P=2,206,143

See accompanying Notes to Consolidated Financial Statements.

Metro Pacific Investments Corporation 107 METRO PACIFIC INVESTMENTS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Corporate Information

Metro Pacific Investments Corporation (the Parent Company or MPIC) was incorporated in the Philippines and registered with the Securities and Exchange Commission (SEC) on March 20, 2006 as an investment holding company. MPIC’s shares of stock are listed in and traded through the Philippine Stock Exchange (PSE).

The principal activities of the subsidiaries and significant associates and joint ventures of the Parent Company are described in Notes 2 and 12, respectively.

MPIC is 55.6% owned by Metro Pacific Holdings, Inc. (MPHI). MPHI is a Philippine corporation whose stockholders are Enterprise Investment Holdings, Inc. (EIH) (60.0%), Intalink B.V. (26.7%) and First Pacific International Limited (13.3%). First Pacific Company Limited (FPC), a company incorporated in Bermuda and listed in Hong Kong, through its subsidiaries, holds a direct 40.0% equity interest in EIH and investment financing which under Hong Kong Generally Accepted Accounting Principles require FPC to account for the results and assets and liabilities of EIH and its subsidiaries as FPC group companies in Hong Kong. On such basis, FPC is referred to as the ultimate parent company of EIH and of MPIC.

The registered office address of the Parent Company is 10th Floor, MGO Building, Legaspi corner Dela Rosa Streets, Legaspi Village, Makati City.

The accompanying consolidated financial statements as of December 31, 2010 and 2009 and for each of the three years in the period ended December 31, 2010 were approved and authorized for issue by the Board of Directors (BOD) on March 3, 2011.

2. Summary of Significant Accounting Policies

Basis of Preparation The consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments, available- for-sale (AFS) financial assets and investment properties that have been measured at fair value. The consolidated financial statements are presented in Philippine peso, which is MPIC and its Subsidiaries’ (the Company) functional and presentation currency, and all values are rounded to the nearest thousands (000), except when otherwise indicated.

Statement of Compliance The consolidated financial statements have been prepared in compliance with Philippine Financial Reporting Standards (PFRS).

Changes in Accounting Policies The accounting policies adopted are consistent with those of the previous financial year except for the voluntary change in accounting policy as discussed below and the adoption of the new and amended standards and Philippine Interpretations based on International Financial Reporting Interpretations Committee (IFRIC) as of January 1, 2010.

Voluntary Change in Accounting Policy

Investment Properties. FPC, referred to as the ultimate parent company of MPIC, carries investment properties at fair value. As further discussed in Note 12, MPIC acquired investments in Beacon Electric Asset Holdings, Inc. (Beacon Electric) whose main asset is its investment in Manila Electric Company (Meralco). Similar to FPC, Beacon Electric accounts for its investment properties at fair value. As a standalone company, MPIC has no investment properties nor does its current subsidiaries have significant investment properties. Thus, in 2010, to align its policy with FPC and that of Beacon Electric, the Parent Company opted to adopt the fair value model accounting for investment properties. Subsequent to initial recognition, fair value model requires measurement of investment properties at fair value and any gain or loss arising from a change in the fair value of investment properties is recognized in the consolidated statement of income for the period in which it arises.

Investment properties are previously accounted for using the cost model. The change in accounting policy to fair value model resulted in an additional share of P=110.0 million in the 2010 earnings of Beacon Electric, presented as part of “Share in net earnings of associates and joint ventures” in the consolidated statement of income, which additional share in earnings arose from remeasurement to fair value of the investment properties of Meralco. The Company had no significant investment properties in prior years, thus the change in policy did not have material impact on the Company’s prior years consolidated financial statements.

108 2010 Annual Report Adoption of New and Amended Standards and Interpretations

PFRS 3 (Revised), “Business Combinations” and PAS 27 (Amended), “Consolidated and Separate Financial Statements” — PFRS 3 (Revised) introduces significant changes in the accounting for business combinations occurring after becoming effective. Changes affect the valuation of non-controlling interest (previously known as “minority interest”), the accounting for transactions costs, the initial recognition and subsequent measurement of a contingent consideration and accounting for business combinations achieved in stages. These changes will impact the amount of goodwill recognized, the reported results in the period that an acquisition occurs and future reported results. PAS 27 (Amended) requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as a transaction with owners in their capacity as owners. Therefore, such transactions will no longer give rise to goodwill, nor will it give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. The changes by PFRS 3 (Revised) and PAS 27 (Amended) will affect future acquisitions or loss of control of subsidiaries and transactions with non-controlling interests. PFRS 3 (Revised) was prospectively effective while Amended PAS 27 was applied retrospectively subject to certain exceptions.

The adoption of revised PFRS 3 and amended PAS 27 affected the Company’s accounting policies and procedures for business combinations and acquisition and disposal of non-controlling interest during the year. Refer to the sections Basis of Consolidation and Policies on Business Combination and Goodwill for the detailed discussions of the changes as a result of adoption of these revised and amended standards.

PFRS 2, “Share-based Payment (Amendment) - Group Cash-settled Share-based Payment Transactions” — The amendment to PFRS 2 clarified the scope and the accounting for group cash-settled share-based payment transactions.

PAS 39, “Financial Instruments: Recognition and Measurement” (Amendment) - Eligible Hedged Items — This amendment clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as hedged item. This also covers the designation of inflation as a hedged risk or portion in particular situations.

Philippine Interpretation IFRIC 17, “Distributions of Non-cash Assets to Owners” — This interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends.

The adoption of the amendments to PFRS 2 and PAS 39 and the Philippine Interpretation IFRIC 17 did not have any impact on the financial position or performance of the Company.

Improvements to PFRS. Improvements to PFRS, an omnibus of amendments to standards, deal primarily with a view of removing inconsistencies and clarifying wordings. There are separate transitional provisions for each standard. The adoption of the following amendments resulted in changes to accounting policies but did not have any impact on the financial position or performance of the Company.

PFRS 8, “Operating Segments” — This clarifies that segment assets and liabilities need only be reported when those assets and liabilities are included in measures that are used by the chief operating decision maker. As the Company’s chief operating decision maker does review segment assets and liabilities, the Company has continued to disclose this information in Note 5.

PAS 7, “Statement of Cash Flows” — The amendment stated that only expenditure that results in recognizing an asset can be classified as a cash flow from investing activities.

PAS 39 — clarifies the following:

a. that a prepayment option is considered closely related to the host contract when the exercise price of a prepayment option reimburses the lender up to the approximate present value of lost interest for the remaining term of the host contract.

b. that the scope exemption for contracts between an acquirer and a vendor in a business combination to buy or sell an acquiree at a future date applies only to binding forward contracts, and not derivative contracts where further actions by either party are still to be taken.

c. that gains or losses on cash flow hedges of a forecast transaction that subsequently results in the recognition of a financial instrument or on cash flow hedges of recognized financial instruments should be reclassified in the period that the hedged forecast cash flows affect profit or loss.

PAS 36, “Impairment of Assets” — The amendment clarifies that the largest unit permitted for allocating goodwill, acquired in a business combination, is the operating segment as defined in PFRS 8 before aggregation for reporting purposes. The amendment has no impact on the Company as the annual impairment test is performed at the level of the operating segment.

Metro Pacific Investments Corporation 109 The improvements to the following standards and interpretations did not have any impact on the accounting policies, financial position or performance of the Company:

PFRS 2, “Share-based Payment” PFRS 5, “Non-current Assets Held for Sale and Discontinued Operations” PAS 1, “Presentation of Financial Statements” PAS 17, “Leases” PAS 34, “Interim Financial Reporting PAS 38, “Intangible Assets” Philippine Interpretation IFRIC 9, “Reassessment of Embedded Derivatives” Philippine Interpretation IFRIC 16, “Hedge of Net Investment in a Foreign Operation”

Future Changes in Accounting Policies The Company did not early adopt the following PFRS, Philippine Interpretations and amendments to existing standards which are not yet effective as of December 31, 2010:

PFRS 7, “Financial Instruments: Disclosures (Amendment) – Disclosures–Transfers of Financial Assets” (effective for annual periods beginning on or after July 1, 2011) — The amendments will allow users of financial statements to improve their understanding of transfer transactions of financial assets (for example, securitizations), including understanding the possible effects of any risks that may remain with the entity that transferred the assets. The amendments also require additional disclosures if a disproportionate amount of transfer transactions are undertaken around the end of a reporting period.

PFRS 9, “Financial Instruments: Classification and Measurement” (effective for annual periods beginning on or after January 1, 2013) — PFRS 9, as issued in 2010, reflects the first phase of the work on the replacement of PAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in PAS 39. In subsequent phases, hedge accounting and derecognition will be addressed. The completion of this project is expected in the middle of 2011. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Company’s financial assets. The Company will quantify the effect in conjunction with the other phases, when issued, to present a comprehensive picture.

PAS 12, “Income Taxes (Amendment) – Deferred Tax: Recovery of Underlying Assets” (effective for annual periods beginning on or after January 1, 2012) — The amendment provides a practical solution to the problem of assessing whether recovery of an asset will be through use or sale. It introduces a presumption that recovery of the carrying amount of an asset will, normally, be through sale.

PAS 24 (Amended), “Related Party Disclosures” (effective for annual periods beginning on or after January 1, 2011) — This amendment clarified the definition of a related party to simplify the identification of such relationships and to eliminate inconsistencies in its application. The revised standard introduces a partial exemption of disclosure requirements for government-related entities.

PAS 32, “Financial Instruments: Presentation (Amendment) – Classification of Rights Issues” (effective for annual periods beginning on or after February 1, 2010) — This amended the definition of a financial liability in order to classify rights issues (and certain options or warrants) as equity instruments in cases where such rights are given pro rata to all of the existing owners of the same class of an entity’s non-derivative equity instruments, or to acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency.

Philippine Interpretation IFRIC 14 (Amendment), “Prepayments of a Minimum Funding Requirement” (effective for annual periods beginning on or after January 1, 2011) — The amendment provides guidance on assessing the recoverable amount of a net pension asset. The amendment permits an entity to treat the prepayment of a minimum funding requirement as an asset.

Philippine Interpretation IFRIC 15, “Agreements for the Construction of Real Estate” (effective for annual periods beginning on or after January 1, 2012) — This interpretation covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. This interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11 or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion.

Philippine Interpretation IFRIC 19, “Extinguishing Financial Liabilities with Equity Instruments” (effective for annual periods beginning on or after July 1, 2010) — This interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid. The equity instruments issued are measured at their fair value. In case that this cannot be reliably measured, the instruments are measured at the fair value of the liability extinguished. Any gain or loss is recognized in profit and loss.

The Company is currently assessing and determining the impact of adopting the aforementioned new standards, amendments and interpretations in its future reporting and consolidated financial statements.

110 2010 Annual Report Improvements to PFRS Improvements to PFRS is an omnibus of amendments to PFRS. The amendments have not been adopted as they become effective for annual periods on or after either July 1, 2010 or January 1, 2011. The Company is currently assessing the impact of applying in its future reporting the amendments listed below:

PFRS 3, “Business Combination” PFRS 7, “Financial Instruments: Disclosures” PAS 1, “Presentation of Financial Statements” PAS 27, “Consolidated and Separate Financial Statements” PAS 31, “Interests in Joint Ventures” Philippine Interpretation IFRIC 13, “Customer Loyalty Programmes”

Basis of Consolidation

Basis of Consolidation from January 1, 2010. The consolidated financial statements of the Company include the accounts of the Parent Company and its subsidiaries as of December 31, 2010 and 2009.

Subsidiaries are entities over which the Parent Company has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity.

Subsidiaries are fully consolidated from the date the Company obtains control and continue to be consolidated until the date that such control ceases or transferred out of the Company. The financial statements of the subsidiaries are prepared for the same reporting period as the Parent Company using consistent accounting policies for like transactions and other events in similar circumstances. All intra- company balances and transactions, including income, expenses, dividends and unrealized gains and losses arising from intra-company transactions are eliminated in full.

Losses within a subsidiary are attributed to the non-controlling interest even if that results in a deficit balance.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Company loses control over a subsidiary, it:

Derecognizes the assets (including goodwill) and liabilities of the subsidiary Derecognizes the carrying amount of any non-controlling interest Derecognizes the cumulative translation differences, recorded in equity Recognizes the fair value of the consideration received Recognizes the fair value of any investment retained Recognizes any surplus or deficit in profit or loss Reclassifies the Parent Company’s share of components previously recognized in other comprehensive income to profit or loss or retained earnings, as appropriate.

Basis of Consolidation Prior to January 1, 2010. Certain of the above-mentioned requirements were applied on a prospective basis. The following differences, however, are carried forward in certain instances from the previous basis of consolidation:

Acquisitions of non-controlling interest, prior to January 1, 2010, were accounted for using the parent entity extension method, whereby, the difference between the consideration and the book value of the share of the net assets acquired were recognized as goodwill or negative goodwill.

Losses incurred by the Company were attributed to the non-controlling interest until the balance was reduced to nil. Any further excess losses were attributed to the parent, unless the non-controlling interest had a binding obligation to cover these losses. Losses prior to January 1, 2010 were not reallocated between non-controlling interest and the parent shareholders.

Upon loss of control, the Company accounted for the investment retained at its proportionate share of net asset value at the date control was lost. The carrying value of such investments at January 1, 2010 have not been restated.

Metro Pacific Investments Corporation 111 The consolidated subsidiaries of MPIC are as follows:

2010 2009 MPIC Indirect MPIC MPIC Indirect MPIC Direct Interest of Effective Direct Interest of Effective Name of Subsidiary Place of Incorporation Principal Activity Interest Subsidiary Interest Interest Subsidiary Interest

MPIC Subsidiaries

Metro Pacific Tollways Corporation (MPTC) Philippines Investment holding 99.85 99.85 99.85 99.85 Investment holding Metro Pacific Corporation (MPC) Philippines and Real estate 96.60 96.60 96.60 96.60 DMCI-MPIC Water Company, Inc. (DMWC)(a) Philippines Investment holding 55.41 55.41 55.41 55.41 Riverside Medical Center, Inc (RMCI)(b) Philippines Hospital operation 51.00 51.00 – – East Manila Hospital Manager’s Corp. (EMHMC) (c) Philippines Hospital operation 100.00 100.00 – –

MPTC Subsidiaries

Operating Subsidiaries Metro Pacific Tollways Development Corporation (MPTDC) Philippines Investment holding – 100.00 99.85 – 100.00 99.85 Manila North Tollways Corporation (MNTC) Philippines Tollway operations – 67.10 67.00 – 67.10 67.00 Metro Strategic Infrastructure Holdings, Inc. (MSIHI) (d) Philippines Investment holding – 57.00 95.55 – – –

Dormant Subsidiary Luzon Tollways Corporation (LTC) Philippines Tollway operations – 100.00 99.85 – 100.00 99.85

MPC Subsidiaries

Operating Subsidiaries First Pacific Bancshares Philippines, Inc. Philippines Investment holding – 100.00 96.60 – 100.00 96.60 Metro Pacific Management Services, Inc. Philippines Management services – 100.00 96.60 – 100.00 96.60 Metro Tagaytay Land Co., Inc. Philippines Real estate – 100.00 96.60 – 100.00 96.60 Lucena Commercial Land Corporation Philippines Real estate – 65.00 62.79 – 65.00 62.79 First Pacific Realty Partners Corporation (FPRPC) Philippines Investment holding – 50.67 48.95 – 50.67 48.95

Dormant Subsidiaries Metro Capital Corporation Cayman Islands Investment holding – 100.00 96.60 – 100.00 96.60 Metro Pacific Capital Ltd. Cayman Islands Investment holding – 100.00 96.60 – 100.00 96.60 Pacific Plaza Towers Management Services, Inc. Philippines Management services – 100.00 96.60 – 100.00 96.60 Philippine International Paper Corporation Philippines Investment holding – 100.00 96.60 – 100.00 96.60 Pollux Realty Development Corporation Philippines Investment holding – 100.00 96.60 – 100.00 96.60 Uptime Limited Cayman Islands Investment holding – 100.00 96.60 – 100.00 96.60 Metro Asia Link Holdings, Inc. (MALHI) Philippines Investment holding – 60.59 58.52 – 60.59 58.52

DMWC Subsidiary Water and sewerage Maynilad Water Services, Inc. (Maynilad)(a) Philippines services 5.88 91.91 56.80 5.88 94.11 58.03

RMCI Subsidiary

Riverside College, Inc. (RCI) Philippines School operations – 100.00 51.00 – 100.00 51.00

(a) In 2010, Maynilad’s BOD approved the transfer of 88.5 million Maynilad shares held by DMWC to employees. The transferred shares represent 2.2% of Maynilad’s total outstanding capital stock. Accordingly, DMWC’s ownership interest in Maynilad was reduced to 91.91% as of December 31, 2010. (b) Acquired on May 31, 2010 (see Note 4). (c) Incorporated on October 26, 2010 to operate and manage Our Lady of Lourdes Hospital (see Note 4). (d) Acquired on July 20, 2010; MPC also holds a 40.0% direct interest in MSIHI (see Note 4).

MPTC and Subsidiaries. MPTC’s main activity is the holding of shares of MPTDC whose main activity likewise is the holding of shares in MNTC, LTC and Tollways Management Corporation (TMC), an associate. MPTC also holds investment in MSIHI.

MPTDC (then known as First Philippine Infrastructure Development Corporation, FPIDC) established MNTC jointly with Philippine National Construction Corporation (PNCC) for the sole purpose of implementing the rehabilitation of the North Luzon Expressway (NLE) and the installation of appropriate collection system therein referred to as the “North Luzon Tollway Project” or the “Project” (see also Note 13).

112 2010 Annual Report The Project consists of three phases as follows:

Phase I Rehabilitation and expansion of approximately 84 kilometers (km) of the existing NLE and an 8.8-km stretch of a Greenfield expressway

Phase II Construction of the northern parts of the 17-km circumferential road C-5 which connects the current C-5 expressway to the NLE and the 5.85-km road from McArthur to Letre

Phase III Construction of the 57-km Subic arm of the NLE to Subic Expressway

The construction of Phase I was substantially completed in January 2005 and tollway operations commenced on February 10, 2005 following the issuance by the Toll Regulatory Board (TRB) of the Toll Operation Permit on January 27, 2005. On June 5, 2010, Segment 8.1, a portion of Phase II, which is a 2.7 km-road designed to link Mindanao Avenue to the NLE, had officially commenced tollway operation. The remaining portion of Phase II is under pre-construction works while Phase III of the Project has not yet been started.

On June 5, 2010, the Department of Public Works and Highways (DPWH) accepted MPTDC’s unsolicited proposal for the NLE to South Luzon Expressway (SLEx) Connector Road project (“the Connector Road Project”), which is a 13.5-kilometer elevated toll road which will connect the north to south corridor. Following the submission of the required documents, MPTDC was granted the “original proponent” status for the Connector Road project. As of March 3, 2011, 2011, MPTDC continues to discuss with DPWH and other government agencies the said Project.

MNTC is also the assignee of all the rights, interests and privileges over Segment 7, known as the Tipo Road which connects Tipo in Hermosa, Bataan to Subic. As further discussed in Note 35, MNTC was awarded the right to enter into a concession agreement with the Philippine Government, through Bases Conversion and Development Authority (BCDA), for the operation and maintenance of the Subic- Clark-Tarlac Expressway (SCTEx). MSIHI, on the other hand, holds 2.7% interest in Citra Metro Manila Tollways Corporation (CMMTC) (see also Note 10). CMMTC is engaged primarily in the design, construction and financing of the Metro Manila Skyway (in three stages) and the proposed Metro Manila Tollways projects. On January 1, 1999, CMMTC started its regular commercial operations for its Phase 1 of Stage I Project (Bicutan to Magallanes), while Phase 2 of Stage I (Magallanes to Buendia) started its regular operations on July 11, 1999.

MPC and Subsidiaries. MPC and its subsidiaries are engaged in the business of real estate investments and property development, investment holding and management services. MPC also once engaged in the shipping business through Negros Navigation Co., Inc. (Nenaco) of which interest in such Company was entirely disposed in 2008 (see Note 6).

DMWC and a Subsidiary. Prior to being consolidated in MPIC on July 17, 2008, MPIC was a joint venture partner in DMWC. DMWC was then established by MPIC and DMCI Holdings Inc. (DMCI) as a joint venture to acquire equity interest, purchase, negotiate or otherwise deal with or dispose of stocks, bonds of Maynilad. Currently, DMWC’s main activity is the holding of controlling shares of Maynilad. Maynilad, in which MPIC has also a direct interest, holds the exclusive concession granted by the Metropolitan Waterworks and Sewerage System (MWSS), on behalf of the Philippine Government, to provide water and sewerage services in the area of West Metro Manila (see Note 13).

Under the Concession Agreement, MWSS grants Maynilad (as contractor to perform certain functions and as agent for the exercise of certain rights and powers under the Charter), the sole right to manage, operate, repair, decommission and refurbish all fixed and movable assets required (except certain retained assets of MWSS) to provide water and sewerage services in the West Service Area for 25 years commencing on August 1, 1997 to May 6, 2022 (original Expiration Date) or the early termination date as the case may be. As discussed in Note 13, the Concession term was extended by another 15 years to May 6, 2037.

Maynilad is also tasked to manage, operate, repair, decommission and refurbish certain specified MWSS facilities in the West Service Area. Legal title to these assets remains with MWSS. The legal title to all property, plant and equipment contributed to the existing MWSS system by Maynilad during the concession period remains with Maynilad until the Expiration Date (or on early termination date) at which time, all rights, titles and interest in such assets will automatically vest to MWSS.

RMCI and a Subsidiary. RMCI’s main activity is the operations and management of a hospital and its subsidiary, Riverside College, Inc (RCI), a nursing school. RMCI was acquired on May 31, 2010 in line with the Company’s plan to expand its healthcare services (see Note 4).

Metro Pacific Investments Corporation 113 EMHMC. EMHMC’s main activity is the operation and management of Our Lady of Lourdes Hospital (OLLH). As further discussed in Note 4, EMHMC entered into a Lease Agreement with the previous owner and operator of the OLLH. The lease agreement was assessed as, in substance, an acquisition of business qualified as business combination. OLLH is consolidated in MPIC starting October 23, 2010.

Acquisition or Disposal of Non-controlling Interest in a Subsidiary Non-controlling interest represents the portion of profit or loss and the net assets not held by the Parent Company and are presented separately in the consolidated statement of income and within equity in the consolidated balance sheet, separately from total equity attributable to owners of the Parent Company. Starting January 1, 2010, any losses applicable to a non-controlling shareholder of a consolidated subsidiary are attributed to the non-controlling interest even if that results in a deficit balance. Prior to January 1, 2010, losses incurred by the subsidiary were attributed to the NCI until the balance was reduced to nil. Any further excess losses were attributed to the Parent Company, unless the NCI had a binding obligation to recognize the loss.

Starting January 1, 2010, transactions involving non-controlling interest in a subsidiary without a change of control is accounted for as an equity transaction in accordance with PAS 27 (Amended). Any excess or deficit of consideration paid over the carrying amount of non- controlling interest is recognized in equity of the Parent Company. The Company has elected to recognize this effect as other reserves in equity.

Prior to January 1, 2010, acquisition of non-controlling interest is accounted for using the parent entity extension method, whereby the excess of the fair value of consideration given over the net book value of the share in the net assets acquired is recognized as goodwill. When the consideration paid is less than the carrying value acquired, the difference is recognized as a gain in the consolidated statement of income. In an acquisition without consideration involved, the difference between the share of the non-controlling interest in the net assets at book value before and after the acquisition is recognized either as goodwill or a gain from acquisition of non-controlling interest.

Business Combinations and Goodwill

Business Combinations from January 1, 2010. Business combinations are accounted for using the acquisition method of accounting. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed and included in general and administrative expenses.

When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree.

If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through the consolidated statement of income.

Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability, will be recognized in accordance with PAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity.

Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in the consolidated statement of income.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Company’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

If the initial accounting for business combination can be determined only provisionally by the end of the period by which the combination is effected because the fair values to be assigned to the acquiree’s identifiable assets, liabilities can be determined only provisionally, the Company accounts the combination using provisional fair values. Adjustments to those provisional fair values as a result of completing the initial accounting shall be made within 12 months from the acquisition date. The carrying amount of an identifiable asset, liability or contingent liability that is recognized as a result of completing the initial accounting shall be calculated as if its fair value at the acquisition date had been recognized from that date and goodwill or any gain recognized shall be adjusted from the acquisition date by an amount equal to the adjustment to the fair value at the acquisition date of the identifiable asset, liability or contingent liability being recognized or adjusted.

114 2010 Annual Report Business Combination prior to January 1, 2010. In comparison to the above-mentioned requirements, the following differences applied:

Business combinations were accounted for using the purchase method. Transaction costs directly attributable to the acquisition formed part of the acquisition costs. The non-controlling interest was measured at the proportionate share of the acquiree’s identifiable net assets.

Business combinations achieved in stages were accounted for as separate steps. Any additional acquired share of interest did not affect previously recognized goodwill.

When the Company acquired a business, embedded derivatives separated from the host contract by the acquiree were not reassessed on acquisition unless the business combination resulted in a change in the terms of the contract that significantly modified the cash flows that otherwise would have been required under the contract.

Contingent consideration was recognized if, and only if, the Company had a present obligation, the economic outflow was more likely than not and a reliable estimate was determinable. Subsequent adjustments to the contingent consideration were recognized as part of goodwill.

Noncurrent Assets Held for Sale and Discontinued Operations Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

Immediately before classification as held for sale, the assets, or components of a disposal group, are remeasured in accordance with the Company’s accounting policies. Thereafter, generally the assets, or disposal group, are measured at the lower of their carrying amount and fair value less cost to sell. Any impairment loss on a disposal group is first allocated to goodwill, and then to remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets and investment property, which continue to be measured in accordance with the Company’s accounting policies. Impairment losses on initial classification as held for sale and subsequent gains or losses on remeasurement are recognized in the consolidated statement of income. Gains are not recognized in excess of any cumulative impairment loss.

A discontinued operation is a component of the Company’s business that represents a separate major line of business or geographical area of operations that had been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative consolidated statement of income and consolidated statement of comprehensive income are re-presented as if the operation had been discontinued from the start of the comparative period. In the consolidated statement of income of the reporting period, and of the comparable period of the previous year, income and expenses from discontinued operations are reported separately from normal income and expenses down to the level of profit after taxes, even when the Company retains a non-controlling interest in the subsidiary after the sale. The resulting profit or loss (after taxes) is reported separately in the consolidated statement of income.

Property and equipment and intangible assets once classified as held for sale are not depreciated or amortized.

Investments in Associates Investments in associates, where the Company has the ability to exercise significant influence since date of acquisition even though the Company holds less than 20% interest, are accounted for using the equity method. The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by other companies, are considered when assessing whether a company has significant influence. If the conversion or the potential voting rights results to significant influence, equity accounting is applied from the date on which the investee becomes an associate.

Under the equity method, investments are carried in the consolidated balance sheet at cost plus post-acquisition changes in the Company’s share in net assets of investees, less any dividends declared and impairment loss. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. The consolidated statement of income reflects the Company’s share in the financial performance of the associates. Where there had been a change recognized directly in equity of the associate, the Company recognizes its share of any changes and discloses this in the consolidated statement of comprehensive income and changes in equity. Unrealized gains arising from transactions with associates are eliminated to the extent of the Company’s interests in the associates, against the respective investment account. When potential voting rights exist, the investor’s share of profit or loss of the investee and of changes in the investee’s equity is determined on the basis of present ownership interests and does not reflect the possible exercise or conversion of potential voting rights.

The share in net earnings of an associate is shown on the face of the consolidated statement of income. This is the profit attributable to equity holders of the associate and therefore is profit after tax and non-controlling interests in the subsidiaries of the associate.

Metro Pacific Investments Corporation 115 When the Company’s share in the losses of associates equals or exceeds its interests in the associate, the Company provides for additional losses to the extent that the Company has incurred legal or constructive obligations or made payments on behalf of the associate to satisfy the obligations of the associate that the Company has guaranteed or otherwise committed. If the associate subsequently reports profits, the Company resumes recognizing its share of those profits only after its share of the profits equals the share of losses not recognized.

After the application of the equity method, the Company determines whether it is necessary to recognize an additional impairment loss on the Company’s investments in associates. The Company determines at each end of reporting period whether there is any objective evidence that the investment in the associate is impaired. If this is the case, the Company calculates the amount of impairment as the difference between the recoverable amount of the investment in associate and its carrying value and recognizes the same in the consolidated statement of income.

The financial statements of all associates are prepared in the same reporting period as the financial statements of the Parent Company. In 2008, the end of reporting periods of the Parent Company and Davao Doctors Hospital, Inc. (DDH) are different. For purposes of applying the equity method, DDH prepared consolidated financial statements as of September 30, 2008. As allowed by PAS 28, “Investments in Associates”, the end of reporting periods of the Company and that of the associates shall be no more than three (3) months. Where necessary, adjustments are made to bring the accounting policies in line with those of the Company. In 2009, DDH has changed its end of reporting period to December 31 to align with the reporting period of the Parent Company.

Interest in Joint Ventures The Company has an interest in a joint venture which is a jointly controlled entity, whereby the venturers have a contractual arrangement that establishes joint control over the economic activities of the entity. The Company recognizes its interest in a joint venture using the equity method. Under the equity method, such interest is stated at cost plus post-acquisition changes in the Company’s proportionate share in the net assets of the joint venture, less any impairment in value. The consolidated statement of income reflects the Company’s proportionate share of the results of operation of the joint venture from the date of incorporation of the joint venture to the end of reporting period.

The financial statements of the joint venture are prepared for the same reporting period as the consolidated financial statements. Adjustments, if necessary, are made to bring the accounting policies in line with those of the Company and to eliminate share of unrealized gains and losses, if any, arising from intra-company transactions. Losses on transactions are recognized immediately if the loss provides evidence of a reduction in the net realizable value of current assets or an impairment loss. The joint venture is carried at equity method until the date on which the Company cease to have joint control over the joint venture.

Upon loss of joint control, the Company measures and recognizes its remaining investment at its fair value. Any difference between the carrying amount of the former joint controlled entity upon loss of joint control and the fair value of the remaining investment and proceeds from disposal are recognized in the consolidated statement of income. When the remaining investment constitutes significant influence, it is accounted for as investment in an associate.

Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value.

Short-term Deposits Short-term deposits are highly liquid money market placements with maturities of more than three months but less than one year from dates of acquisition.

Financial Instruments The Company recognizes a financial asset or a financial liability in the consolidated balance sheet when it becomes a party to the contractual provisions of the instrument. All regular way purchases and sales of financial assets are recognized on the settlement date. Regular way purchases and sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace. Derivatives are also recognized on a trade date basis.

Initial Recognition. Financial instruments are recognized initially at fair value, which is the fair value of the consideration given (in case of an asset) or received (in case of a liability). The fair value of the consideration given or received is determined by reference to the transaction price or other market prices. If such market prices are not reliably determinable, the fair value of the consideration is estimated as the sum of all future cash payments or receipts, discounted using the prevailing market interest rates for similar instruments with similar maturities. The initial measurement of financial instruments, except for financial instruments at fair value through profit or loss (FVPL), includes transaction costs.

The Company classifies its financial instruments in the following categories: financial assets at FVPL, held-to-maturity (HTM) investments, loans and receivables, AFS financial assets, financial liabilities at FVPL and other financial liabilities.

116 2010 Annual Report The classification depends on the purpose for which the instruments were acquired and whether they are quoted in an active market. Management determines the classification of its instruments at initial recognition and, where allowed and appropriate, re-evaluates such classification at every reporting date.

Subsequent Measurement. The subsequent measurement of financial assets and financial liabilities depends on their classification as follows:

Financial Assets

Financial Assets at FVPL. Financial assets at FVPL include financial assets held for trading and financial assets designated upon initial recognition as at FVPL. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives are also classified as held for trading unless they are designated as effective hedging instruments or a financial guarantee contract. Gains or losses on investments held for trading are recognized in the consolidated statement of income. Interests earned on holding financial assets at FVPL are reported as interest income using the effective interest rate. Dividends earned on holding financial assets at FVPL are recognized in the consolidated statement of income when the right of payment had been established.

Financial assets may be designated at initial recognition at FVPL if any of the following criteria are met:

the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the financial assets or recognizing gains or losses on them on a different basis; or

the assets are part of a group of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or

the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.

Assets and liabilities classified under this category are carried at fair value in the consolidated balance sheet, with any gains or losses being recognized in the consolidated statement of income.

The Company accounts for its derivative transactions (including embedded derivatives) under this category with fair value changes being reported directly in the consolidated statement of income, except when the derivative is treated as an effective accounting hedge, in which case the fair value change is either reported in the consolidated statement of income with the corresponding adjustment from the hedged transaction (fair value hedge) or deferred in equity (cash flow hedge) presented as “Fair value changes on cash flow hedges” under “Other comprehensive income reserve” account.

As of December 31, 2010 and 2009, the Company has outstanding cross currency swaps and interest rate swaps classified as financial assets at FVPL (see Note 38).

Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as financial assets at FVPL, HTM investments or AFS financial assets. After initial measurement, loans and receivables are subsequently measured at amortized cost using the effective interest rate method, less impairment. The amortization is included as part of interest income in the consolidated statement of income. Losses arising from impairment are recognized in the consolidated statement of income. Loans and receivables are included in current assets if maturity is within 12 months after the end of reporting period, otherwise these are classified as noncurrent assets.

Loans and receivables include cash and cash equivalents, short-term and long-term deposits, receivables, investments in preferred shares with mandatory redemption, sinking fund and other deposits, and advances to and due from related parties (see Notes 7, 8, 11, 12 and 21)

HTM Investments. HTM investments are quoted nonderivative financial assets with fixed or determinable payments and fixed maturities for which the Company’s management has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are not included in this classification. When the Company sells other than an insignificant amount of HTM investments, the entire category would be tainted for 2 years and reclassified as AFS financial assets. After initial measurement, these investments are subsequently measured at amortized cost. The amortization is included as part of interest income in the consolidated statement of income. Gains and losses are recognized in the consolidated statement of income when the HTM investments are derecognized and impaired, as well as through the amortization process. The losses arising from impairment of such investments and the effects of restatement on foreign currency denominated HTM investments are also recognized in the consolidated statement of income. Assets under this category are classified as current assets if maturity is within 12 months from the balance sheet date and as noncurrent assets if maturity is more than a year from the balance sheet date.

Metro Pacific Investments Corporation 117 As of December 31, 2009, HTM investments consist of investment in fixed rate retail treasury bonds of the Republic of the Philippines (ROP). As further discussed in Note 3, in view of the pretermination of the HTM investments, the fixed rate retail treasury bonds were reclassified as AFS financial assets in 2010.

AFS Financial Assets. AFS financial assets are non-derivative financial assets that are designated as such or not classified in any of the other categories and these include equity and debt securities. They are purchased and held indefinitely and may be sold in response to liquidity requirements or changes in market conditions.

After initial measurement, AFS financial assets that are quoted are subsequently measured at fair value. The unrealized gains and losses arising from the change in fair value of AFS financial assets are recognized as “Other comprehensive income” in the AFS financial assets reserve until the investment is derecognized, at which time the cumulative gain or loss is recognized in other income, or determined to be impaired, at which time the cumulative loss is reclassified to the consolidated statement of income and removed from the AFS financial assets reserve. When the Company holds more than one investment in the same security, these are deemed to be disposed of on a first- in, first-out basis. The losses arising from impairment of such financial assets are also recognized in the consolidated statement of income. Interest earned on holding AFS financial assets are reported as interest income using the effective interest rate. Dividends earned on holding AFS financial assets are recognized in the consolidated statement of income when the right of payment had been established. AFS financial assets that are unquoted are carried at cost less any impairment in value.

This category includes investments in unlisted shares of CITRA Metro Manila Tollways Corporation (CMMTC), Landco Pacific Corporation (Landco), NE Pacific Shopping Center Corporation (NEPSCC), Bonifacio Land Corporation (BLC), investment in bonds previously classified as HTM investments and investment in preferred shares of Beacon Electric (see Notes 10 and 12).

Financial Liabilities

Financial Liabilities at FVPL. Financial liabilities are classified in this category if these result from trading activities or derivative transactions that are not accounted for as accounting hedges, or when the Company elects to designate a financial liability under this category. Gains and losses from fair value changes of financial liabilities at FVPL are recognized in the consolidated statement of income.

As of December 31, 2010 and 2009, the Company has outstanding cross currency swaps and interest rate swaps classified as financial liabilities at FVPL (see Note 38).

Other Financial Liabilities. This category pertains to financial liabilities that are not held for trading or not designated at FVPL upon the inception of the liability. These include liabilities arising from operations and borrowings.

Issued financial instruments or their components, which are not classified as financial liabilities at FVPL are classified as other financial liabilities, where the substance of the contractual arrangement results in the Company having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue. Any effects of restatement of foreign currency denominated liabilities are recognized in the consolidated statement of income.

Other financial liabilities are recognized initially at fair value and are subsequently carried at amortized cost, taking into account the impact of applying the effective interest method of amortization (or accretion) for any related premium, discount and any directly attributable transaction costs.

All of the Company’s financial liabilities, except for derivative liabilities, are classified as other financial liabilities which includes the following, among others:

a. Loans and Borrowings

All loans and borrowings are initially recognized at fair value of the consideration received less directly attributable transaction costs (referred to as “debt issue costs”). Debt issue costs are amortized over the life of the debt instrument using the effective interest method. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortized cost using the effective interest method. Gains and losses are recognized in the consolidated statement of income when the liabilities are derecognized, as well as through the amortization process. This category generally includes long-term debt.

118 2010 Annual Report b. Financial Guarantee Contracts

Financial guarantee contracts issued by the Company are those contracts that require a payment to be made to reimburse the holder for a loss it incurs because the specified debtor fails to make a payment when due in accordance with the terms of a debt instrument. Financial guarantee contracts are recognized initially as a liability at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. Subsequently, the liability is measured at the higher of the best estimate of the expenditure required to settle the present obligation at the end of reporting period and the amount recognized less cumulative amortization. This category generally includes financial guarantee obligation.

Derivatives and Hedge Accounting Freestanding and separated embedded derivatives are classified as financial assets or financial liabilities at FVPL unless they are designated as effective hedging instruments. Derivative instruments are initially recognized at fair value on the date in which a derivative transaction is entered into or bifurcated, and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Consequently, gains and losses from changes in fair value of derivatives not designated as effective accounting hedges are recognized immediately in the consolidated statement of income.

For the purpose of hedge accounting, hedges are classified primarily either as: (a) a hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment except for foreign currency risk (fair value hedge); or (b) a hedge of the exposure to variability in cash flows attributable to a recognized asset or liability or a highly probable forecasted transaction or foreign currency risk in an unrecognized firm commitment (cash flow hedge); or (c) hedge of a net investment in a foreign operation. The Company has designated certain derivatives as cash flow hedges. The Company did not designate any of its derivatives as fair value hedges and hedges of a net investment in a foreign operation.

At the inception of a hedge relationship, the Company formally designates and documents the hedge relationship to which the Company wishes 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 assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

In cash flow hedges, changes in the fair value of a hedging instrument that qualifies as a highly effective cash flow hedge are included in equity, net of related deferred tax, presented as “Fair value changes on cash flow hedges” under “Other comprehensive income reserve” account in the consolidated balance sheet. The ineffective portion is immediately recognized in the consolidated statement of income.

If the hedged cash flow results in the recognition of an asset or a liability, gains and losses initially recognized in equity are transferred from equity to net income in the same period or periods during which the hedged forecasted transaction or recognized asset or liability affect the consolidated statement of income.

When the hedge ceases to be highly effective, hedge accounting is discontinued prospectively. In this case, the cumulative gain or loss on the hedging instrument that had been recognized in other comprehensive income reserve is retained as such until the forecasted transaction occurs. When the forecasted transaction is no longer expected to occur, any net cumulative gain or loss previously reported in other comprehensive income reserve is charged in the consolidated statement of income.

Embedded Derivatives. An embedded derivative is separated from the host contract and accounted for as derivative if all the following conditions are met:

the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristic of the host contract;

a separate instrument with the same terms as the embedded derivative would meet the definition of the derivative; and

the hybrid or combined instrument is not recognized at fair value through profit or loss.

The Company assesses whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. The Company determines whether a modification to cash flows is significant by considering the extent to which the expected future cash flows associated with the embedded derivative, the host contract or both have changed and whether the change is significant relative to the previously expected cash flows on the contract.

Metro Pacific Investments Corporation 119 Current Versus Non-current Classification of Derivatives Derivative instruments that are not designated and considered as effective hedging instrument are classified as current or non-current or separated into a current and noncurrent portion based on an assessment of the facts and circumstances (i.e., the underlying contracted cash flows).

Where the Company will hold a derivative as an economic hedge (and does not apply hedge accounting), for period beyond 12 months after the end of reporting period, the derivative is classified as non-current (or separated into current and non-current portions) consistent with the classification of the underlying item.

Embedded derivatives that are not closely related to the host contract are classified consistent with the cash flows of the host contract.

Derivative instruments that are designated as, and are considered effective hedging instruments, are classified consistent with the classification of the underlying hedged item. The derivative instrument is separated into a current portion and noncurrent portion only if a reliable allocation can be made.

Classification of Financial Instruments Between Liability and Equity A financial instrument is classified as liability if it provides for a contractual obligation to:

deliver cash or another financial asset to another entity; or

exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Company; or

satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares.

If the Company does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability.

Determination of Fair Value The fair value of financial instruments traded in active markets at the end of reporting period is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction is used since it provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models, and other relevant valuation models.

Amortized Cost Amortized cost is computed using the effective interest rate method less any allowance for impairment and principal reduction. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are integral part of the effective interest rate.

“Day 1” Profit or Loss Where the transaction price in a non-active market is different from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Company recognizes the difference between the transaction price and fair value (a “Day 1” profit or loss) in the consolidated statement of income unless it qualifies for recognition as some other type of asset. In cases where the data is not observable, the difference between the transaction price and model value is only recognized in the consolidated statement of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Company determines the appropriate method of recognizing the “Day 1” profit or loss amount.

Offsetting of Financial Instruments Financial assets and liabilities are offset and the net amount reported in the consolidated balance sheet if and only if, there is a currently enforceable right to offset the recognized amounts and there is intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented at gross amounts in the consolidated balance sheet.

120 2010 Annual Report Impairment of Financial Assets The Company assesses at each end of reporting period whether a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Objective evidence of impairment may include indications that the borrower or a group of borrowers 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 measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Assets Carried at Amortized Cost. The Company first assesses whether objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss on loans and receivables and HTM carried at amortized cost had been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated statement of income. The assets together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral had been realized or had been transferred to the Company. If a write-off is later recovered, any amount formerly charged is credited to the consolidated statement of income.

If, in a subsequent year, the amount of the impairment loss decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the consolidated statement of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.

Assets Carried at Cost. If there is objective evidence that an impairment loss had been incurred on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.

The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated statement of income. The asset together with the 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 Company. 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 future write-off is later recovered, the recovery is credited to the consolidated statement of income.

AFS Financial Assets. For AFS financial assets, the Company assesses at each end of reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired.

In the case of equity investments classified as AFS, this would include a significant or prolonged decline in the fair value of the investments below their 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 reserve and recognized in the consolidated statement of income. Impairment losses on equity investments are not reversed through the consolidated statement of income. Increases in fair value after impairment are recognized directly in other comprehensive income reserve.

Derecognition of Financial Instruments

Financial Asset. 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 Company’s rights to receive cash flows from the asset have expired;

the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or

the Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Metro Pacific Investments Corporation 121 Where the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Company’s continuing involvement in the asset. In that case, the Company also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay.

Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or has expired. 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. The recognition of a new liability and the difference in the respective carrying amounts is recognized in the consolidated statement of income.

Inventories For the tollways and water business, inventories consist of transponders, magnetic cards, materials and supplies and spare parts that are valued at the lower of cost and net realizable value (NRV). Cost includes purchase price and import duties, and is determined using a first- in, first-out method. For transponders and magnetic cards, NRV is the estimated selling price in the ordinary course of business less estimated costs necessary to make the sale. NRV for materials and supplies and spare parts is the current replacement cost.

For the healthcare business, inventories includes medicines, hospital supplies, books and others. Medicine and hospital supplies inventory are stated at the lower of cost or NRV. NRV is the estimated selling price in the ordinary course of business less direct cost to sell. Cost is determined using the moving average method.

Real Estate for Sale Real estate for sale is carried at the lower of cost and NRV. Cost includes the acquisition cost of the land plus all costs directly attributable to the acquisition for projects where the Company is the landowner, and includes actual development costs incurred up to end of reporting period for projects where the Company is both the landowner and developer. Where the Company is only a developer, the cost of real estate for sale pertains only to the actual development costs. NRV is the selling price in the ordinary course of business less estimated costs to complete and make the sale.

Advances to Contractors and Consultants Advances to contractors and consultants represent advance payments for mobilization of the contractors and consultants. These are stated at costs less any impairment in value. These are progressively reduced upon receipt of the equivalent amount of services rendered by the contractors and consultants.

Service Concession Arrangements The Company accounts for its service concession arrangements under the intangible asset model as it receives the right (license) to charge users of public service.

In addition, the Company recognizes and measures revenue and cost in accordance with PAS 11, “Construction Contracts” and PAS 18, “Revenue” for the services it performs. When the Company provides construction or upgrade services, the consideration received or receivable by the Company is recognized at its fair value. The revenue and cost from these services are recognized based on the percentage of completion measured principally on the basis of estimated completion of a physical proportion of the contract works, and by reference to the actual costs incurred to date over the estimated total cost of the project.

The Company recognizes any contractual obligations in relation to the concession agreements in accordance with PAS 37, “Provisions, Contingent Liabilities and Contingent Assets.”

The Company recognizes its contractual obligations to restore the toll roads to a specified level of serviceability in accordance with PAS 37, “Provisions, Contingent Liabilities and Contingent Assets,” as the obligations arises which is as a consequence of the use of the toll roads and therefore it is proportional to the number of vehicles using the toll roads and increasing in measurable annual increments.

Service Concession Assets. The service concession assets acquired through business combinations are recognized initially at the fair value of the concession agreement using multi-period excess earnings method. Additions subsequent to business combinations are initially measured at present value of any additional estimated future concession fee payments pursuant to the Concession Agreement (see Notes 13 and 18) and/or the costs of rehabilitation works incurred. Following initial recognition, the service concession assets are carried at cost less accumulated amortization and any impairment losses.

Service concession assets are amortized using the straight-line method over the term of the service concession. The amortization period and method for an intangible asset with a finite useful life is reviewed at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the service concession asset is accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense is recognized under the “Cost of services” account in the consolidated statement of income.

The service concession assets will be derecognized upon turnover to the Grantor. There will be no gain or loss upon derecognition as the service concession assets, which is expected to be fully depreciated by then, will be handed over to the Grantor with no consideration.

122 2010 Annual Report Property and Equipment Property and equipment, except land, are carried at cost, excluding day-to-day servicing, less accumulated depreciation and any impairment loss. The initial cost of property and equipment comprises its purchase price, including import duties and non-refundable purchase taxes and any directly attributable costs of bringing the property and equipment to its working condition and location for its intended use. Such cost includes the cost of replacing part of such property and equipment and borrowing costs for long-term construction projects when the recognition criteria are met. When significant parts of property and equipment are required to be replaced at intervals, the Company recognizes such parts as individual assets with specific useful lives and depreciation, respectively. Likewise, when a major inspection is performed, its cost is recognized in the carrying amount of the property and equipment as a replacement if the recognition criteria are satisfied. Land is stated at cost less any impairment loss.

Expenditures incurred after the property and equipment have been put into operation, such as repairs and maintenance, are normally recognized as expense in the period such costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as additional cost of the property and equipment.

Depreciation commences once the property and equipment are available for use and is computed on a straight line basis over the estimated useful lives of the assets (see Note 14).

The asset’s residual values, useful lives and depreciation method are reviewed, and adjusted if appropriate, at each financial year-end.

An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated statement of income in the year the asset is derecognized.

Construction in progress is stated at cost less any impairment in value. This includes cost of construction and other direct costs. Construction in progress is not depreciated until such time that the relevant assets are completed and available for its intended use.

Investment Properties Investment properties are initially measured at cost, including transaction costs. 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 cost of day-to-day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at fair value, which have been determined based on the latest valuations performed by an independent firm of appraisers. Gains or losses arising from changes in the fair values of investment properties are included in our consolidated statement of income in the year in which they arise. Where an entity is unable to determine the fair value of an investment property under construction, but expects to be able to determine its fair value on completion, the investment under construction will be measured at cost until such time that fair value can be determined or construction is completed.

Investment properties are derecognized when they have been disposed of or when the investment property is permanently withdrawn from use and no future benefit is expected from its disposal. Any gain or loss on the retirement or disposal of an investment property is recognized in the consolidated statement of income in the year of retirement or disposal.

Transfers are made to or from investment property only when there is a change in use. For a transfer from investment property to owner occupied property, the deemed cost for subsequent accounting is the fair value at the date of change in use. If an owner occupied property becomes an investment property, we account for such property in accordance with the policy stated under property, plant and equipment up to the date of change in use.

Software Cost Software cost (included as part of “Other noncurrent assets” account in the consolidated balance sheet) includes the cost of software purchased from a third party, and other direct costs incurred in the software configuration and interface, coding and installation to hardware, including parallel processing, and data conversion. Software cost is amortized on a straight-line basis over the estimated useful life of five years. The carrying cost is reviewed for impairment on an annual basis, whether there is an indication that software cost maybe impaired.

Impairment of Nonfinancial Assets

Property and Equipment, Service Concession Assets, Investments in Associates and Joint Venture, and Software Cost. The Company assesses at each end of reporting period whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Company makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset 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 assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. Impairment losses are recognized in the consolidated statement of income.

Metro Pacific Investments Corporation 123 The Company bases its impairment calculation on detailed budgets and forecast calculations which are prepared separately for each of the Company’s cash-generating units to which the individual assets are allocated. These budgets and forecast calculations are generally covering a period of five years. For longer periods, a long term growth rate is calculated and applied to project future cash flows after the fifth year.

Impairment losses of continuing operations, including impairment on inventories, are recognized in the consolidated statement of income in those expense categories consistent with the function of the impaired asset, except for a property previously revalued where the revaluation was taken to other comprehensive income. In this case, the impairment is also recognized in other comprehensive income up to the amount of any previous revaluation.

For nonfinancial assets excluding goodwill, an assessment is made at each end of reporting period 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 recoverable amount is estimated. A previously recognized impairment loss is reversed only if there had been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statement of income unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal, the depreciation (in case of property and equipment) and amortization (in case of service concession assets and software cost) charges are adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

Goodwill. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of the cash generating unit, or group of cash-generating units, to which the goodwill relates. Where the recoverable amount of the cash-generating unit, or group of cash- generating units, is less than the carrying amount of the cash generating unit, or group of cash-generating units, to which goodwill had been allocated, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.

Customers’ Guaranty Deposits Customers’ guaranty deposits (included as part of “Deferred credits and other noncurrent liabilities” in the consolidated balance sheet) are initially measured at fair value. After initial recognition, these deposits are subsequently measured at amortized cost using the effective interest rate method. The discount is amortized over the remaining concession period using the effective interest rate method.

Assets Held in Trust Assets which are owned by MWSS but are used in the operations of Maynilad under the Concession Agreement are not reflected in the consolidated balance sheet but carried as Assets Held in Trust, except for certain assets transferred to Maynilad as mentioned in Note 36.

Convertible Bonds Convertible bonds are separated into liability and equity components based on the terms of the contract. On issuance of the convertible bonds, the fair value of the liability component is determined using a market rate for an equivalent non-convertible bond. This amount is classified as a financial liability measured at amortised cost (net of transaction costs) until it is extinguished on conversion or redemption. The remainder of the proceeds is allocated to the conversion option that is recognized and included in equity. Transaction costs are deducted from bonds, net of associated income tax. The carrying amount of the conversion option is not remeasured in subsequent years.

Transaction costs are apportioned between the liability and equity components of the convertible bonds based on the allocation of proceeds to the liability and equity components when the instruments are initially recognized.

Equity Ordinary shares (common stock) are classified as equity and measured at par value for all shares issued. Incremental costs directly attributable to the issue of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects. Proceeds and/or fair value of consideration received in excess of par value are recognized as additional paid-in capital.

Preference share capital (preferred share) is classified as equity if it is non-redeemable, or redeemable only at the Company’s option, and any dividends are discretionary. Dividends thereon are recognized as distributions within equity upon approval by the Company’s shareholders. Preference share capital is classified as a liability if it is redeemable on a specific date or at the option of the shareholders, or if dividend payments are not discretionary. Dividends thereon are recognized as interest expense in the consolidated statement of income as accrued.

Retained earnings (deficit) represent accumulated earnings (losses) net of cumulative dividends declared, adjusted for the effects of equity restructuring and transactions with non-controlling interest.

Other reserves comprise of equity transactions other than capital contributions such as equity component of a convertible financial instrument, transaction with non-controlling interest and share-based payment transactions or Executive Stock Option Plan (ESOP).

124 2010 Annual Report Other comprehensive income reserve comprise items of income and expenses that are not recognized in statement of income as required or permitted by other PFRS.

Non-controlling interest represents the equity interest in DMWC, Maynilad, MPTC, MPTDC, MNTC, RMCI, RCI, MSIHI, MPC, FPRPC and MALHI not held by the Parent Company.

Borrowing Costs Borrowing costs are capitalized if they are directly attributable to the acquisition, construction or production of a qualifying asset. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization on that asset shall be determined as the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investment of those borrowings. To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization shall be determined by applying a capitalization rate to the expenditures on that asset. The capitalization rate shall be the weighted average of the borrowing costs applicable to the borrowings of the Company that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs capitalized during a period shall not exceed the amount of borrowing costs incurred during that period.

Capitalization of borrowing costs commences when the activities necessary to prepare the asset for intended use are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the asset is available for their intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognized. 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 these projects, to the extent that they are regarded as an adjustment to interest costs.

All other borrowing costs are expensed as incurred.

Provisions

General. Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Company expects some or all of a 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 presented in the consolidated statement of income, net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as an interest expense.

Warranties and Guarantees. Provision relates to estimated expenses of concluded and ongoing debt settlement negotiations and certain warranties extended in relation to debt for asset swap arrangements entered in prior years. The amount of provision is recognized upon entering into such arrangement and is based on historical experience or best estimate as a result of ongoing negotiations.

Provision for Heavy Maintenance. Provision for heavy maintenance pertains to the present value of the estimated contractual obligations of the Company to restore the service concession assets or toll road to a specified level of serviceability during the service concession term and to maintain the same assets in good condition prior to turnover of the assets to the Grantor. The amount of provision is accrued every year and presented in the consolidated statement of income and is reduced by the actual obligations incurred for heavy maintenance of the service concession.

Contingent Liabilities Recognized in a Business Combination. A contingent liability recognized in a business combination is initially measured at its fair value. Subsequently, it is measured at the higher of (a) the amount that would be recognized in accordance with the general guidance for provisions above (PAS 37) or (b) the amount initially recognized less, when appropriate, cumulative amortization recognized in accordance with the guidance for revenue recognition (PAS 18)

Operating Segments An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Company’s other components. An operating segment’s operating results are reviewed regularly by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

Segment results that are reported to the chief operating decision maker include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly of corporate assets (primarily the Company’s main office), main office expenses, and income tax assets and liabilities.

Segment capital expenditure is the total cost incurred during the period to acquire property and equipment, and intangible assets other than goodwill.

Metro Pacific Investments Corporation 125 Revenue and Income Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured, 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, excluding discounts, rebates and sales taxes or duty. The Company assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent. The Company has concluded that it is acting as a principal in all of its revenue arrangements. The following specific recognition criteria must also be met before revenue is recognized:

Water and Sewerage Services Revenue. Revenues from water and sewerage services are recognized upon supply of water to the customers. Billings to customers consist of water charges, environmental and sewerage charges.

Toll Fees. Revenue from toll fees is recognized upon sale of toll tickets. Toll fees received in advance, through transponders or magnetic cards, is recognized as income upon the holders’ availment of the toll road services, net of sales discounts. The unused portion of toll fees received in advance is reflected as “Unearned toll revenues” account in the consolidated balance sheet.

Hospital and School Revenues. Revenue is recognized upon rendering of medical and educational services.

Tuition and Other School Fees. Tuition and other school fees are recognized as income over the corresponding school term. Tuition and other school fees related to the succeeding school term which are collected in advance are presented as “Unearned tuition and other school fees” in the consolidated balance sheet.

Sale of Transponders and Magnetic Cards. Revenue is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, which is normally upon delivery.

Construction Revenue. Revenue is recognized by reference to the stage of completion of the contract activity at the end of reporting period. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognized as an expense immediately.

Interest Income. Interest income is recognized as it accrues, using the effective interest method.

Dividends. Revenue is recognized when the right to receive the payment is established.

The following revenue streams were included under “Other income” account in the consolidated statement of income:

Guarantee Fees. Guarantee fees are recognized in accordance with the terms of the agreement.

Sale of Investments. Gain or loss is recognized when risk and rewards of ownership had been transferred to the buyer.

Rental Income. Revenue from rent is recognized on a straight-line basis over the terms of the lease.

Management Fees. Fees are recognized when services are rendered.

Other Income. Recognized when there is an incidental economic benefits, other than the usual business operations, that will flow to the Company and that can be measured reliably.

Cost and Expenses Recognition 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 distributions to equity participants. Cost and expenses other than the items mentioned below are recognized in the consolidated statement of income as incurred.

Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement at inception date of whether the 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. A reassessment is made after inception of the lease only if one of the following applies:

a. there is a change in contractual terms, other than a renewal or extension of the agreement; b. a renewal option is exercised or extension granted, unless the term of the renewal or extension was initially included in the lease term; c. there is a change in the determination of whether the fulfillment is dependent on a specified asset; or d. there is a substantial change to the asset.

126 2010 Annual Report Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) and the date of renewal or extension period for scenario (b).

Leases where the lessor retains substantially all the risks and benefits of ownership of the assets are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as rental income. Contingent rents are recognized as revenue in the period in which they are earned.

Operating lease payments are recognized as income in the consolidated statement of income on a straight-line basis over the lease term.

Retirement Benefits

Defined Contribution Plan. Retirement benefits of the Parent Company’s employees are provided through a defined contribution scheme. The Parent Company operates a Retirement Plan which is a contributory plan wherein the Parent Company undertakes to contribute a predetermined amount to the individual account of each employee and the employee gets whatever is standing to his credit upon separation from the Parent Company. The Plan is managed and administered by a Retirement Committee and a trustee bank had been appointed to hold and invest the assets of the retirement fund in accordance with the provisions of the Plan. The Parent Company records expense for its contribution to the defined contribution plans when the employee renders service to the Parent Company, essentially coinciding with their cash contributions to the plans.

Defined Benefit Plan. MPIC subsidiaries have funded, noncontributory retirement benefit plans covering all their eligible regular employees. The cost of providing benefits under the defined benefit plan is determined using the projected unit credit actuarial valuation method. Actuarial gains and losses are recognized as income or expense immediately in the year when these are incurred.

The past service cost is recognized as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested immediately following the introduction of, or changes to, a retirement plan, past service cost is recognized immediately.

The defined benefit asset or liability is the aggregate of the present value of the defined benefit obligation (using a discount rate of government bonds) reduced by past service cost not yet recognized and the fair value of plan assets out of which the obligations are to be settled directly. If such aggregate is negative, the asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.

Share-based Payment The Company has an ESOP for eligible executives to receive remuneration in the form of share-based payment transactions, whereby executives render services in exchange for the share option.

The cost of equity-settled transactions with employees is measured by reference to the fair value of the stock options at the date at which they are granted. Fair value is determined using an option-pricing model, further details of which are set forth in Note 33. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the share price of the Parent Company (“market conditions”).

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 (“vesting date”). The cumulative expense recognized for equity-settled transactions at each end of reporting period until the vesting date reflects the extent to which the vesting period has expired and the Company’s best estimate of the number of awards that will ultimately vest at that date. The consolidated statement of income credit or expense for a period represents the movement in cumulative expense recognized as at the beginning and end of that period and is recognized as employee benefits.

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 and/or service conditions are satisfied.

Where the terms of an equity-settled award are modified, the minimum expense recognized is the expense as if the terms had not been modified, if the original terms of the award are met. If the modification increases the fair value of the equity instruments granted, as measured immediately before and after the modification, the entity shall include the incremental fair value granted in the measurement of the amount recognized for services received as consideration for the equity instruments granted. The incremental fair value granted is the difference between the fair value of the modified equity instrument and that of the original equity instrument, both estimated as at the date of the modification. If the modification occurs during the vesting period, the incremental fair value granted is included in the measurement of the amount recognized for services received over the period from the modification date until the date when the modified equity instruments vest, in addition to the amount based on the grant date fair value of the original equity instruments, which is recognized over the remainder of the original vesting period. If the modification occurs after vesting date, the incremental fair value granted is recognized immediately, or over the vesting period if the employee is required to complete an additional period of service before becoming unconditionally entitled to those modified equity instruments.

Metro Pacific Investments Corporation 127 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. This includes any award where non-vesting conditions within the control of either the entity or the counterparty are not met. 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 previous paragraph.

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share.

Other Long-term Employee Benefits The Company’s Long Term Incentive Plan (LTIP) grants cash incentives to eligible key executives of the Parent Company and certain subsidiaries. Liability under the LTIP is determined using the projected unit credit method. Employee benefit costs include current service costs, interest cost, actuarial gains and losses and past service costs. Past service costs and actuarial gains and losses are recognized immediately.

The long term employee benefit liability comprises the present value of the defined benefit obligation (using discount rate based on government bonds) at the end of the reporting period.

Foreign Currency Denominated Transactions and Translations The consolidated financial statements are presented in Philippine peso, which is the Parent Company’s functional and presentation currency. All subsidiaries and associates evaluate their primary economic and operating environment and determine their functional currency. Items included in the consolidated financial statements of each entity are initially measured using that functional currency. Transactions in foreign currencies are initially recorded in the functional currency rate of exchange ruling at the date of transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the end of reporting period. All differences are taken to the consolidated statement of income except when qualified as adjustment to borrowing costs.

Foreign exchange differentials relating to the restatement of concession fees payable are deferred in view of the automatic reimbursement mechanism as approved by the MWSS Board of Trustees (BOT) under Amendment No. 1 of the Concession Agreement of Maynilad. Net foreign exchange losses are recognized as deferred Foreign Currency Differential Adjustments (FCDA) and net foreign exchange gains are recognized as deferred credits in the consolidated balance sheet. The write-off of the deferred FCDA or reversal of deferred credits will be made upon determination of the new base foreign exchange rate as approved by the Regulatory Office during every Rate Rebasing exercise, unless indication of impairment of the deferred FCDA would be evident at an earlier date.

Foreign exchange differentials arising from other foreign currency denominated transactions are credited or charged to operations.

Income Taxes

Current Tax. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the tax authority. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the end of reporting period where the Company operates and generates taxable income.

Current income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated statement of income. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.

Deferred Tax. Deferred tax is provided, using the balance sheet liability method, on all temporary differences at the end of reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognized for all taxable temporary differences, except (a) 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 income nor taxable income or loss; and (b) 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 are recognized for all deductible temporary differences, carryforward benefits of unused tax credits from excess minimum corporate income tax (MCIT) over the regular corporate income tax (RCIT) and unused net operating loss carryover (NOLCO), to the extent that it is probable that taxable income will be available against which the deductible temporary differences and carryforward benefits of unused tax credits from MCIT and NOLCO can be utilized. Deferred tax, however, is not recognized when (a) it 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 income nor taxable income or loss; and (b) in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, 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 income will be available against which the temporary differences can be utilized.

128 2010 Annual Report The carrying amount of deferred tax assets is reviewed at each end of reporting period and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each end of reporting period and are recognized to the extent that it has become probable that future taxable income will allow the deferred tax assets to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the end of reporting period.

Deferred tax relating to items recognized outside profit or loss is recognized outside 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 assets and deferred tax liabilities are offset, if a legally enforceable right exists to offset current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, would be recognized subsequently if new information about facts and circumstances changed. The adjustment would either be treated as a reduction to goodwill (as long as it does not exceed goodwill) if it incurred during the measurement period or in profit or loss.

Sales Tax Revenues, expenses and assets are recognized net of the amount of sales tax (commonly referred to as “Value Added Tax”), except:

Where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable.

Receivables and payables that are stated with the amount of sales tax included.

The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the consolidated balance sheet.

Earnings (Loss) Per Share Basic earnings (loss) per share is calculated by dividing the net income (loss) for the year attributable to the owners of the Parent Company by the weighted average number of common shares outstanding during the year, after considering the retroactive effect of stock dividend declaration, if any.

Diluted earnings (loss) per share is computed by dividing the net income (loss) for the year attributable to the owners of the Parent Company by the weighted average number of common shares outstanding during the period, adjusted for any subsequent stock dividends declared and potential common shares resulting from the assumed exercise of outstanding stock options. 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.

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 in the consolidated financial statements but are disclosed in the notes to consolidated financial statements when an inflow of economic benefits is probable.

Events after the Reporting Period Post year-end events that provide additional information about the Company’s financial position at the date of the balance sheet (adjusting events), if any, are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to consolidated financial statements when material.

3. Management’s Use of Judgments, Estimates and Assumptions

The preparation of the consolidated financial statements in compliance with PFRS requires management to make judgments and estimates that affect the reported amounts of revenues, expenses, assets and liabilities, the disclosure of contingent liabilities and other significant disclosures. In preparing the consolidated financial statements, management has made its best judgments and estimates of certain amounts, giving due consideration to materiality. The judgments, estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of relevant facts and circumstances as of the date of the consolidated financial statements. Actual results could differ from those estimates, and such estimates will be adjusted accordingly.

Metro Pacific Investments Corporation 129 The Company believes that the following represent a summary of these significant judgments, estimates and assumptions, the related impact and associated risks in the consolidated financial statements.

Judgments In the process of applying the Company’s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the consolidated financial statements.

Determination of Functional Currency. Based on the economic substance of the underlying circumstances relevant to the Company, the functional currency of the Company had been determined to be the Philippine peso. The Philippine peso is the currency of the primary economic environment in which the Company operates. It is the currency that mainly influences revenue and expenses.

Service Concession Arrangements. In applying Philippine Interpretation IFRIC 12, the Company has made a judgment that the service concession arrangements related to the Company’s water and tollway businesses qualify under the intangible asset model as they receive the right to charge users of public service.

The carrying values of service concession assets amounted to P=69,348.1 million and P=62,185.4 million as of December 31, 2010 and 2009, respectively (see Note 13).

Classification as Investment in an Associate or Joint Venture. As provided in PAS 28, significant influence must be present and currently exercisable over an investee to account any interest in that investee as investment in an associate and under the equity accounting. Notwithstanding a less than 20.0% interest in the investee company, if significant influence can be clearly demonstrated, the investor cannot be precluded from accounting an interest in the investee company as investment in an associate, thus account for such investment under equity method.

PAS 31 also provides that a joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control and that control shall be contractually agreed.

In 2009, the Company classified and accounted for its 14.67% interest in Manila Electric Company (Meralco) as an investment in an associate by virtue of a Shareholders’ Agreement entered into by the Company with PLDT Communication and Energy Ventures, Inc. (PCEV, formerly Pilipino Telephone Corporation) which defines the basic principles governing their conduct as common shareholders of Meralco and the exercise of their respective voting rights therein. In 2010, in exchange for the Meraco shares, the Company subscribed for 50.0% in the common shares of Beacon Electric and by virtue of the joint control arrangement with PCEV, the interest in Beacon Electric was accounted for as investment in joint venture.

The carrying value of the investment in Beacon Electric as of December 31, 2010 amounted to P=23,245.9 million and the carrying value of the investment in Meralco as of December 31, 2009 amounted P=24,367.0 million (see Note 12).

Noncurrent Asset Held for Sale and AFS Financial Assets. On June 18, 2009, the Company sold 17.0% out of its 51.0% interest in Landco and consequently conceded control over Landco. Management intended to dispose the remaining 34.0% during 2010 and as of December 31, 2009, the investment in Landco was classified as a noncurrent asset held for sale after management had assessed that it met the criteria of an asset held for sale following the provisions of PFRS 5 which include, among others:

Landco is available for immediate sale and can be sold to a potential buyer in its current condition.

The BOD is committed to sell Landco and had entered into preliminary negotiations with a potential buyer as of December 31, 2009. Should negotiations with the party not lead to a sale, a number of potential buyers have been then identified.

The BOD expects negotiations to be finalized and the sale to be substantially completed in 2010.

On August 24, 2010, the Company sold another 15.0% of Landco resulting in 19.0% remaining interest. The further reduction in interest resulted in a loss of significant influence over Landco, thus the investment is being accounted for as AFS financial assets in accordance with PAS 39. The Company intends to dispose the 19.0% remaining interest in Landco.

The carrying value of the investment in Landco as AFS financial asset as of December 31, 2010 amounted to P=211.8 million. The carrying value of the investment in Landco accounted for as noncurrent asset held for sale as of December 31, 2009 amounted to P=329.6 million (see Notes 6 and 10).

Classifying HTM Investment. The classification to HTM investments requires significant judgment. In making this judgment, the Company evaluates its intention and ability to hold such investments to maturity. If the Company fails to keep these investments to maturity, it will be required to reclassify the entire portfolio as part of AFS financial assets. The investments would therefore be measured at fair value and not at amortized cost.

130 2010 Annual Report The Company believes that the following represent a summary of these significant judgments, estimates and assumptions, the related impact In 2009, the Company classified its investments in bonds as HTM investments. The total carrying value of the HTM investments amounted to and associated risks in the consolidated financial statements. P=404.6 million as of December 31, 2009. However, in 2010, the Company sold a significant portion of its investments in bonds before their maturity, thus, the Company reclassified the remaining and newly acquired investment in bonds as AFS financial assets and remeasured the Judgments investments to fair value (see Notes 10 and 38). In the process of applying the Company’s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the consolidated financial statements. Financial Assets not Quoted in an Active Market. Where fair value of financial assets recorded in the consolidated balance sheets cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flow model. The inputs to Determination of Functional Currency. Based on the economic substance of the underlying circumstances relevant to the Company, the these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in functional currency of the Company had been determined to be the Philippine peso. The Philippine peso is the currency of the primary establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk, and volatility. Change in economic environment in which the Company operates. It is the currency that mainly influences revenue and expenses. assumptions about these factors could affect the reported fair value of financial instruments.

Service Concession Arrangements. In applying Philippine Interpretation IFRIC 12, the Company has made a judgment that the service Unquoted financial assets of the Company include investments in Beacon Electric’s preferred shares and other unlisted shares classified concession arrangements related to the Company’s water and tollway businesses qualify under the intangible asset model as they receive as AFS financial assets. Aggregate carrying values of these unquoted financial assets amounted to P=8,646.0 million and P=282.8 million as the right to charge users of public service. of December 31, 2010 and 2009, respectively (see Notes 10 and 12).

The carrying values of service concession assets amounted to P=69,348.1 million and P=62,185.4 million as of December 31, 2010 and Lease Agreement Qualifies as Business Combination. On October 23, 2010, East Manila Hospital Managers Corporation (EMHMC or 2009, respectively (see Note 13). Lessee) entered into a lease agreement with Our Lady of Lourdes Hospital, Inc. (OLLHI) and Servants of the Holy Spirit (the Lessors) over OLLH. The intent of MPIC, similar to its previous investments in hospitals, is to operate and manage the hospital, through EMHMC. The terms of the agreement provides the following: Classification as Investment in an Associate or Joint Venture. As provided in PAS 28, significant influence must be present and currently exercisable over an investee to account any interest in that investee as investment in an associate and under the equity accounting. Notwithstanding a less than 20.0% interest in the investee company, if significant influence can be clearly demonstrated, the investor EMHMC has the full and exclusive control of OLLH and OLLH properties and Improvements. PFRS 3 defines business combination cannot be precluded from accounting an interest in the investee company as investment in an associate, thus account for such investment as a transaction or other event in which an acquirer obtains control of one or more businesses. under equity method. Aside from properties and improvements, the subject of the lease includes hospital and patient records and information. hospital PAS 31 also provides that a joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is employees, even though terminated by ollh, were hired by EMHMC. hence, the subject of the agreement included inputs, processes subject to joint control and that control shall be contractually agreed. and even outputs, which are the elements of a business.

In 2009, the Company classified and accounted for its 14.67% interest in Manila Electric Company (Meralco) as an investment in an Upon termination of the lease by EMHMC, it shall transition the operations of OLLH to the Lessors or third party, which implies the associate by virtue of a Shareholders’ Agreement entered into by the Company with PLDT Communication and Energy Ventures, Inc. turnover of business and not just assets. (PCEV, formerly Pilipino Telephone Corporation) which defines the basic principles governing their conduct as common shareholders of Meralco and the exercise of their respective voting rights therein. In 2010, in exchange for the Meraco shares, the Company subscribed In accordance with Standing Interpretations Committee (SIC) 27, Evaluating the Substance of Transactions Involving the Legal Form of a Lease, for 50.0% in the common shares of Beacon Electric and by virtue of the joint control arrangement with PCEV, the interest in Beacon the Company assessed the substance of the lease agreement. SIC 27 requires that when the arrangement involves the legal form of a lease, Electric was accounted for as investment in joint venture. the accounting shall reflect the substance and economic reality of the arrangement, not merely the legal form. The Company has assessed that the agreement meets the definition of a business combination; particularly since the Company obtained control over the operations and The carrying value of the investment in Beacon Electric as of December 31, 2010 amounted to P=23,245.9 million and the carrying value of management of OLLH. Hence, the lease agreement qualifies as an acquisition of a business and is accounted for in accordance with PFRS 3 the investment in Meralco as of December 31, 2009 amounted P=24,367.0 million (see Note 12). (see Note 4).

Noncurrent Asset Held for Sale and AFS Financial Assets. On June 18, 2009, the Company sold 17.0% out of its 51.0% interest in Landco Operating Leases. The Company has entered into various lease agreements as a lessor and as a lessee. The Company has determined that and consequently conceded control over Landco. Management intended to dispose the remaining 34.0% during 2010 and as of the significant risks and rewards are retained by the lessor and accounts for these leases as operating lease. December 31, 2009, the investment in Landco was classified as a noncurrent asset held for sale after management had assessed that it met the criteria of an asset held for sale following the provisions of PFRS 5 which include, among others: Rental income, included under the “Other income” account in the consolidated statements of income, amounted to P=3.6 million, P=2.9 million and P=3.3 million for the years ended December 31, 2010, 2009 and 2008, respectively (see Note 29). Landco is available for immediate sale and can be sold to a potential buyer in its current condition. Rental expense, included under “Cost of services” and“General and administrative expenses” accounts in the consolidated statements of The BOD is committed to sell Landco and had entered into preliminary negotiations with a potential buyer as of December 31, 2009. income, amounted to P=171.4 million, P=84.4 million and P=36.7 million for the years ended December 31, 2010, 2009 and 2008, respectively Should negotiations with the party not lead to a sale, a number of potential buyers have been then identified. (see Notes 24 and 25).

The BOD expects negotiations to be finalized and the sale to be substantially completed in 2010. Estimates and Assumptions The key assumptions concerning future and other key sources of estimation at the end of reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. The Company based On August 24, 2010, the Company sold another 15.0% of Landco resulting in 19.0% remaining interest. The further reduction in interest its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and resulted in a loss of significant influence over Landco, thus the investment is being accounted for as AFS financial assets in accordance assumptions about future developments however, may change due to market changes or circumstances arising beyond the control of the with PAS 39. The Company intends to dispose the 19.0% remaining interest in Landco. Company. Such changes are reflected in the assumptions when they occur. The carrying value of the investment in Landco as AFS financial asset as of December 31, 2010 amounted to P=211.8 million. The carrying Determination of Fair Value of Financial Instruments (Including Derivatives). The Company initially records all financial instruments at fair value of the investment in Landco accounted for as noncurrent asset held for sale as of December 31, 2009 amounted to P=329.6 million value and subsequently carries certain financial assets and financial liabilities at fair value, which requires extensive use of accounting (see Notes 6 and 10). estimates and judgment. Valuation techniques are used particularly for financial assets and financial liabilities (including derivatives) that are not quoted in an active market. Where valuation techniques are used to determine fair values (e.g., discounted cash flow, option Classifying HTM Investment. The classification to HTM investments requires significant judgment. In making this judgment, the Company models), they are periodically reviewed by qualified personnel who are independent of the trading function. All models are calibrated to evaluates its intention and ability to hold such investments to maturity. If the Company fails to keep these investments to maturity, it will be ensure that outputs reflect actual data and comparative market prices. To the extent practicable, models use only observable data as required to reclassify the entire portfolio as part of AFS financial assets. The investments would therefore be measured at fair value and valuation inputs. However, other inputs such as credit risk (whether that of the Company or the counterparties), forward prices, volatilities not at amortized cost. and correlations, require management to develop estimates or make adjustments to observable data of comparable instruments. The amount of changes in fair values would differ if the Company uses different valuation assumptions or other acceptable methodologies. Any change in fair value of these financial instruments (including derivatives) would affect either the consolidated statement of income or consolidated statement of changes in equity.

Metro Pacific Investments Corporation 131 Fair values of financial assets and financial liabilities are presented in Note 38.

Purchase Price Allocation in Business Combinations and Goodwill. The Company’s consolidated financial statements and financial performance reflect acquired businesses after the completion of the respective acquisition. The Company accounts for the acquired businesses using the acquisition method starting January 1, 2010 and purchase method for prior year acquisitions, which both require extensive use of accounting judgments and estimates to allocate the purchase price to the fair market values of the acquiree’s identifiable assets and liabilities and contingent liabilities, if any, at the acquisition date. Any excess in the purchase price over the fair market values of the net assets acquired is recorded as goodwill in the consolidated balance sheet. Thus, the numerous judgments made in estimating the fair market value to be assigned to the acquiree’s assets and liabilities can materially affect the Company’s financial position and performance.

The Company’s acquisitions have resulted in recognition of goodwill. The carrying values of goodwill as of December 31, 2010 and 2009 amounted to P=12,751.0 million and P=12,551.8 million, respectively. Total goodwill of P=199.3 million arising from various acquisitions in 2010 were provisionally determined as allowed by PFRS 3 (see Note 4).

Fair Value Measurement of Contingent Consideration. Contingent consideration, resulting from business combinations, is valued at fair value at acquisition date as part of the business combination. Where the contingent consideration meets the definition of a derivative and, thus, a financial liability, it is subsequently remeasured to fair value at each reporting date. The determination of the fair value is based on discounted cash flows. The key assumptions take into consideration the probability of meeting each performance target and the discount factor.

As part of the purchase price allocation for its acquisition of OLLH, the Company identified an element of contingent consideration with a fair value of P=170.0 million at the acquisition date which is classified as other financial liability. Such contingent consideration was not remeasured as of December 31, 2010 since it was determined provisionally as permitted by PFRS 3. Management, however, believes that the fair value of the contingent consideration determined at acquisition date approximates the fair value at year end as the acquisition of OLLH and valuation of the contingent consideration happened close to reporting date (see Notes 4 and 20).

Revenue and Cost Recognition. The Company’s revenue recognition policies require management to make use of estimate and assumptions that may affect the reported amounts of revenue. The Company measures revenue from construction services or rehabilitation works at the fair value of the consideration received or receivable with reference to the percentage of completion of the project. Given that the Company has subcontracted or subcontracts the construction services and rehabilitation works to outside contractors, the recognized revenue from the construction services or rehabilitation works equals or substantially approximates the related cost.

Construction revenue for the years ended December 31, 2010, 2009 and 2008 amounted to P=8,931.9 million, P=4,879.1million and P=4,158.9 million, respectively, and construction costs for the years ended December 31, 2010, 2009 and 2008 amounted to P=8,858.6 million, P=4,771.0 million and P=4,092.1 million, respectively.

Impairment of Loans and Receivables. The Company estimates the allowance for doubtful accounts related to receivables using a combination of specific and collective assessment. The amounts calculated in each level of impairment assessment are combined to determine the total amount of allowance. First, the Company evaluates specific accounts that are considered individually significant for any objective evidence that certain customers are unable to meet their financial obligations. In these cases, the Company uses judgment, based on the best available facts and circumstances, including but not limited to, the length of its relationship with the customer and the customer’s current credit status based on third party credit reports and known market factors. The allowance provided is based on the difference between the present value of the receivable that the Company expects to collect, discounted at the receivables’ original effective interest rate and the carrying amount of the receivable. These specific allowances are re-evaluated and adjusted as additional information received affects the amounts estimated. Second, if it is determined that no objective evidence of impairment exists for an individually assessed receivable, the receivable is included in a group of receivables with similar credit risk characteristics and is collectively assessed for impairment. The provision under collective assessment is based on historical collection, write-off, experience and change in customer payment terms. Impairment assessment is performed on a continuous basis throughout the year.

The carrying values of receivables, net of allowance for doubtful accounts, amounted to P=3,055.7 million and P=13,475.3 million as of December 31, 2010 and 2009, respectively (see Notes 8 and 38). Allowance for doubtful accounts amounted to P=487.9 million and P=511.3 million as of December 31, 2010 and 2009, respectively (see Note 8).

Impairment of AFS Financial Assets. The Company treats an AFS financial asset as impaired when there had been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires judgment. The Company treats “significant” generally as 20.0% or more and “prolonged” as greater than six (6) months for quoted equity securities. In addition, the Company evaluates other factors, including normal volatility in share price for quoted equities and the future cash flows and the discount factors for unquoted equities.

Impairment loss on AFS financial assets amounted to P=55.8 million for the year ended December 31, 2008 (see Note 29). No impairment loss was recognized for the years ended December 31, 2010 and 2009. The carrying value of AFS financial assets amounted to P=9,070.0 million and P=282.8 million as of December 31, 2010 and 2009, respectively (see Notes 6, 10, 12 and 38).

132 2010 Annual Report Impairment of Goodwill. Goodwill is subject to annual impairment test. This requires an estimation of the value in use of cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Company to make an estimate of the expected future cash flows from the cash-generating unit and to choose a suitable discount rate in order to calculate the present value of those cash flows.

No impairment of goodwill was recognized in 2010 and 2009. Provisional goodwill for 2010 acquisitions of P=199.3 million were not tested for impairment as allowed by PAS 36. The carrying value of goodwill amounted to P=12,751.0 million and P=12,551.8 million as of December 31, 2010 and 2009, respectively (see Note 4).

Impairment of Nonfinancial Assets. Impairment review is performed when certain impairment indicators are present. Determining the fair value of assets requires the estimation of cash flows expected to be generated from the continued use and ultimate disposition of such assets.

While it is believed that the assumptions used in the estimation of fair values reflected in the consolidated financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable values and any resulting impairment loss could have a material adverse impact on the results of operations.

The carrying values of non-financial assets subject to impairment review when impairment indicators are present are as follows:

2010 2009 (In Thousands)

Service concession assets (see Note 13) P=69,348,123 P=62,185,407 Investments in associates and interest in joint ventures (see Note 12) 34,871,657 27,370,023 Property and equipment (see Note 14) 1,423,235 634,405 Software costs (see Note 15) 51,449 19,908 Noncurrent asset held for sale (see Note 6) – 329,570

As discussed in Note 13, the MWSS Regulatory Office (MWSS-RO or Regulatory Office) issued MWSS-RO resolution No. 209-069, where certain issues were resolved that had an impact on the new rate rebasing adjustment or “R.” Management noted that said resolution may have an impact on the expected cash flows from Maynilad’s operations. Consequently, management performed an impairment calculation of the Service Concession Assets of Maynilad as of December 31, 2009 using the new “R” under said resolution. Based on the impairment analysis, management believes that the carrying value of the Service Concession Assets would not exceed its recoverable amount.

Other than the impairment losses on investments in associates, property and equipment and investment properties of P=188.1 million, P=120.2 million and P=3.2 million, respectively, for the year ended December 31, 2008, there were no impairment losses recognized on other non- financial assets for each of the three years in the period ended December 31, 2010 (see Note 29).

Estimating NRV of Inventories and Real Estate for Sale. Inventories and real estate for sale 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 and real estate for sale are expected to be realized. A review of the items of inventories and real estate for sale is performed at each end of reporting period to reflect the accurate valuation of inventories and real estate for sale in the consolidated financial statements.

The carrying values of inventories amounted to P=158.8 million and P=96.0 million as of December 31, 2010 and 2009, respectively. The carrying value of real estate for sale amounted to P=187.0 million as of December 31, 2010 and 2009 (see Note 9).

Estimated Useful Lives of Service Concession Assets, Property and Equipment and Software Costs. The useful lives of each of the item of the Company’s service concession assets, property and equipment and software costs, are estimated based on the period over which the asset is expected to be available for use. Such estimation is based on a collective assessment of similar businesses, internal technical evaluation and experience with similar assets. The estimated useful life of each asset is reviewed at each financial year-end and updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the asset. It is possible, however, that future results of operations could be materially affected by changes in the amounts and timing of recorded expenses brought about by changes in the factors mentioned above. A reduction in the estimated useful life of any item of service concession assets, property and equipment and software costs would increase the recorded depreciation and amortization expense and decrease the carrying values of service concession assets, property and equipment and software costs.

As further discussed in Note 13, the estimated useful lives for the concession assets of MNTC were revised in 2008 and Maynilad in 2009 to effect the extension of the terms of the service concession arrangements. The effect of the change decreased amortization expense by P=33.0 million in 2008 and P=395.7 million in 2009, with expected decrease in amortization expense for 2010 and onwards . There was no change in the estimated useful lives of the service concession assets in 2010. The carrying values of the Company’s service concession assets, property and equipment and software cost are as follows:

2010 2009 (In Thousands)

Service concession assets (see Note 13) P=69,348,123 P=62,185,407 Property and equipment (see Note 14) 1,423,235 634,405 Software costs (see Note 15) 51,449 19,908

Metro Pacific Investments Corporation 133 Realizability of Creditable Withholding Taxes (CWTs). The carrying amount of CWTs is reviewed at each end of reporting period and reduced to the extent that it will not be realized as there will be no sufficient taxable income that will be available to allow utilization of such CWTs.

The carrying amount of CWTs is reduced through the use of an allowance account. The allowance is established by charges to income in the form of provision for decline in value of the CWTs. The amount and timing of recorded expenses for any period would therefore differ based on the judgment or estimates made. An increase in provision for decline in value of CWTs would increase the Company’s recorded expenses and decrease current assets.

The carrying values of CWTs, included under “Other current assets” account in the consolidated balance sheets, amounted to P=415.2 million and P=380.2 million as of December 31, 2010 and 2009, respectively. Allowance for decline in value of CWTs amounted to P=341.1 million and P=347.6 million as of December 31, 2010 and 2009, respectively (see Note 11).

Input/Output Value Added Tax (VAT). MNTC and other tollway operators continue to discuss the issue of VAT with concerned agencies. On one hand, BIR continues to send VAT assessments to MNTC. However, as further discussed in Note 34, in view of the issuance of Revenue Memorandum Circular (RMC) No.63-2010 on July 19, 2010, the Supreme’s Court issuance of the Temporary Restraining Order (TRO) on August 13, 2010 on the imposition of VAT which is not yet lifted as of March 3, 2011 and the quick response by the Cabinet and the TRB to defer the imposition of RMC No. 72-009 issued on December 21, 2009, MNTC continues to defer the imposition of VAT on toll fees from motorist and is of the position that VAT on tollway operators, if ever implemented, will be on a prospective basis.

On this basis, the Company did not recognize any VAT liability, and while it continues to accumulate input VAT, it likewise continues to provide allowance for potential losses on input VAT.

In addition, in response to the issuance RMC No. 63-2010 confirming the imposition of VAT on a prospective basis, and as further discussed in Note 20, the Company reversed the P=418.0 million contingent liability in relation to output VAT and deferred tax assets of P=254.5 million relating to input VAT which were set up at acquisition of MPTC.

Thus, carrying balance of input VAT as of December 31, 2010 and 2009 is zero. Provision for potential losses on input VAT amounted to P=334.1 million in 2010 and P=308.8 million in 2009 (see Note 25).

Recognition of Deferred Tax Assets. The carrying amount of deferred tax assets is reviewed at each end of reporting period and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the deferred tax assets to be utilized.

Maynilad and MNTC recognized deferred tax assets or deductible temporary differences expected to reverse after the income tax holiday period while deferred taxes on deductible temporary differences expected to reverse during the income tax holiday and to items where doubt exists as to the tax benefits they will bring in the future were not recognized. The Company’s assessment on the recognition of deferred tax assets on deductible temporary differences is based on the expected future results of operations.

Net recognized deferred tax assets amounted to P=275.3 million and P=215.0 million as of December 31, 2010 and 2009, respectively. Unrecognized deferred tax assets amounted to P=1,976.9 million and P=2,654.6 million relates to deductible temporary differences, unused NOLCO and MCIT aggregating to P=6,589.7 million and P=8,848.7 million as of December 31, 2010 and 2009, respectively (see Note 31).

On December 16, 2009, the Board of Investments (BOI) released the Certificate of Registration of Maynilad certifying 6-year income tax holiday incentive. As a result, Maynilad derecognized deferred tax assets that will reverse during the new income tax holiday period amounting to P=1.7 billion in 2009. Also, deferred tax assets amounting P=254.5 million related to input VAT of MPTC was written off in 2010 in view of the various developments that points to a prospective implementation of input VAT on toll fees.

Deferred FCDA and Deferred Credits. Maynilad is entitled to recover (refund) foreign exchange losses (gains) arising from restatement and payments of concession fees payable. For the unrealized foreign exchange losses, Maynilad recognized deferred FCDA as an asset since this is a resource controlled by Maynilad as a result of past events and from which future economic benefits are expected to flow to Maynilad. Unrealized foreign exchange gains, however, which will be refunded to the customers are presented as deferred credits. As a result of the second rate rebasing, deferred credits that will no longer be subject to the FCDA mechanism were derecognized and presented as “Other income from rate rebasing resolutions” under “Other income” account in the 2009 consolidated statement of income (see Notes 20 and 29).

Net deferred credits pertaining to these foreign exchange gains amounted to P=1,450.9 million and P=703.7 million as of December 31, 2010 and 2009, respectively (see Note 20).

Retirement Costs. The cost of defined benefit plans and the present value of the retirement obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions which may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. Those assumptions are described in Note 27.

134 2010 Annual Report Actual results that differ from the Company’s assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods. While it is believed that the Company’s assumptions are reasonable and appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the Company’s retirement obligations.

Accrued retirement cost under the defined benefit plan amounted to P=49.4 million as of December 31, 2010. As of December 31, 2009, net pension assets under the defined benefit plan amounted to P=18.1 million (see Notes 15 and 27).

Share-based Payments. The Company measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payments requires determining the most appropriate valuation model for a grant of equity instruments, which is dependent on the terms and conditions of the grant. This also requires determining the most appropriate inputs to the valuation model including the expected life of the option, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for share-based payments are disclosed in Note 33. The Company recognizes expenses based on the estimated number of grants that will ultimately vest and will require settlement. The Company’s average turnover rate over the past few years is used to determine the attrition rate in computing the benefit expense and the estimated liability.

Equity based compensation expense recognized in 2010 and 2009 amounted to P=34.4 million and P=50.0 million, respectively (see Notes 26 and 33).

Other Long Term Incentives Benefits. The LTIP for key executives of MPIC and certain subsidiaries was approved by the Compensation Committee and the BOD and is based on profit targets for the covered Performance Cycle. The cost of LTIP is determined using the projected unit credit method based on prevailing discount rates and profit targets. While management’s assumptions are believed to be reasonable and appropriate, significant differences in actual results or changes in assumptions may materially affect the Company’s other long term incentive benefits.

LTIP expense and liability for the year ended and as of December 31, 2010 amounted to P=133.0 million and presented as “Personnel costs” under “General and administrative expenses” and “Deferred credits and other long-term liabilities” accounts, respectively (see Notes 26 and 27).

Provisions. The Company recognizes provisions based on estimates of whether it is probable that an outflow of resources will be required to settle an obligation. Where the final outcome of these matters is different from the amounts that were initially recognized, such differences will impact the financial performance in the current period in which such determination is made.

Provisions mainly consist provision for estimated expenses related to the concluded and ongoing debt settlement negotiations and certain warranties and guarantees, claims and potential claims against the Company and provision for heavy maintenance. The provisions for the heavy maintenance requires an estimation of the periodic cost, generally estimated to be every five to seven years or the expected heavy maintenance dates, to restore the assets to a level of serviceability during the concession term and in good condition before turnover to the Grantor. This is based on the best estimate of management to be the amount expected to be incurred to settle the obligation at every heavy maintenance dates discounted using a pre-tax rate that reflects the current market assessment of the time value of money and the risk specific to the liability.

Additional provisions for the years ended December 31, 2010, 2009 and 2008 amounted to P=322.2 million, P=695.0 million and P=233.5 million, respectively. Cumulative provisions amounted to P=2,496.5 million and P=2,285.9 million as of December 31, 2010 and 2009, respectively (see Note 17).

Contingencies. The Company is a party to certain lawsuits or claims arising from the ordinary course of business. However, the Company’s management and legal counsel believe that the eventual liabilities under these lawsuits or claims, if any, will not have a material effect on the consolidated financial statements (see Notes 20 and 34).

4. Business Combinations, Transactions with Non-controlling Interest and Goodwill

The Company’s intention is to maintain and continue to develop a diverse set of infrastructure assets through its investments in water utilities, toll roads, electricity distribution and health care services. The Company is therefore committed to investing through acquisitions and strategic partnerships in prime infrastructure assets with the potential to provide synergies with its existing operations. Accordingly, the following acquisitions in 2010 were made:

Acquisition of RMCI. On May 31, 2010, the Company, through a Share Purchase Agreement (SPA) with a third party, completed the acquisition of 190,413 shares representing 51.0% of the total outstanding and issued voting shares of RMCI for a total consideration of P=275.6 million.

Metro Pacific Investments Corporation 135 The provisional fair value of the identifiable assets and liabilities of RMCI as of the date of acquisition were as follows:

Provisional Fair Values Recognized on Acquisition (In Thousands) Assets Cash and cash equivalents P=56,974 Receivables 112,376 Inventories 43,339 Other current assets 6,000 Property and equipment 712,399 Pension plan assets 32,917 Long-term cash deposits 6,985 Other noncurrent assets 3,245 974,235 Liabilities Accounts payable and other current liabilities 224,641 Unearned tuition and other school fees 3,056 Income tax payable 2,110 Other current liabilities 13,061 Long-term debt 240,431 Pension liabilities 9,235 Deferred tax liabilities 69,096 Deposits 13,002 574,632 Total net identifiable assets at provisional fair value 399,603 Non-controlling interest (195,805) Provisional goodwill 71,823 Purchase consideration transferred P=275,621

The purchase price consideration had been allocated to the identifiable assets and liabilities of RMCI on the basis of provisional fair values pending finalization of appraisal of RMCI properties. As permitted by the revised PFRS 3, Business Combinations, the Company will recognize any adjustment to those provisional values as an adjustment to goodwill upon determining the final fair values of identifiable assets and liabilities within 12 months from the acquisition date.

Non-controlling interest represents the interest not owned by MPIC in RMCI and its subsidiary RCI. The Company has elected to measure the amount of non-controlling interest at the proportionate share in provisional fair value of RMCI’s net identifiable assets.

The goodwill of P=71.8 million, which was determined provisionally, represents the fair value of expected economic benefit that the Company will obtain arising from the acquisition of RMCI.

From the date of acquisition to December 31, 2010, RMCI contributed P=30.9 million to the consolidated net income of the Company from continuing operations. If the combination had taken place at the beginning of the year, RMCI’s contribution to the Company’s consolidated net income from continuing operations in 2010 would have been P=27.9 million and its contribution to the Company’s consolidated revenues from continuing operations would have been P=967.5 million.

Net cash outflow on acquisition is as follows:

Amount (In Thousands) Total cash paid on acquisition* P=275,621 Transaction costs of the acquisition 4,305 Net cash acquired with the subsidiary (56,974) Net cash outflow on acquisition P=275,621 *Includes escrow deposits of P=25.0 million presented under “Other current assets” account in the consolidated balance sheets as of December 31, 2009.

136 2010 Annual Report Transaction costs of P=4.3 million have been expensed and are included in “General and administrative expenses” in the consolidated statement of income for the year ended December 31, 2010.

Acquisition of OLLH through a Lease Agreement. EMHMC, a wholly owned subsidiary of MPIC, was incorporated on October 15, 2010 to operate and manage OLLH, a non-tertiary hospital previously managed by the Missionary Sister Servants of the Holy Spirit congregation (SSpS) through OLLHI (the “Lessors”). With the decision of SSpS to turn over the operations and management to a professional group, OLLHI has signed a 20-year lease of the hospital land and facilities in favor of EMHMC.

The lease shall be for a period of twenty (20) years, renewable for successive periods of ten (10) years upon the mutual consent of both parties. Pursuant to the Lease Agreement, the lessors have decided to cease operation and management of OLLH effective October 31, 2010 wherein all the contracts with employees were terminated by OLLHI. EMHMC has the option to employ the employees under new terms and conditions. The existing inventories as of that date were bought by EMHMC from OLLHI for a separate consideration.

As consideration for the Lease Agreement, EMHMC will pay fixed and variable monthly rates, where the variable rate is based on the prior year’s net revenues. Below is the schedule of fixed and variable monthly rent:

Annual Variable Rent (% of Prior Year’s Period Fixed Monthly Rent Net Revenues) (In Thousands) November 2010 to October 2015 P=1,000 2.00% November 2015 to October 2020 1,250 2.25% November 2020 1,500 2.50%

Also, as consideration for the mutual desire of OLLHI and EMHMC to improve and develop OLLH, EMHMC commits to improve and develop OLLH, by way of cumulative capital expenditures of at least P=350.0 million no later than November 1, 2015. The commitment shall be utilized in accordance with EMHMC Capital Expenditure (Capex) program as predetermined, without prejudice to EMHMC’s right to amend/modify the Capex program. In the event that EMHMC fails to make or infuse the commitment in the amounts and within the period stated, EMHMC shall deposit in escrow such deficiency and use of which will be mutually determined by both parties.

As discussed in Note 3, following the provisions of SIC 27, Evaluating the Substance of Transaction Involving the Legal Form of a Lease, EMHMC accounted for the Lease Agreement as an acquisition of a business in accordance with PFRS 3, since the subject of the Lease Agreement meet the definition of a business.

The provisional fair value of the identifiable assets of OLLH, which are mostly property and equipments, as of the date of acquisition were:

Provisional Fair Values Recognized on Acquisition (In Thousands) Assets Land improvements P=1,362 Buildings 46,705 Machinery and equipment 17,741 Medical equipment 112,715 Transporation equipment 965 Total identifiable net assets at provisional fair value 179,488 Provisional goodwill 126,315 Purchase consideration transferred P=305,803

For purposes of purchase price allocation, the fair values of the identifiable assets of OLLH are provisional pending finalization of appraisal of the aforementioned properties and equipment. Based on provisional fair values, the goodwill arising from the acquisition of OLLH amounted to P=126.3 million. PFRS 3 allows a measurement period not to exceeding one year from the acquisition date, which is October 31, 2010. The measurement period provides EMHMC with a reasonable time to obtain the information necessary to identify and measure the following as of the acquisition date in accordance with the requirements of PFRS 3:

the identifiable assets acquired and liabilities assumed; the consideration transferred for OLLH; and the resulting goodwill or gain on a bargain purchase.

EMHMC will recognize adjustments to the provisional amounts as if the accounting for the business combination was completed at the acquisition date.

Metro Pacific Investments Corporation 137 The total consideration is the present value of the fixed monthly rent and annual variable rent representing the contingent consideration for a period of 20 years discounted using discount rate of 11.0%. The present value of the lease payable amounted to P=305.8 million, of which P=135.8 million is attributable to fixed rent or consideration and P=170.0 million is attributable to variable rent or contingent consideration. The variable rental payments, which was considered as contingent consideration, were determined as a percentage of projected annual revenues for the next 20 years growing annually at an average of 9.0%. The total consideration is also considered provisional pending final computation by management . Any subsequent changes in the variable/contingent consideration after completion of the final purchase price allocation will be accounted for in the consolidated statement of income.

From the date of acquisition to December 31, 2010, OLLH contributed P=5.8 million to the consolidated net income of the Company from continuing operations. If the combination had taken place at the beginning of the year, OLLH’s contribution to the Company’s consolidated net income from continuing operations in 2010 would have been P=12.0 million and its contribution to the Company’s consolidated revenues from continuing operations would have been P=458.0 million.

Transaction costs of P=0.6 million, which is the only cash flow incurred in connection with the acquisition, have been expensed and are included in “General and administrative expenses” in the consolidated statement of income for the year ended December 31, 2010.

Acquisition of MSIHI. On July 20, 2010, MPTC entered into a Share Purchase Agreement (SPA) with a third party (the “Seller”) for the acquisition of 148,000 common shares in MSIHI (representing 37.0% of the outstanding voting capital stocks of MSIHI) for a purchase price of P=51.0 million. An amendment to the SPA was made on August 30, 2010, reflecting the allocation of the purchase price as follows:

P=14.8 million as consideration for the MSIHI shares; and P=36.2 million as consideration for the assignment to MPTC of the Seller’s total deposit for future stock subscription in MSIHI.

On August 30, 2010, the parties signed the Deed of Absolute Sale of Shares and the Deed of Assignment of the deposit for future stock subscription.

Prior to this acquisition, MPIC, through MPC, has an existing 40.0% voting interest in MSIHI. The acquisition by MPTC of the additional 37.0% effectively brings the Company’s total ownership of MSIHI to 77.0%. Under the revised PFRS 3, Business Combination, if the acquirer holds a non-controlling equity investment in the acquiree immediately before obtaining control, the acquirer remeasures that previously held equity investment at its acquisition-date fair value and recognizes any resulting gain or loss in profit or loss. As a result, the Company recognized a gain on remeasurement of P=54.4 million of the previously held 40.0% interest in MSIHI at acquisition date (see Note 29).

The provisional fair value of the identifiable assets and liabilities of MSIHI as of the date of acquisition were:

Provisional Fair Values Recognized on Acquisition (In Thousands) Assets Cash in bank P=27 AFS financial asset 140,953 140,980 Liabilities Accounts payable and accrued expenses 1,161 Due to a related party 889 Payable to stockholders 3,428 5,478 Total net identifiable assets 135,502 Non-controlling interest (31,166) Fair value of previously held interest (54,401) Provisional goodwill 1,113 Purchase consideration transferred P=51,048

The purchase price consideration was allocated to the identifiable assets and liabilities of MSIHI on the basis of provisional fair values. As permitted by the revised PFRS 3, Business Combinations, the Company will recognize any adjustment to those provisional values as an adjustment to goodwill upon determining the final fair values of identifiable assets and liabilities within 12 months from the acquisition date.

138 2010 Annual Report Non-controlling interest represents the interest not owned by MPIC in MSIHI and its subsidiaries. The Company has elected to measure the non-controlling interest at the proportionate share in provisional fair value of MSIHI’s net identifiable assets.

The provisional goodwill of P=1.1 million represents the fair value of expected economic benefit that the Company will obtain arising from the acquisition of MSIHI.

From the date of acquisition to December 31, 2010, MSIHI contributed a loss of P=0.1 million to the consolidated net income of the Company from continuing operations. If the combination had taken place at the beginning of the year, MSIHI’s contribution to the Company’s consolidated net income from continuing operations in 2010 would have been a loss of P=0.2 million.

Net cash outflow on acquisition is as follows:

Amount (In Thousands) Total cash paid on acquisition (P=51,048) Net cash acquired with the subsidiary 27 Net cash outflow on acquisition (P=51,021)

Transaction costs of P=0.1 million have been expensed and are included in “General and administrative expenses” in the consolidated statement of income for the year ended December 31, 2010.

Acquisition of Non-controlling Interest in MSIHI. On December 30, 2010, MPTC acquired from another third party an additional 20.0% interest in MSIHI. Through a Deed of Absolute Sale of Shares, MPTC agreed to buy the 80,000 MSIHI shares from the said third party for P=8.0 million. In addition, through a Deed of Assignment, the third party assigned to MPTC its deposit for stock subscription in MSIHI for P=19.6 million.

As of December 30, 2010, MPTC had acquired 57.0% of the outstanding capital stocks of MSIHI. At consolidated level, the Company effectively owns 95.6% of MSIHI.

The increase in effective ownership interest to 95.6% was accounted for as an acquisition of non-controlling interest and difference is recognized directly in equity. Based on the information below, the acquisition of effectively 19.97% non-controlling interest by the Parent Company in MSIHI resulted to equity reserve of P=0.5 million and was reflected under “Other reserves” account in equity attributable to the owners of the Parent Company (see Note 22).

Carrying Value (In Thousands) Net assets of MSIHI as of December 30, 2010 P=135,403

Non-controlling interest acquired 27,081 Equity reserve (513) Total consideration transferred P=27,594

Disposal of Non-controlling Interest in Maynilad. On October 29, 2010, DMWC and Maynilad entered into an Agreement for the transfer of the 88,500 ESOP shares to certain employees of Maynilad. Maynilad shall pay the DMWC the amount of P=88.5 million as reimbursement for the DMWC’s subscription payment for the ESOP shares. DMWC expects to collect the said amount within 60 days from the issuance of ESOP shares. After the transfer, the DMWC’s interest ownership in Maynilad was reduced to 91.91% and the MPIC’s effective ownership to 56.80% from 58.03%.

The decrease in ownership interest was accounted for as disposal of non-controlling interest and the difference of the proceeds and the non-controlling interest sold is recognized directly in equity. Based on the information below, the transfer of effectively 1.23% of non- controlling interest in Maynilad resulted in an equity reserve of P=122.1 million and was reflected under “Other reserves” account in equity attributable to the owners of the Parent Company.

Carrying Value (In Thousands) Net assets of Maynilad as of October 29, 2010 P=13,976,217

Non-controlling interest disposed P=210,609 Equity reserve (122,109) Total consideration transferred P=88,500

Metro Pacific Investments Corporation 139 Impairment Testing of Goodwill As of December 31, 2010 and 2009, goodwill from business combinations comprised of:

2010 2009 (In Thousands)

DMWC / Maynilad P=6,802,972 P=6,802,972 MPTC 5,748,778 5,748,778 OLLH 126,315 – RMCI 71,823 – MSIHI 1,113 – P=12,751,001 P=12,551,750

Goodwill is tested for impairment annually and when circumstances indicate the carrying value may be impaired. The Group’s impairment test of goodwill is based on value in use (VIU) calculations that uses discounted cash flow model. The key assumptions used to determine the recoverable amount for the different cash generating units are discussed below:

Goodwill Allocated to Maynilad. Goodwill as a result of the acquisition of Maynilad amounted to P=6,803.0 million. The following table sets out the assumptions used by management in performing impairment calculations as at December 31, 2010:

December 31, 2010 Growth rate(a) 2.5% Average forecast period(b) 27 years Discount rate(c) 11.5% (a) Projected cash flows were updated to reflect the new “R”(See Note 20). (b) Considers extension of concession term as discussed in Notes 3 and 13. (c) Based on weighted cost of capital.

As a result of the impairment test, management did not identify an impairment loss for this cash-generating unit.

Goodwill Allocated to MPTC. The goodwill related to the acquisition amounted to P=5,748.8 million. The test for recoverability of MPIC’s goodwill from the acquisition of MPTC was applied at the toll operations segment, which represents the lowest level for which identifiable cash flows are largely independent of the cash inflows and outflows of other group’s assets and liabilities.

The VIU was based on the cash flow projections on the most recent financial budgets and forecast of MPTC. For the impairment testing conducted for the year ended December 31, 2010, average traffic volume growth rate used was 1.7% for NLEX and 5.0% for SCTEX for the forecast period of 27 years. The discount rate applied was 10.9% which was based on the weighted cost of capital.

As a result of the impairment test, management did not identify an impairment loss for this cash-generating unit.

Goodwill Allocated to RMCI, OLLH and MSIHI. Goodwill acquired from the Company’s acquisition of RMCI, OLLH and MSIHI are based on provisional values as previously discussed and therefore the amount of goodwill has yet to be allocated to its particular cash-generating unit. Impairment testing will commence on the period the initial accounting will be finalized which should not be more than 12 months from date of acquisition.

With regard to the assessment of VIU of the above cash-generating units, management believes that no reasonably possible change in any of the key assumptions would cause the carrying value of the units to materially exceed the recoverable amount.

5. Operating Segment Information

As of December 31, 2010, for management purposes, the Company is organized into five major business segments based on services and products namely water utilities, toll operations, power distribution, healthcare, and others. The Company’s business segment in power distribution started only in 2009. The Company also had business segment in real estate in 2008 which was discontinued in 2009.

Water Utilities Water utilities primarily relate to the operations of DMWC and Maynilad in relation to the provision of water and sewerage services.

Toll Operations Toll operations primarily relate to operations and maintenance of toll facilities by MPTC and its subsidiary MNTC and an associate, TMC.

Power Distribution Power distribution primarily relate to the operations of Meralco in relation to the distribution and supply of electricity.

140 2010 Annual Report Healthcare Healthcare primarily relates to operations and management of hospitals, nursing and medical school and such other enterprises that have similar undertakings.

Others Others represent operations of subsidiaries involved in real estate, provision of services and holding companies. Real estate primarily relates to the operations of MPC and Landco and its subsidiaries which are involved in the business of real estate of all kinds.

The Company’s management monitors the operating results of each business unit separately for purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on net income for the year; earnings before interest, taxes and depreciation and amortization, or EBITDA; EBITDA margin; and core income. Net income for the year is measured consistent with consolidated net income in the consolidated financial statements.

EBITDA is measured as net income excluding depreciation and amortization of property and equipment and intangible assets, asset impairment on noncurrent assets, financing costs, interest income, equity in net earnings (losses) of associates and joint ventures, net foreign exchange gains (losses), net gains (losses) on derivative financial instruments, provision for (benefit from) income tax and other nonrecurring gains (losses). EBITDA margin pertains to EBITDA divided by service revenues.

Management also assesses the performance of the operating segments based on a measure of recurring profit or core income contribution. This is measured as net income attributable to owners of the Company excluding core income adjustments from one-off transaction, foreign exchange gains or losses, asset impairment on noncurrent assets, net of tax effect of aforementioned adjustments and other nonrecurring gains or losses as defined by the Company’s policy. Non-recurring items represent gains or losses that, through occurrence or size, are not considered usual operating items.

Segment revenues, segment expenses and segment results include transfers between business segments. These transfers are eliminated upon full consolidation.

Metro Pacific Investments Corporation 141

59% 59% 62,147 62,147 96,097 96,097 =866,864) =984,642) =2,871,152 =9,009,087 =10,933,487 =82,376,922 =62,920,466 =18,564,478 =117,248,579

– – (984,642) – – (179,925) – – 2,535,115 – – (6,785,822) – – 34,871,657 – – 1,771,067 – – (197,882) – – (3,182,402) – – – (3,908,074) 4,490,298 (2,501,668) – – – – 11,778,656 – – 8,398,372 – – 2,084,727 – – 3,855,794 =– P =– P =– P =– =– (P (P =– P P P P P P P =833,646) P =833,339) P =833,646) P

- – – – – – – – – – =– P (233) (233) 9,767 9,767 Other Other 22,043 22,043 32,790 24,000 24,000 =13,909 =59,014 =59,014 =509,369) =1,570,397) =4,175,735 (P =4,208,525 (P Businesses Businesses Eliminations Consolidated =15,245,242 (P or the years ended December 31, 2010, 2009 and 2008:and 2009 31,December 2010, ended years the or

– – – – – – – – – (543,136) – (1,132,085) – – – – – – – – (1,651,221) – – (519,136) – – (1,629,411) egments as at and for the years ended December 31, 2010, 31, 2010, December ended foryears the as at and egments =– P =– (P =– P =– =– P P P P P P Power Power =821,423) P =821,423) P =664,741 (P Distribution Distribution =32,012,741 P

18% 18% 6,322 6,322 7,239 7,239 2,621 2,621 Year Ended December 31, 2010 31, December Year Ended 53,575 53,575 50,727 50,727 64,429 18,710 =33,384) (P =19,823) (P =27,399 =152,031 P =118,004 =656,460 =829,047 =1,199,036 =3,351,463 P

59% 59% =176,002) (P =273,644) (P =1,288,921 P =1,159,468 P =3,445,958 P =5,858,494 P =20,015,967 P =10,908,950 P =20,689,666 P

- 673,699 2,152,427 32,012,741 – – 131,759 153,144 1,486,164 65% 65% 71,234 71,234 (273,644) 53,670 (19,823) (239,917) (821,423) 59,014 (87,367) (87,367) 142,275 185,986 185,986 (95,114) (16,818) =71,234 (P P (399,480) (399,480) 174,977 =104,931 (P P 1,830,715 1,830,715 641,058 4,029,488 4,029,488 2,061,304 8,066,561 8,066,561 3,282,663 429,432 6,048,179 6,048,179 2,804,900 2,394,075 2,394,075 1,301,353 2,394,075 2,394,075 1,433,112 171,854 1,486,164 (1,629,411) (3,982,963) (3,982,963) (1,618,902) (2,575,831) (2,018,691) (652,740) (227,028) (1,821,399) (743,596) (367,624) (664,837) (13,702) (15,199) =7,678,858 P =2,465,309 P =7,878,894 P P P P =12,049,524 P =57,819,830 P =36,770,566 P =57,819,830 P P P P P Water Utilities Water Utilities Toll Operations Healthcare

controlling and Income Tax Tax Income and controlling fit from) income tax fit income from) fit from) income tax fit income from) nancing Charges Charges nancing ilities and a a venture joint and propertyand asset and concession Service equipment Segment Income (Loss) Income Segment Net Net Gross Margin Gross amortization and Depreciation 2009 and 2008 are as follows: as follows: are 2008 and 2009 business f segments regarding certain liabilities assets income and and and revenue on table information presents following The (Charges) Income Non-recurring The segment revenues, net income for the year, assets, liabilities, and other segment information of our reportable operating s operating reportable of our information segment other and assets, foryear, liabilities, income the net segment revenues, The sales from external revenue Total Cost of sales expenses Operating - net Interest expense interests Non-controlling associates (losses) income of in net Equity (charges) income Non-recurring EBITDA Margin EBITDA for (bene Provision Liabilities and Assets assets Segment Liab Segment Information Other Segment - expenditures Capital Non-controlling interests Non-controlling Profit Fi before Other income - (charges) income net Other Non- Profit before for (bene Provision from Subsidiaries Contribution Investment in associates, at equity in associates, at equity Investment Total Assets Consolidated Contribution from Operations - Core - Core from Operations Contribution

142 2010 Annual Report

60% 68,618 68,618 =866,899 =252,460 =2,299,652 =4,942,436 =9,584,243 =16,107,734 =89,223,858 =66,293,367 =116,593,881

– – – – 8,987,069 – – – – (3,357,648) – 252,460 – – (189,137) – – 27,370,023 – – (2,679,236) – 518,118 – – (7,120,665) – (425,302) – – 3,293,101 =– P =– P =– P =– P P P P P 815 815 1,529,074 815 815 2,047,192 353 353 (1,644,557) (608) (608) 2,933,494 (608) (608) 6,291,142 (608) (608) (16,691) =608) P =815 P P 1,070 1,070 240,137 (P =1,314,453) P =1,608,763) P =1,314,453) P

– – – – – – – – – – – – – – =– P 7,217 7,217 4,852 4,852 68,618 68,618 25,293 25,293 =22,356 =247,730) =222,437) =299,346) =1,380,660) =16,779,531 (P =20,907,350 (P =17,049,836 (P

– – (1,158,223) – – – – – – (1,158,223) – – (306,563) – – (851,660) – – – – – (311,415) – – – – – – – – – =– P =– =– (P =– P =– P P P P P P =72,070 (P =139,807) (P =139,807) (P =24,366,978 P

– – – – – – – – – – – – – – – – – – – – – – – – =– =– =– =– =– P P P P P Year Ended December 31, 2009 31, December Ended Year (7,700) (7,700) =54,976 (P =47,276 (P =221,089 P =2,055,230 P

– – 54% 177) 177) =325,246) P =213,925) P =360,827 =1,064,763 P =5,489,190 =2,985,798 =19,627,043 =10,506,002 =20,304,553 P

– – 132,428 173,813 211,877 – – – – 677,510 2,055,230 24,366,978 270,305 65% 181,437) 181,437) 277,244 277,244 (38, 781,353 781,353 (213,925) 47,276 (139,807) (222,437) ( (561,916) (561,916) 111,321 (130,331) (130,331) 109,396 =781,353 (P P 2,376,235 2,376,235 1,716,090 6,194,671 6,194,671 2,792,398 1,540,222 1,540,222 1,146,260 4,225,034 4,225,034 2,373,279 1,540,222 1,540,222 1,278,688 173,813 211,877 (1,158,223) 2,673,365 2,673,365 612,519 (1,848,799) (1,848,799) (657,189) (1,839,306) (1,839,306) (528,515) (4,423,873) (4,423,873) (2,696,792) (1,113,257) (1,113,257) (531,653) =4,559,253 P =2,321,575 P =1,524,706 (P =6,898,399 P P P P P =10,618,544 P =54,131,737 P =36,488,778 P =54,131,737 P P P P P Water Utilities Water Utilities Operations Toll Healthcare Distribution Power Businesses Other Eliminations Consolidated rty

controlling and Income Tax Income and controlling fit from) income tax fit income from) fit from) income tax fit income from) nancing Charges nancing ilities and equipment and and a a venture joint and prope assets and concession Service Segment Income (Loss) Income Segment (Charges) Income Non-recurring Gross Margin Gross Net Provision for (bene Provision from Contribution Subsidiaries

Profit Fi before Non- Profit before amortization and Depreciation of assets in value for decline Provision Other income (charges) - (charges)net income Other - Core from Contribution Operations interests Non-controlling Total revenue from external sales from external revenue Total Cost of sales expenses Operating - net Interest expense interests Non-controlling associates (losses) income of in net Equity (charges) income Non-recurring EBITDA Margin EBITDA for (bene Provision Liabilities and Assets assets Segment Liab Segment Information Other Segment - expenditures Capital Investment in associates, at equity in associates, at equity Investment Total Assets Consolidated

Metro Pacific Investments Corporation 143

16% 5,828 5,828 =525,546 =191,822 =178,471 =1,403,861 =8,635,832 =7,263,869 =76,932,771 =29,112,557 =79,521,671

– – 2,773,448 – – 139,278 – – – – – (774,455) (38,580) – – 482,396 – – (19,179) – – (1,334,513) – – (5,862,384) – – – – 120,112 =– P =– P P P 2,195 2,195 (333,043) 79,914 79,914 209,404 =88,807 P =362,194) =362,194) P P =466,468) P =360,963) P =455,412) P

– – – – – – – – – – – – =– P (1,732) (1,732) 48,625 48,625 =53,979 =528,222 (746,553) P =186,728 =298,951 (P (P =360,568 (P =7,797,008 (P =7,191,809 (P =8,041,391 P

– – 311,943 (466,468) 1,283,749 – – – – – 231,003 – 229,271 (466,468) 229,271 (464,273) 509,294 (384,359) 137,671 347,075 – – – (80,940) – – – 298,951 (362,194) 178,471 – – 431,191 – – 112,223 – – (160,830) – 244,383 449,770 2,588,900 – – – – – 472,773 (466,468) (155,186) – – =– P =– =– P P =– =– P =– P =– P =– P =– P P P P P P P P P P

– – – – – – – – – – – – – – – – – – – – – – – – – =– =– =– =– =– P P P P P Year Ended December 31, 2008 31, December Ended Year (5,252) (5,252) 49,244 49,244 =54,496 =49,244 =159,110 =1,259,011

– – – =– P 36% 3,264 3,264 2,437 2,437 19,624 19,624 109,866 34,603 34,603 =73,928 P =34,603 P =200,531 P =715,079 =259,545 =2,499,365 =20,276,994 =20,912,730 P

– – – – 635,736 1,259,011 16% 970) 970) 17,122 51,205 51,205 68,223 68,223 22,546 22,546 (16,718) (53, 103,543) 103,543) (22,607) 544,316 544,316 226,369 200,443 226,369 146,304 165,928 109,866 139,278 157,867 157,867 (637,677) (637,677) (55,838) ( (263,977) (263,977) (71,261) (163,928) (163,928) =238,864 P =384,236 P =157,867 P P P P 1,181,993 1,181,993 256,281 2,364,244 2,364,244 409,204 (1,018,323) (1,018,323) (155,360) (5,556,509) (5,556,509) (305,875) =7,920,753 P =7,209,890 =1,250,216 P P P P =49,219,732 P =19,876,795 P =49,219,732 P P P P Water Utilities Water Utilities Operations Toll Healthcare Distribution Power Businesses Other Eliminations Consolidated

fit from) income tax fit income from) fit from) income tax fit income from) nancing Charges nancing ilities and a a venture joint and equipment and property and and amortization and provision for decline for decline provision and amortization and of assets in value Profit Fi before (Charges) Income Non-recurring Segment Income (Loss) Income Segment Gross Margin Gross

Profit before non-controlling and Income Tax Income and Profit non-controlling before from Contribution Subsidiaries - Core from Contribution Operations Net Other income (charges) - (charges)net income Other for (bene Provision Total revenue from external sales from external revenue Total Cost of sales expenses Operating - net Interest expense interests Non-controlling associates (losses) income of in net Equity (charges) income Non-recurring EBITDA Margin EBITDA for (bene Provision Liabilities and Assets assets Segment Liab Segment Information Other Segment assets concession - expenditures Service Capital Non-cash expenses, other than depreciation depreciation than other expenses, Non-cash Non-controlling interests Non-controlling of assets in value for decline Provision Depreciation and amortization amortization and Depreciation Consolidated Total Assets Consolidated Investment in associates, at equity in associates, at equity Investment

144 2010 Annual Report The following table shows the reconciliations of the Company’s consolidated EBITDA to consolidated net income for the years ended December 31, 2010, 2009 and 2008.

2010 2009 2008 (In Thousands)

Consolidated EBITDA P=10,933,487 P=9,584,243 P=1,403,861 Depreciation and amortization (2,535,115) (3,293,101) (120,112) Consolidated operating profit for the year 8,398,372 6,291,142 1,283,749 Interest income 531,666 499,221 440,621 Foreign exchange losses - net (8,150) (986,882) (499,943) Equity in net earnings (losses) of associates and joint ventures 1,771,067 399,535 209,404 Interest expense (4,439,740) (4,012,258) (1,215,076) Non-recurring gains (losses) - net (1,038,637) 2,216,431 771,512 Consolidated income before income tax 5,214,578 4,407,189 990,267 Provision for (benefit from) income tax 96,097 (37,326) 40,434 Consolidated net income P=5,310,675 P=4,369,863 P=1,030,701

The following table shows the reconciliations of Company’s consolidated core income to the Company’s consolidated net income for the years ended December 31, 2010, 2009 and 2008.

2010 2009 2008 (In Thousands)

Consolidated core income for the year P=3,855,795 P=2,047,192 P=347,075 Foreign exchange losses - net (8,150) (986,882) (499,943) Other non-recurring gains (losses) (1,038,637) 2,216,431 771,512 Net tax effect of aforementioned adjustments 62,144 (977,089) (93,099) Net income for the year attributable to owners of the Parent Company 2,871,152 2,299,652 525,545 Net income for the year attributable to non-controlling interest 2,439,523 2,070,211 505,156 Consolidated net income for the year P=5,310,675 P=4,369,863 P=1,030,701

6. Noncurrent Asset Held for Sale and Discontinued Operations

Landco Following a strategic review of the Company’s businesses in 2008, and its focus on infrastructure, MPIC decided to divest its 51.0% interest in Landco. Landco is primarily engaged in all aspects of real estate business and was previously a separate reportable operating segment. Initially, the sale of 17.0% interest in Landco to AB Holdings Corporation (ABHC) was completed on June 18, 2009. On the basis of the foregoing, the results of Landco’s operations for all the periods presented until discontinuance have been presented in the 2009 and 2008 consolidated statements of income as “Income (loss) from discontinued operations, net of tax.” Further, the Company recognized impairment loss amounting to P=431.2 million for the year ended December 31, 2008, allocated to Landco’s noncurrent assets on the basis of their carrying amounts, in view of the requirement of PFRS 5 to measure noncurrent asset (disposal group) held for sale sale at fair value less cost to sell. The impairment was included under provision for decline in value of assets (see Note 29).

The results of operations of Landco in 2008 and until disposal on June 18, 2009 are as follows:

For the period January 1 to June 18, 2009 2008 (In Thousands)

Revenue from sale of real estate P=436,242 P=1,456,328 Costs and expenses: Costs of real estate sold 253,463 964,124 General and administrative expenses 553,255 832,992 806,718 1,797,116 (370,476) (340,788) Other income - net 203,960 307,009 Interest income 117,044 222,350 Interest expense (53,353) (136,548) Income (loss) before income tax (102,825) 52,023 Provision for (benefit from) income tax (45,728) 9,967 Income (loss) after income tax (P=57,097) P=42,056

Metro Pacific Investments Corporation 145 The net cash flows of Landco prior to disposal are as follows:

For the period January 1 to June 18, 2009 2008 (In Thousands)

Operating P=290,808 (P=608,706) Investing 135,032 (99,404) Financing (405,273) 739,798 Net cash inflows P=20,567 P=31,688

Net loss per share attributable to the owners of Parent Company (see Note 32): Basic, from discontinued operations (P=0.001) (P=0.002) Diluted, from discontinued operations (P=0.001) (P=0.002)

On June 18, 2009, the BOD approved resolutions for the execution of an agreement (the “Agreement”) with ABHC, with the conformity of Landco, for ABHC to (i) acquire from MPIC 33.3% of MPIC’s 51.0% shareholding in Landco representing 17.0% of the total issued shares of Landco and (ii) procure Landco to settle MPIC’s outstanding loan to Landco in the principal amount of P=500.0 million plus accrued interest (the “MPIC loan”).

The Agreement was signed on June 19, 2009 and pursuant to the Agreement, ABHC shall pay to MPIC the amount of P=203.3 million (“Share Purchase Price”) which, together with the portion of the MPIC loan, was settled by end of 2009 through conveyance of certain assets, more particulary NE Pacific Shopping Center Corporation (NEPSCC) shares and certain properties.

With the sale, MPIC’s interest in Landco was reduced from 51.0% to 34.0%. Notwithstanding the significant interest retained by MPIC, the sale of the 17.0% interest in Landco was accounted for as a disposal of a subsidiary accordingly, Landco ceased to be a subsidiary of the Company.

Consequently, all the assets, liabilities, reserves, non-controlling interest and other accounts pertaining and relating to Landco, which were previously being consolidated by MPIC, were derecognized. For the year ended December 31, 2009, the gain on disposal was included under “Income (loss) from discontinued operations - net of tax” in the 2009 consolidated statement of income.

Total loss from discontinued operations in 2009 consists of:

Amount (In Thousands)

Loss from discontinued operations before tax (P=102,825) Gain on disposal of Landco 25,202 Benefit from income tax 45,728 Loss from discontinued operations after income tax (P=31,895)

MPIC’s remaining 34.0% interest in Landco is continued to be carried at the lower of carrying value and fair value less cost to sell and classified as “Noncurrent asset held for sale” in the 2009 consolidated balance sheet in accordance with PFRS 5 upon satisfying the criteria set forth therein. The carrying value of the said remaining interest amounted to P=329.6 million as of December 31, 2009.

On August 4, 2010, the BOD signed an agreement with ABHC, Landco and a third party individual in relation to the following:

a. Settlement of the MPIC Loan, including advances, totaling P=554.7 million via cash of P=225.0 million and the balance of P=329.7 million applied against the Company’s subscription in preferred shares in Landco as further explained below;

b. Sale of 1.17 million shares of common stock of Landco, representing 15.0% interest in Landco, owned by MPIC to ABHC at the price of P=156.0 per share. The total consideration of P=183.4 million was paid in cash of P=50.0 million and an issuance of a promissory note (ABHC Note) by ABHC with nominal amount of P=133.4 million. The ABHC Note bears interest of 10.0% per annum with the principal and cumulative interest payable on the fifth anniversary of the issuance of the ABHC Note. The sale resulted in a P=38.0 million gain on sale of investments (see Note 29). Payment of this loan is secured by a pledge over shares of ABHC in Landco;

c. New loan grant by MPIC to Landco for P=175.0 million at 12.0% interest, with the principal to be repaid quarterly in equal amounts with the first principal repayment due on March 31, 2011 and the final principal repayment due on December 31, 2014;

146 2010 Annual Report d. Subscription of 379.7 million redeemable preferred shares of Landco at a subscription price of P=1.0 per share, which is equal to par value, which total subscription price was paid P=50.0 million in cash and the assignment of the MPIC loans and advances as described above in the amount of P=329.7 million. These preferred shares shall have the following features:

i. Preferential cash dividends at the rate of 10.0% per annum, to be calculated based on the par value of such preferred shares;

ii. Non-voting except in those cases under the law or any one of the conditions set out in the term sheet;

iii. Mandatory redemption period of 10 years unless Landco, at its option and upon notice to MPIC, redeems all or a portion of the outstanding Landco preferred shares at a redemption price equal to the subscription price paid by MPIC therefore plus any accrued and unpaid dividends, at any time following the full settlement of all loans and advances granted to Landco by MPIC, its subsidiaries, affiliates and/or associates including, without limit, the new MPIC loan, plus any and all accrued interests and/or penalties thereon; and the ABHC Note (as defined above), plus all accrued interests and/or penalties thereon; and

iv. Convertible to Landco common shares at the option of MPIC at a conversion price of P=156.27 per common share, if and only if, Landco undertakes an intial public offering, ABHC gives notice of its intention to sell or dispose all or a portion of its shares pursuant to its obligations, or Landco issues additional common shares.

The Company accounted for the investment in Landco’s preferred shares as loans and receivables in view of its mandatory redemption feature and assigned a value of P=31.7 million for the conversion option feature which is presented as “Derivative asset” in the consolidated balance sheet as of December 31, 2010. Such derivative asset will be carried at cost (since the underlying Landco preferred shares are unquoted and there is no reliable basis for its fair value) until such time the option will be exercised or has expired.

The remaining interest of 19.0% with a carrying value of P=184.2 million was reclassified to AFS financial assets and remeasured to P=211.8 million in light of the sale. The Company recognized a gain on remeasurement of P=27.7 million and was included in the “Gain on sale of investments” presented under “Other income” in the consolidated statements of income (see Note 29).

Nenaco On December 20, 2006, MPC’s BOD approved the sale of the Company’s 83.96% interest, equivalent to 2,531,843,830 common shares, in Nenaco to Negros Holdings and Management Corporation, a company owned by the management of Nenaco.

Prior to 2008, investments in and advances to Nenaco were fully provided with impairment on the basis that Nenaco had been incurring significant losses, experiencing financial difficulties and already in a capital deficiency position. These factors are strong indicators of impairment, thus, an impairment test using value in use was made, since Nenaco is not quoted and there is no readily available fair value. Value in use yielded a negative result as Nenaco had negative forecasted cash flows hence the full impairment.

Early in 2008, an investor expressed interest to venture in the shipping services, more particularly in Nenaco and such investor offered to purchase the interest held by the Company. The same approach as for the identification of impaired assets, the Company assessed whether there is an indication that the impairment loss previously recognized may have decreased. By that offer, management calculated the recoverable amount of both investment and advances which was based on the lowest expected selling price of the remaining interest and the expected recoverable amount of the advances totaling P=253.0 million. With the investments and advances reduced to zero after recognition of impairment losses, the increase in recoverable amount of P=253.0 million resulted in the reversal of the impairment losses for the same amount (included under the P=262.5 million reversal of provision for decline of value of assets in Note 29). The impairment losses reversed did not exceed the original impairment loss recognized.

On May 6, 2008, MPC’s BOD finally approved the sale of the Company’s remaining 15.3% interest in Nenaco for P=173.6 million resulting in recognition of a net gain on sale of investment amounting to P=51.3 million (see Note 29). The proceeds of the sale of Nenaco were paid in cash.

7. Cash and Cash Equivalents and Short-term Deposits

This account consists of:

2010 2009 (In Thousands)

Cash and cash equivalents P=4,941,693 P=6,379,731 Short-term deposits 6,138 2,433,418 P=4,947,831 P=8,813,149

Metro Pacific Investments Corporation 147 Cash and cash equivalents include cash in banks and temporary placements which are made for varying periods of up to three months depending on the immediate cash requirements of the Company. Cash in banks and temporary placements earn interest at the prevailing bank and temporary placements rates, respectively.

Short-term deposits are deposits with original maturities of more than three months to one year from dates of acquisition and earn interest at the prevailing short-term deposits rates.

Interest earned from cash and cash equivalents and short-term deposits amounted to P=238.2 million, P=248.4 million and P=89.4 million for the years ended December 31, 2010, 2009 and 2008, respectively (see Note 28).

For the purpose of the consolidated statements of cash flows, cash and cash equivalents comprise of the following as at December 31:

2010 2009 2008 (In Thousands)

Cash on hand and in banks P=1,622,174 P=508,597 P=1,934,855 Short-term deposits that qualify as cash equivalents 3,319,519 5,871,134 93,978 4,941,693 6,379,731 2,028,833 Cash on hand and in banks and short-term deposits attributable to discontinued operations – – 177,310 P=4,941,693 P=6,379,731 P=2,206,143

8. Receivables

This account consists of:

2010 2009 (In Thousands) Notes receivables (see Note 6) P=1,294,002 P=11,878,480 Trade receivables 1,724,687 1,696,654 Advances to customers 203,347 17,962 Advances to other affiliates 91,495 69,917 Advances to officers and employees 37,900 38,891 Accrued interest receivables 32,430 81,500 Dividends receivable 28,494 7,841 Others 131,251 195,354 3,543,606 13,986,599 Less allowance for doubtful accounts 487,917 511,299 3,055,689 13,475,300 Less current portion 2,380,660 13,475,300 Noncurrent portion P=675,029 P=–

a. Notes receivables as of December 31, 2010 include the new ABHC Note amounting to P=133.4 million subject to a 10.0% interest per annum and with maturity date of August 30, 2015, and a P=175.0 million new loan to Landco subject to a 12% interest per annum and principal repayment in equal quarterly installments until December 31, 2014. As of December 31, 2009, the Company has an existing 10.0% interest-bearing P=493.5 million loan to Landco which was settled in August 2010 as part of the agreement entered into with ABHC and Landco (see Note 6).

Notes receivables also include investment in preferred shares of Landco with mandatory redemption features and with carrying value of P=348.6 million as of December 31, 2010 (see Note 6).

Also during the year, MPC granted a third party a P=500.0 million, 5% interest-bearing loan due in five (5) years. The loan was discounted using market interest rate of 6.3%, and MPC recognized a Day-1 loss of P=20.1 million included under “Other expense” in the consolidated statement of income (see Note 29). The note was initially recognized at present value of P=479.9 million. Principal repayment and interest accretion for the year amounted to P=25.1 million and P=2.2 million, respectively. As of December 31, 2010, the carrying value of this loan amounted to P=457.0 million.

Notes receivables as of December 31, 2009 mainly include an P=11.2 billion short term note receivable from First Philippine Utilities Corporation (FPUC). The Note bears interest of 5.0% per annum and was collected on March 30, 2010 together with the related interest of P=194.9 million.

148 2010 Annual Report Notes receivables in 2010 and 2009 also include the following which were fully provided with allowance:

i. A five-year note with a face value of P=150.0 million that was issued by Steniel (Netherlands) Holdings B.V. on December 12, 2000 as part of the consideration for the Steniel Manufacturing Corporation shares of stock which was sold by MPC on October 30, 2000. The said note was impaired at full amount when no payment was received from Steniel Netherlands Holdings B.V. on June 30, 2006, the maturity date of the note; and

ii. A noninterest-bearing loan of P=45.0 million made to a certain individual due on February 21, 2009 subject to a 12.0% interest per annum in case of default. On June 11, 2009, the Company collected P=15.0 million reducing the balance to P=30.0 million as of December 31, 2009. As of December 31, 2010, the remaining balance was impaired at full amount.

b. Trade receivables mainly include receivables from customers arising from provision of water and sewerage services, further classified as residential, semi-business, commercial and industrial customers depending on the purpose of the provision of water and sewerage services. These receivables are generally collectible over a period of 60 days.

c. Advances to other affiliates represent advances to former subsidiaries and affiliates of the Company which are fully provided with allowance. Certain advances amounting to P=57.9 million were written off in 2010.

d. Other receivables mainly represent advances to former subsidiaries and related parties.

e. Movements in the allowance of individually assessed impaired receivables in 2010 and 2009 are as follows:

2010 Balance at Charge for Balance at January 1, the year December 31, 2010 (see Note 25) Write-off 2010 (In Thousands)

Trade receivables P=278,004 P=2,902 P=– P=280,906 Notes receivables 150,000 30,000 – 180,000 Advances to other affiliates 69,917 – (57,905) 12,012 Advances to officers and employees 9,894 – (4,784) 5,110 Others 3,484 6,405 – 9,889 P=511,299 P=39,307 (P=62,689) P=487,917

2009 Balance at Charge for Balance at January 1, the year December 31, 2009 (see Note 25) Write-off 2009 (In Thousands)

Trade receivables P=52,443 P=226,266 (P=705) P=278,004 Notes receivable 150,000 – – 150,000 Advances to other affiliates 69,917 – – 69,917 Advances to officers and employees 9,894 – – 9,894 Others 3,484 – – 3,484 P=285,738 P=226,266 (P=705) P=511,299

No collective impairment was provided in 2010 and 2009.

9. Inventories and Real Estate for Sale

Inventories. Inventories consist of transponders, magnetic cards, chemicals, medicines and hospital supplies, books, materials and supplies and spare parts. All inventories amounting to P=158.8 million and P=96.0 million as of December 31, 2010 and 2009, respectively, are stated at cost.

Cost of inventories charged to “Cost of services” account in the consolidated statements of income amounted to P=421.9 million, P=229.2 million and P=104.3 million for the years ended December 31, 2010, 2009 and 2008, respectively (see Note 24).

Metro Pacific Investments Corporation 149 Real Estate For Sale. This account consists of the following as of December 31, 2010 and 2009:

Amount (In Thousands)

Land P=54,747 Development costs: Residential resort community and Central Business District 46,706 Condominium units, including parking lots 85,557 P=187,010

Condominium units include units amounting to P=26.0 million which are carried at NRV. Had these been carried at cost, the carrying values of such units would have been P=88.5 million as of December 31, 2010 and 2009. The Company’s property operations, specifically for MPC’s condominium properties, were affected by the then general decline in the real estate industry resulting in the Company recording the real estate for sale at its NRV since 2006. No further impairment loss was recognized in 2010, 2009 and 2008.

Condominium units with a carrying value of P=19.0 million as of December 31, 2010 and 2009 were used to secure certain provisions (see Note 17).

Cost of real estate sold included under “Income (loss) from discontinued operations - net of tax” account in the consolidated statements of income amounted to P=253.5 million and P=964.1 million for the years ended December 31, 2009 and 2008, respectively.

10. Available-for-sale Financial Assets

This account consists of:

2010 2009 (In Thousands) Shares of stock in: NEPSCC (see Note 6) P=236,262 P=236,262 Landco (see Note 6) 211,825 – CMMTC (see Note 4) 140,953 – BLC 46,525 46,525 635,565 282,787 Investment in bonds 424,093 – 1,059,658 282,787 Less current portion 546,424 282,787 Noncurrent portion P=513,234 P=–

Shares of Stocks. As discussed in Note 6, the Company’s remaining interest of 19.0% in Landco with a carrying value of P=184.2 million was classified to AFS financial assets and remeasured at fair value of P=211.8 million, where a gain on remeasurement of P=27.7 million was recognized as other income included under “Gain on sale of investments” (see Note 29). The fair value was determined using the discounted cash flow method with the following assumptions:

December 31, 2010 Discount rate 13.9% Minority discount 10.8% Marketability discount 30%

NEPSCC shares, which are unquoted, were transferred to the Company in 2009 in settlement of the ABHC Note. NEPSCC is engaged in leasing properties, more particularly mall spaces.

Investment in CMMTC represents 2.7% interest or 1,379,674 of unquoted investment in shares of stocks of CMMTC. The Company classifies the investment as noncurrent AFS financial asset.

Investment in BLC consists of unquoted shares of stock totaling of 339,772 shares as of December 31, 2010 and 2009. All BLC shares were used to secure certain provisions as of December 31, 2010 and 2009 (see Note 17).

150 2010 Annual Report Investment in Bonds. As of December 31, 2010, this account consists of investments in fixed rate retail treasury bonds of the ROP. The quoted ROP treasury bonds which bear fixed interest rates ranging from 5.9% to 9.0% is payable quarterly and with the following maturities:

Amount (In Thousands) Current P=51,812 Noncurrent 372,281 P=424,093

Maturity Date Fair value Principal Amount (In Thousands) July 31, 2011 P=51,813 P=50,000 July 31, 2013 56,545 50,600 August 9, 2015 315,735 300,000 P=424,093 P=400,600

As discussed in Note 3, investments in bonds are classified as HTM investments in 2009. As of December 31, 2009, HTM investments amounted to P=400.6 million and stated at amortized cost. In August 2010, prior to their maturity, MNTC sold P=300.0 million of its investments in bonds and invested the same for new bonds with higher yield of 5.9% from 5.3%. The pretermination of these bonds precludes the Company from classifying any existing and new investments as HTM, hence the reclassification of investments in bonds from HTM investments to AFS financial assets.

As further discussed in Note 19, all existing and future assets of MNTC are mortgaged in favor of the lenders in line with the requirements of the Mortgage Assignment and Pledge Agreement known as the Master Security Agreement (MSA) and this include MNTC’s investment in bonds as herein presented.

The movements in the AFS financial assets are as follows:

2010 2009 (In Thousands)

Balance at beginning of year P=282,787 P=402,964 Additions (see Note 6) 652,778 236,262 Reclassification from HTM investments 100,600 – Disposals – (356,439) Change in fair value (see Note 30) 23,493 – Balance at end of year P=1,059,658 P=282,787

11. Advances to Contractors and Consultants and Other Current Assets

Advances to Contractors and Consultants. Advances to contractors and consultants mainly represent advanced payments for various contracts relating to Segment 8.1 Project and Maynilad operations. These are progressively reduced upon receipt of the equivalent amount of services rendered by the contractors and consultants. Carrying value of these advances amounted to P=288.3 million and P=527.6 million as of December 31, 2010 and 2009, respectively.

Other Current Assets. This account consists of:

2010 2009 (In Thousands)

Sinking fund P=843,590 P=796,302 Deposits 988,575 554,400 CWTs 415,228 380,233 Input VAT 278,263 118,997 Prepaid expenses 15,471 32,746 Miscellaneous deposits and others 133,465 96,273 2,674,592 1,978,951 Less allowance for decline in value 353,688 385,119 P=2,320,904 P=1,593,832

Sinking fund represents amount set aside to cover semi-annual principal and interest payments of certain long-term debt (see Note 19).

Metro Pacific Investments Corporation 151 Deposits relate to the following:

On November 12, 2010, the Company entered into a Cooperation Agreement with Fil-Estate Corporation, Fil-Estate Properties, Inc. and Fil-Estate Management, Inc. (the “Fil-Estate Companies”) relating to the Fil-Estate Companies’ rights and interests in the MRT 3 companies consisting of Metro Rail Transit Holdings, Inc. (“MRTH”), Metro Rail Transit Holdings II, Inc. (“MRTH-II”), Metro Rail Transit Corporation (“MRTC”) and Monumento Rail Transit Corporation (“MNRTC”). MPIC entered into a Cooperation Agreement with the following objectives: (i) explore solutions that will enable the expansion of the MRT 3 system through financially and legally viable means, and (ii) acquire the interests of the Fil-Estate Companies in MRTH, MRTH-II, MRTC (“MRT Companies”) and MNRTC, subject to obtaining the necessary consents from the relevant parties. Under the Cooperation Agreement, the Fil-Estate Companies shall appoint MPIC as its attorney-in-fact in connection with the exercise of the rights and interests of the Fil-Estate Companies in the MRT Companies and MNRTC.

MPIC also entered into binding term sheets with Anglo Philippines Holdings Corporation (“APHC”) and DBH Incorporated (“DBH”) in connection with all the interests of APHC and DBH in MRTH and MNRTC. The execution of definitive agreements for the acquisition of the aforementioned MRTH and MNRTC shares by MPIC shall be subject to the condition that the necessary consents and waivers from relevant parties are obtained.

Total deposits made by the Company in 2010 in connection with the above agreements amounted to P=462.5 million. Should the planned acquisitions push through, these deposits will form part of the acquisition price, otherwise these will be forfeited and expensed outright.

Deposits amounting to P=526.1 million and P=554.4 million as of December 31, 2010 and 2009, respectively, represent short-term pledged deposits to secure Maynilad’s US$12.0 million performance bond in compliance with the terms of its Concession Agreement with MWSS. With the submission of the US$90 million performance bond (see Notes 13 and 35), the US$12.0 million performance bond was allowed to expire on January 31, 2011.

The allowance for decline in value mainly represents provision for impairment of CWT recognized in prior years as management believes that it may not be able to utilize the same. No further provision was recognized in 2010 and 2009.

12. Investments in Associates and Interest in Joint Ventures

The associates and joint ventures of the Company are as follows:

Place of Ownership Interest Incorporation Principal Activities 2010 2009 Associates: Costa De Madera Corporation (a) Philippines Real estate 62.00 62.00 Prime Media Holdings, Inc. Philippines Media holding company 49.00 49.00 Metro Pacific Land Holdings, Inc. Philippines Real estate 49.00 47.33 Tollways Management Corporation (TMC) Philippines Tollways 46.00 45.93 Davao Doctors Hospital, Inc. (DDH) Philippines Hospital 34.85 34.85 Medical Doctors Inc. (MDI) Philippines Hospital 35.03 34.79 First Gen Northern Energy Corp. (FGNEC) Philippines Power generation 33.33 – Landco NE Resources Ventures, Inc. (LNERVI) Philippines Real estate 24.95 24.95 Metro Strategic Infrastructure Holdings, Inc. (b) Philippines Investment holding – 38.64 Manila Electric Company (Meralco) (c) Philippines Power distribution – 14.67 Joint Ventures: Beacon Electric Asset Holdings, Inc. (Beacon Electric.) (c) Philippines Investment holding 50.00 – Manila North Harbour Port, Inc.(MNHPI)(d) Philippines Port Operator – 35.00 (a) Not consolidated as control rests with the other shareholders (b) Became a 95.55% owned subsidiary in 2010 (see Note 4) (c) Meralco was transferred to Beacon Electric in exchange for 50.0% equity interest in the latter (d) Disposed in June 2010

152 2010 Annual Report The carrying values of the Company’s investments in associates and interest in joint ventures are as follows:

2010 2009 (In Thousands)

Carrying value of investments in associates: MDI P=1,552,800 P=1,475,210 TMC 673,699 677,511 DDH 599,628 580,020 Meralco – 24,366,978 Others 32,788 32,539 2,858,915 27,132,258 Carrying value of interest in joint ventures: Beacon Electric 23,245,911 – MNHPI – 237,765 23,245,911 237,765 Investment in Beacon Electric’s preferred shares 8,010,444 – Advances to Beacon Electric 756,387 – P=34,871,657 P=27,370,023

Movements in the carrying values of investments in associates and interest in joint ventures accounted for under equity method for the years ended December 31, 2010 and 2009 are as follows:

2010 2009 (In Thousands) Acquisition Costs Balance at beginning of year P=30,112,985 P=5,150,370 Acquisitions 12,484 24,962,615 Transfer of investment in Meralco to Beacon Electric (24,540,310) – Acquisition of Beacon Electric 23,223,230 – Disposal of MNHPI (252,762) – Effect of consolidation of MSIHI (see Note 4) (55,427) – Balance at end of year 28,500,200 30,112,985 Accumulated Equity in Net Losses Balance at beginning of year (1,223,743) (1,252,878) Share in net earnings (losses): MDI 100,859 173,305 TMC 142,928 154,212 DDH 39,995 47,784 Meralco 266,683 72,072 Beacon Electric 22,681 – MNHPI (74,633) (14,526) Others – (608) Transfer of investment in Meralco to Beacon Electric (93,351) – Disposal of MNHPI 89,159 – Dividends: MDI (35,032) – TMC (146,740) (139,840) DDH (20,388) (17,860) Meralco – (245,404) Balance at end of year (931,582) (1,223,743) 27,568,618 28,889,242 Less allowance for impairment loss: Balance at beginning of year 1,519,219 1,519,219 Effect of consolidation of MSIHI (see Note 4) (55,427) – 1,463,792 1,519,219 26,104,826 27,370,023 Investment in Beacon Electric’s preferred shares 8,010,444 – Advances to Beacon Electric 756,387 – P=34,871,657 P=27,370,023

Metro Pacific Investments Corporation 153 Investments in Associates

Meralco. Meralco is the largest electric power distribution company and the largest private sector utility in the Philippines. It is incorporated in the Philippines and is subject to the rate-making regulations and regulatory policies of the Philippine Energy Regulatory Commission. Its subsidiaries are mainly engaged in engineering, construction and consulting services, information systems and technology, real estate, insurance and other electricity-related services.

From July 2009 through October 2009, the Company acquired a total of 163,602,961 common shares of Meralco for an aggregate purchase price of P=24,540.3 million representing 14.67% of the issued and outstanding share capital of Meralco as of December 31, 2009, through a series of negotiated transactions and open market purchases. Details of acquisitions of Meralco shares are as follows:

At various dates in July and August, 2009, MPIC acquired a total of 15,254,294 Meralco shares in open market for a total purchase price of P=4,441.6 million, substantially all of which was financed through the incurrence of indebtedness under the Parent Company’s bridge financing facility (see Note 19).

On October 2, 2009, MPIC entered into a Sale and Purchase Agreement to purchase 113,313,389 common shares of Meralco held directly by Philippine Long Distance Telephone Company (PLDT) Beneficial Trust Fund (BTF) and its wholly owned subsidiary New Gallant Limited (Gallant). MPIC purchased the shares at P=126.0 per share or for a total consideration of P=14,277.5 million.

At the same time, MPIC entered into a Sale and Purchase Agreement with Crogan Limited (Crogan), a corporation organized and existing under the laws of the British Virgin Islands and a subsidiary of FPC, to purchase 31,072,388 common shares of Meralco held directly by Crogan. MPIC agreed to purchase the shares at P=126.0 per share or for a total consideration of P=3,915.1 million.

The acquisition of Meralco shares from BTF and Crogan was partially funded by MPIC from proceeds of share issuances made by it as follows: (i) 3,159,162,337 MPIC common shares at P=3.0 per share or a total of P=9,477.5 million, in favor of BTF. Fair value of MPIC share at acquisition date was P=3.2 per share and the total fair values of MPIC shares issued to BTF amounted to P=10,109.3 million; and (ii) 1,305,040,296 MPIC’s common shares at a subscription price of P=3.0 per share in favor of MPHI.

In addition, MPIC likewise entered into another agreement with Crogan to purchase additional 3,962,890 Meralco shares from the latter for P=231.45 each and the purchase price amounting to P=917.2 million was paid in cash on October 7, 2009.

The total consideration for the acquired interest in Meralco in 2009 amounted to P=24,540.3 million as follows: (a) cash consideration of P=10,158.9 million; (b) fair value of MPIC shares issued of P=14,285.4 million; and (c) transaction costs of P=96.0 million.

On September 2, 2009, MPIC entered into a Shareholders’ Agreement (the “Agreement”) with PCEV and such Agreement defined the basic principles governing their conduct as common shareholders of Meralco and the exercise of their respective voting rights therein. PCEV directly held a 20.0% interest of Meralco’s current outstanding capital stock at that date and both PCEV and MPIC are affiliates of First Pacific, thus, related parties. With the Agreement, MPIC believes that, upon consummation of the acquisition of Meralco common shares held by BTF which was eventually executed on October 2, 2009 as discussed above, it has the ability to exercise significant influence in Meralco and accordingly, MPIC accounted for its 14.67% interest in Meralco under the equity method.

The Company engaged the services of an independent appraiser to determine the fair value of Meralco’s specific identifiable assets and liabilities and allocate the purchase price of the Company’s investment in Meralco among the identified assets and liabilities based on fair values. Based on the final purchase price allocation, the difference of P=16,163.0 million between the Company’s share on the total fair value of Meralco’s specific identified assets and liabilities and the Company’s total cost of investments was allocated as follows: (a) P=874.0 million for utility, plant and others; (b) P=235.0 million for investment properties; (c) P=23.0 million for investment in associates and joint ventures; (d) P=961.0 million for intangible assets particularly for franchise; and (e) P=14,070.0 million for goodwill.

As of December 31, 2009, the carrying value of investment in Meralco amounted to P=24,367.0 million, after recording the share in net earnings of Meralco of P=72.1 million (net of amortization of intangible assets of P=12.0 million and depreciation of fair value adjustment on utility, plant and others of P=13.0 million) and dividends declared of P=245.4 million. The Company’s shares in Meralco were pledged against the Company’s P=11.2 billion loan as of December 31, 2009 (see Note 19).

On March 30, 2010, the Company sold and transferred all its investments in Meralco representing 163.6 million common shares to Beacon Electric for a consideration of P=24.5 billion (see discussion under “Interest in Joint Ventures”). From January 1 to March 30, 2010, prior to the transfer, the Company recorded a share in net earnings of Meralco of P=266.7 million, net of related fair value amortization and adjustments.

154 2010 Annual Report MDI. On May 9, 2007, the Company subscribed to a total of P=750.0 million worth of convertible notes (Notes) of MDI. The Notes are subject to 7.0% interest per annum, payable semi-annually up to the date of conversion.

The Notes are convertible to common shares of MDI at the rate of P=800.0 per share, but not lower than the par value of the common shares. The Notes are convertible into shares anytime after the Note’s issue date and all outstanding convertible notes will be mandatorily converted into common shares on the 5th anniversary date.

On January 18, 2008, all the remaining portion of the convertible note were converted resulting in an additional 25.9% interest in MDI for the Company. On August 14, 2008, the Company purchased 5,284 additional shares from a stockholder of MDI at P=980.0 per share or P=5.2 million.

On September 8, 2009, MDI offered to issue new common shares to existing stockholders by way of a pre-emptive rights offering. The offer shares amounted to 181,226 common shares at the offer price of P=1,150.0 per share. Eligible shareholders shall be entitled to subscribe on the ratio of one share for every sixteen shares held.

On October 14, 2009, the Company subscribed to a total of P=161.0 million or an equivalent of 58,924 shares exercised from the pre- emptive rights offering and 81,059 additional subscription. The shares subscribed represent 2.6% additional interest, thus, resulting in a total of 1,082,767 MDI common shares or 34.79% ownership in MDI.

From January through June 2010, the Company acquired a total of 12,004 additional shares of MDI at a purchase price of P=980.0 per share or for a total purchase price of P=11.8 million. This acquisition represents additional interest of 0.24%, bringing the Company’s total ownership in MDI to 35.03%.

In relation to the purchase price allocation related to the acquisitions made in 2008, the excess of fair values of identifiable assets, liabilities and contingent liabilities of MDI over the acquisition cost, amounting to P=16.0 million in 2009 and P=224.8 million, was recognized as negative goodwill and is included under “Share in net earnings of associates” account in the 2009 and 2008 consolidated statements of income. In 2010, the additional acquisitions resulted in an additional positive goodwill which is not significant.

The Company’s equity share in net earnings of MDI amounted to P=100.9 million, P=173.3 million and P=347.3 million for the years ended December 31, 2010, 2009 and 2008, respectively. The Company received dividends from MDI of P=35.0 million in 2010.

DDH. On May 15, 2008, the BOD approved the purchase and acquisition of up to 34.0% of the issued share capital (including treasury shares) of DDH for P=1,600.0 per share. As of December 31, 2008, MPIC had acquired a total of 311,612 common shares representing 34.6% interest in DDH. Upon finalization of the purchase price allocation in 2009, it was determined that the amount of final goodwill was P=129.8 million and was included in the carrying value of the investment.

In May 2009, MPIC acquired an additional 2,048 common shares representing 0.3% interest in DDH, thereby increasing its percentage ownership to 34.9% as of December 31, 2009.

The Company’s shares in net earnings of DDH for the years ended December 31, 2010, 2009 and 2008 amounted to P=40.0 million, P=47.8 million and P=36.6 million, respectively. The Company recognized its share of dividends from DDH amounting to P=20.4 million and P=17.9 million for the years ended December 31, 2010 and 2009, respectively, of which P=11.0 million and P=7.8 million remain to be receivable as of December 31, 2010 and 2009, respectively.

TMC. With MPIC’s acquisition of MPTC on November 13, 2008, TMC became an associate of the Company at 45.9% interest.

TMC, pursuant to the Operation and Maintenance Agreement (O&M) between MNTC and TMC, is tasked for the operation and maintenance of both the NLEx Project and Segment 7. In addition, TMC continues to operate and manage SCTEx pursuant to its agreement with BCDA.

The Company’s share in net earnings of TMC amounted to P=142.9 million, P=154.2 million and P=18.9 million for the years ended December 31, 2010, 2009 and 2008, respectively. In 2010 and 2009, TMC’s BOD approved the declaration of cash dividends of P=319.0 million and P=304.0 million, respectively, of which the Company recognized its share of the dividends amounting to P=146.7 million and P=139.8 million, respectively.

First Gen Northern Energy Corp (FGNEC). MPIC subscribed for 250,000 common shares, representing 33.0% interest, at P=1.0 per share of FGNEC on March 17, 2010. MPIC has participated in the bidding for the proposed sale of the 246 MW Angat Hydroelectric Power Plant through FGNEC, hence, the initial investment of P=0.25 million. The investment in FGNEC is accounted for as an associate using equity accounting.

The bidding was completed but issues have been raised against the highest bidder giving FGNEC an opportunity to be awarded of the same, being the next highest bidder. The sale of the Angat Power Plant has currently been put on hold with the Supreme Court en banc confirming the status quo ante order of the same.

Metro Pacific Investments Corporation 155 Summarized Financial Information of Associates. The following tables present the summarized financial information of the Company’s investments in associates in conformity with PFRS for equity investees in which the Company has significant influence as of December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009 and 2008:

2010 2009 (In Thousands)

Current assets P=2,185,574 P=47,953,598 Noncurrent assets 7,273,116 141,901,987 Current liabilities 2,184,361 44,733,036 Noncurrent liabilities 1,609,668 78,415,696

2010 2009 2008 (In Thousands)

Revenues P=68,722,256 P=192,158,578 P=4,538,234 Costs and expenses 64,890,448 181,766,480 3,808,451 Net income 2,684,336 7,241,759 436,590

The above information as of and for the years ended December 31, 2010 and 2009 includes the financial information of Meralco as shown below:

2010* 2009 (In Millions)

Current assets P=– P=45,341 Noncurrent assets – 135,062 Current liabilities – 42,751 Noncurrent liabilities – 76,506 Revenues 61,103 184,782 Costs and expenses 58,181 175,610 Net income 1,820 6,356

*Results of operations of Meralco from January 1 to March 30, 2010.

Unrecognized share in net losses of associates amounted to P=0.1 million and P=5.1 million for the years ended December 31, 2010 and 2009, respectively. Cumulative unrecognized share in net losses of associates amounted to P=416.1 million and P=416.0 million as of December 31, 2010 and 2009, respectively.

Interest in Joint Ventures

Transfer of MPIC Equity Interest in Meralco to Beacon Electric. On March 1, 2010, PCEV, MPIC and Beacon, entered into an Omnibus Agreement (OA). Beacon, formerly known as Rightlight Holdings, Inc., was organized with the sole purpose of holding the respective shareholdings in

Meralco of PCEV and MPIC. PCEV and MPIC are Philippine affiliates of FPC and both held equity shares in Meralco. Under the OA, PCEV and MPIC have agreed to set out their mutual agreement in respect of, among other matters, the capitalization, organization, conduct of business and the extent of their participation in the management of the affairs of Beacon Electric.

Investment in Beacon Electric. Prior to the transactions contemplated under the OA, MPIC beneficially owned the entire outstanding capital stock of Beacon Electric consisting of 25,000 common shares, with a total par value of P=25,000.

On April 29, 2010, the Philippine SEC approved Beacon Electric’s application to increase its authorized capital stock to P=5.0 billion consisting of 3.0 billion common shares with par value of P=1.0 per share and 2.0 billion preferred shares with par value of P=1.0 per share. The preferred shares of Beacon Electric are non-voting, not convertible to common shares or any shares of any class of Beacon Electric, have no pre-emptive rights to subscribe to any share or convertible debt securities or warrants issued or sold by Beacon Electric. The preference shareholder is entitled to liquidation preference and yearly cumulative dividends at the rate of 7.0% of the issue value subject to: (a) availability of unrestricted retained earnings; and (b) dividend payment restrictions imposed by Beacon Electric’s bank creditors.

Under the OA, PCEV and MPIC each agreed to subscribe to 1,156.5 million common shares of Beacon Electric, for a subscription price of P=20.0 per share or a total of P=23,130.0 million. PCEV and MPIC also agreed that their resulting equity after such subscriptions and transfer from MPIC of 12,500 Beacon Electric common shares to PCEV will be 50.0% each of the outstanding common shares of Beacon Electric. MPIC additionally agreed to subscribe to 801.0 million shares of Beacon Electric’s preferred stock for a subscription price of P=10.0 per share or a total of P=8,010.0 million.

156 2010 Annual Report The completion of the subscription of MPIC to 1,156.5 million common shares and 801 million preferred shares of Beacon Electric was subject to the following conditions, all of which have been satisfied: (a) approval of MPIC’s BOD, which was obtained on March 1, 2010; (b) approval of the shareholders of FPC, which was obtained on March 30, 2010; and (c) full payment of the subscription price, which was made on March 30, 2010. Consequently, on March 30, 2010, MPIC completed its subscription to 1,156.5 million common shares of Beacon Electric and approximately 801.0 million preferred shares of Beacon Electric in consideration of: (1) the transfer of 163.6 million Meralco shares at a price of P=150.0 per share, or P=24,540.0 million in the aggregate; and (2) P=6,600.0 million in cash, as further described below in “Transfer of Meralco Shares to Beacon Electric”.

The completion of the subscription of PCEV to 1,156.5 million common shares of Beacon Electric was subject also to certain conditions, all of which have been satisfied.

The subscription price of PCEV’s and MPIC’s subscription to Beacon Electric shares was offset in full (in the case of PCEV) and in part (in the case of MPIC) against the consideration for the transfer of Meralco shares held by PCEV and MPIC as described in “Transfer of Meralco Shares to Beacon Electric” section below. In addition, MPIC settled its remaining balance P=6,600.0 million in cash. On May 12, 2010, MPIC also completed the transfer to PCEV of 12,500 shares or 50.0% of the 25,000 Beacon Electric common shares originally owned by MPIC.

Transfer of Meralco Shares to Beacon Electric. Alongside with the subscription to the Beacon Electric shares described above, Beacon Electric agreed to purchase 154.2 million and 163.6 million Meralco shares, or the Transferred Shares, from PCEV and MPIC, respectively, for a consideration of P=150.0 per share or a total of P=23,130.0 million for the PCEV Meralco shares and P=24,540.0 million for the MPIC Meralco shares.

The completion of the sale of the MPIC Meralco shares to Beacon Electric was subject to the following conditions, all of which have been satisfied: (a) approval of MPIC’s BOD, which was obtained on March 1, 2010; (b) approval of the Board of Directors of FPC, which was obtained on March 1, 2010; (c) approval of the shareholders of FPC, which was obtained on March 30, 2010; and (d) release of the pledge over the MPIC Meralco shares, which was completed on March 30, 2010. Consequently, on March 30, 2010, MPIC transferred 163.6 million Meralco shares to Beacon Electric at a price of P=150.0 per share for a total consideration of P=24,540.0 million.

The completion of the sale of the PCEV Meralco shares to Beacon Electric was also subject to certain conditions, all of which have been satisfied. Consequently, on May 12, 2010, PCEV transferred 154.2 million Meralco shares to Beacon Electric at a price of P=150.0 per share for a total consideration of P=23,130.0 million.

The transfer of legal title to the Meralco shares was implemented through a special block sale/cross sale in the PSE.

Subject to rights over certain property dividends that may be declared or distributed in respect of the approximately 317.8 million Transferred Shares, which will be assigned to First Philippines Holding Corporation (FPHC) if the Call Option (as discussed below) is exercised, the rights, title and interest transferred to Beacon Electric by MPIC and PCEV in respect of the approximately 317.8 million Transferred Shares includes: (a) all shares issued by Meralco by way of stock dividends on the Transferred Shares from March 1, 2010; (b) all property or cash dividends declared or paid on the Transferred Shares from March 1, 2010; (c) all other rights accruing on the Transferred Shares from March 1, 2010; and (d) the proceeds of all of the foregoing. PCEV may, at some future time and under such terms and conditions as may be agreed by PCEV and Beacon Electric, transfer to Beacon Electric its remaining 68.8 million Meralco common shares.

Call Option. Under the OA, MPIC assigned its right to acquire the call option, or the Call Option, over 74.7 million common shares of Meralco held by FPHC, or the Option Shares, to Beacon Electric. As a result of this assignment, Beacon Electric and FPHC executed an Option Agreement dated March 1, 2010 pursuant to which FPHC granted the Call Option over the Option Shares to Beacon Electric.

The Call Option is exercisable at the option of Beacon Electric during the period from March 15, 2010 until midnight of May 15, 2010. The exercise price for the Option Shares is P=300.0 per share or an aggregate exercise price of P=22,410.0 million. Beacon Electric exercised the Call Option on March 30, 2010 and FPHC transferred the 74.7 million shares of Meralco common stock to Beacon Electric in consideration of the payment by Beacon Electric of P=22,410.0 million in cash on March 30, 2010. Subject to rights over certain property dividends that may be declared or payable in respect of the 74.7 million shares of Meralco common stock, which are retained by FPHC following the Call Option exercise, the rights, title and interest transferred to Beacon Electric by FPHC in respect of the Option Shares includes: (a) all shares issued by Meralco by way of stock dividends on the Option Shares from March 1, 2010; (b) all property or cash dividends declared or paid on the Transferred Shares from March 1, 2010; (c) all other rights accruing on the Transferred Shares from March 1, 2010; and (d) the proceeds of any sale or disposition of any of the foregoing.

Property Dividends. With respect to the approximately 317.8 million Transferred Shares, the remaining 68.8 million Meralco common shares held by PCEV and the 74.7 million Option Shares transferred by FPHC to Beacon Electric pursuant to the Call Option, FPHC has the benefit of being assigned, or retaining in the case of the Option Shares, certain property dividends that may be declared on such shares.

Metro Pacific Investments Corporation 157 Governance Arrangements. Beacon Electric, PCEV and MPIC have also agreed on certain corporate governance matters, including Board composition, election of officers, shareholders’ action, representation to the Meralco Board, nomination of the Meralco Board Committees, and nomination of Meralco officers. The corporate governance agreements and Beacon Electric equity structure resulted in a jointly-controlled entity.

On March 30, 2010, Beacon Electric also entered into an P=18,000.0 million ten-year corporate notes facility with First Metro Investment Corporation and PNB Capital and Investment Corporation as joint lead arrangers and various local financial institutions as noteholders. The proceeds of the notes facility partially financed the acquisition of Meralco shares by Beacon Electric pursuant to its exercise of the Call Option. As at December 31, 2010, the amount drawn under this facility amounted to P=16,200.0 million (P=16,027.0 million, net of debt issuance cost of P=173.0 million); the remaining undrawn balance amounted to P=1,800.0 million.

In 2010, Beacon Electric engaged the services of an independent appraiser to provide the fair market values of the operating equity investments, fixed assets and intangible assets of Meralco at the time of Beacon Electric’s acquisition of its Meralco shares. The fair valuation resulted in the recognition of Beacon Electric’s proportionate share in fair value adjustment on fixed assets amounting to P=2,376.0 million and intangible asset pertaining to the Meralco franchise amounting to P=1,814.0 million. The fair value adjustment on fixed assets, as well as the intangible asset are amortized over their remaining useful life, and the amortization is charged against Beacon Electric’s equity share in net income of Meralco.

Beacon Electric also recognized in March 2010, a contingent liability amounting to P=2,372.0 million for certain property dividends that may be declared on its Meralco shares pursuant to the Option Agreement between Beacon Electric and FPHC. The contingent liability was remeasured based on the fair value of said property dividends as at December 31, 2010, and the resulting re-measurement loss of P=331.0 million was charged to consolidated statement of income.

As at December 31, 2010, the carrying value of Beacon Electric’s investment in Meralco of P=73,285.0 million includes: (a) consideration for the Transferred Shares from PCEV of P=23,130.0 million and from MPIC of P=24,540.0 million; (b) consideration for the Option Shares from FPHC of P=24,783.0 million, which include contingent consideration of P=2,373.0 million; (c) expenses of P=942.0 million consisting of PSE crossing charges, expenses relating to the Option Shares, as well as professional and legal fees and other cost associated to the transferred Meralco shares all chargeable to Beacon Electric pursuant to an agreement between PCEV and MPIC; and (d) equity share in net income of Meralco of P=2,618.0 million less (e) dividends received of P=2,728.0 million from Meralco.

As at December 31, 2010, Beacon Electric held 392.5 million Meralco common shares representing approximately 35.0% equity interest in Meralco with market value of P=89,490 million based on a quoted price of P=228.0 per share.

The Company’s equity share in net earnings of Beacon Electric amounted to P=22.7 million for the period March 30 to December 31, 2010. For purposes of taking up its equity share in the net earnings of Beacon Electric, , the Company made a downward adjustment, representing actuarial loss, on the net income of Beacon Electric in the amount of P=580.0 million to align with the policy of the Company with respect to recognition of actuarial gain or loss on retirement benefit plan. The Company’s policy is to recognize outright any actuarial gain or loss while that of Beacon Electric adopted the “corridor approach”. The Company’s share in this adjustment amounted to P=290.2 million. As of December 31, 2010, the carrying value of investment in Beacon Electric’s common shares amounted to P=23,245.9 million.

For the investment in Beacon Electric’s preferred shares, the Company received dividends in the amount of P=375.4 million in 2010. As of December 31, 2010, the carrying value of investment in Beacon Electric’s preferred shares amounted to P=8,010.4 million.

Manila North Harbour Port, Inc. (MNHPI). Manila North Harbour Port, Inc. (MNHPI), a joint venture between MPIC and Harbour Centre Port Terminal, Inc. (HCPTI) was incorporated on November 5, 2009 for the purpose of developing, maintaining and operating the Manila North Harbor and other port facilities. The authorized capital stock of MNHPI is P=700.0 million, divided into 7,000,000 shares with the par value of P=100.0 per share. On the basis of the subscribed capital stock, MNHPI is 35.0% and 65.0% owned by MPIC and HCPTI, respectively.

On August 14, 2009, MNHPI formally submitted its bid to be the sole and exclusive operator of the Manila North Harbor. In a letter dated October 8, 2009, the Notice of Award of the Contract for the Development, Management and Maintenance of the Manila North Harbor (the Contract) was made to MNHPI by the Philippine Ports Authority (PPA). The Contract, which was dated November 19, 2009, is effective for a period of 25 years, renewable for another 25 years under such terms and conditions as the parties may agree unless sooner modified, cancelled or terminated. Under the Contract, a fixed fee totaling P=6,818.8 million shall be remitted to the PPA based on a schedule of payments from year 1 to year 25, with the first payment to be made after the date of takeover of operations by MNHPI.

On June 28, 2010, upon inconclusive negotiation over the consortium, MPIC divested all of its shares of common stock of MNHPI representing 35.0% of the outstanding capital stock of MNHPI with prior approval from the PPA. The Company recognized gain from the disposal in the amount of P=81.4 million presented as “Other income” (see Note 29).

DMWC. Prior to July 17, 2008, MPIC has 50.0% interest in DMWC, a joint venture with DMCI. DMWC was incorporated to acquire equity interest, purchase, negotiate or otherwise deal with or dispose of stocks, bonds of Maynilad.

158 2010 Annual Report Governance Arrangements. Beacon Electric, PCEV and MPIC have also agreed on certain corporate governance matters, including MPIC acquired control over DMWC on July 17, 2008, and DMWC became a subsidiary of MPIC. Share in net losses from the joint venture Board composition, election of officers, shareholders’ action, representation to the Meralco Board, nomination of the Meralco Board before control was obtained amounted to P=256.7 million in 2008. Committees, and nomination of Meralco officers. The corporate governance agreements and Beacon Electric equity structure resulted in a jointly-controlled entity. Summarized Financial Information of Joint Ventures. The following table presents the summarized financial information of the joint venture companies and the aggregate amounts of each of the current assets, noncurrent assets, current liabilities, noncurrent liabilities, income On March 30, 2010, Beacon Electric also entered into an P=18,000.0 million ten-year corporate notes facility with First Metro Investment and expenses related to the Company’s interest in joint ventures as of December 31, 2010 and 2009 and for the years ended Corporation and PNB Capital and Investment Corporation as joint lead arrangers and various local financial institutions as noteholders. December 31, 2010, 2009 and 2008. The proceeds of the notes facility partially financed the acquisition of Meralco shares by Beacon Electric pursuant to its exercise of the Call Option. As at December 31, 2010, the amount drawn under this facility amounted to P=16,200.0 million (P=16,027.0 million, net of debt 2010 2009 issuance cost of P=173.0 million); the remaining undrawn balance amounted to P=1,800.0 million. MPIC MPIC Total Interest Total Interest In 2010, Beacon Electric engaged the services of an independent appraiser to provide the fair market values of the operating equity (In Thousands) investments, fixed assets and intangible assets of Meralco at the time of Beacon Electric’s acquisition of its Meralco shares. The fair valuation resulted in the recognition of Beacon Electric’s proportionate share in fair value adjustment on fixed assets amounting to Current assets P=1,658,295 829,148 P=4,247,727 2,123,864 P=2,376.0 million and intangible asset pertaining to the Meralco franchise amounting to P=1,814.0 million. The fair value adjustment on fixed Noncurrent assets 73,285,711 32,259,440 6,216 3,108 assets, as well as the intangible asset are amortized over their remaining useful life, and the amortization is charged against Beacon Current liabilities 3,997,446 1,998,723 178,208 89,104 Electric’s equity share in net income of Meralco. Noncurrent liabilities 16,026,929 8,013,465 3,529,787 1,764,894

Beacon Electric also recognized in March 2010, a contingent liability amounting to P=2,372.0 million for certain property dividends that may 2010* 2009 2008* be declared on its Meralco shares pursuant to the Option Agreement between Beacon Electric and FPHC. The contingent liability was Total MPIC Share Total MPIC Share Total MPIC Share remeasured based on the fair value of said property dividends as at December 31, 2010, and the resulting re-measurement loss of (In Thousands) P=331.0 million was charged to consolidated statement of income. Revenues P=– P=101,949 P=– P=– P=8,654,837 P=4,327,419 Equity in net earnings in Meralco 2,618,344 1,309,172 – – – – As at December 31, 2010, the carrying value of Beacon Electric’s investment in Meralco of P=73,285.0 million includes: (a) consideration for Costs and expenses 1,578,234 928,956 35,258 17,629 7,854,509 3,927,255 the Transferred Shares from PCEV of P=23,130.0 million and from MPIC of P=24,540.0 million; (b) consideration for the Option Shares from Net income (loss) 1,040,110 (51,952) (29,053) (14,527) (397,040) (198,520) FPHC of P=24,783.0 million, which include contingent consideration of P=2,373.0 million; (c) expenses of P=942.0 million consisting of PSE crossing charges, expenses relating to the Option Shares, as well as professional and legal fees and other cost associated to the ** The amounts for 2010 comprise of Beacon Electric’s nine months and MNHPI’s six months results of operations. transferred Meralco shares all chargeable to Beacon Electric pursuant to an agreement between PCEV and MPIC; and (d) equity share in **The amounts for 2008 include balances of DMWC, which became a subsidiary of MPIC in July 2008. net income of Meralco of P=2,618.0 million less (e) dividends received of P=2,728.0 million from Meralco. The above information includes the financial information of Beacon Electric as at and for the year ended December 31, 2010 as shown As at December 31, 2010, Beacon Electric held 392.5 million Meralco common shares representing approximately 35.0% equity interest in below: Meralco with market value of P=89,490 million based on a quoted price of P=228.0 per share. 2010 The Company’s equity share in net earnings of Beacon Electric amounted to P=22.7 million for the period March 30 to December 31, 2010. (In Thousands) For purposes of taking up its equity share in the net earnings of Beacon Electric, , the Company made a downward adjustment, representing actuarial loss, on the net income of Beacon Electric in the amount of P=580.0 million to align with the policy of the Company Current assets P=1,658,295 with respect to recognition of actuarial gain or loss on retirement benefit plan. The Company’s policy is to recognize outright any actuarial Noncurrent assets 73,285,711 gain or loss while that of Beacon Electric adopted the “corridor approach”. The Company’s share in this adjustment amounted to Current liabilities 3,997,446 P=290.2 million. As of December 31, 2010, the carrying value of investment in Beacon Electric’s common shares amounted to Noncurrent liabilities 16,026,929 P=23,245.9 million. Equity in net earnings of Meralco 2,618,344 Costs and expenses 1,578,234 For the investment in Beacon Electric’s preferred shares, the Company received dividends in the amount of P=375.4 million in 2010. As of Net income 1,040,110 December 31, 2010, the carrying value of investment in Beacon Electric’s preferred shares amounted to P=8,010.4 million.

Manila North Harbour Port, Inc. (MNHPI). Manila North Harbour Port, Inc. (MNHPI), a joint venture between MPIC and Harbour Centre 13. Service Concession Assets Port Terminal, Inc. (HCPTI) was incorporated on November 5, 2009 for the purpose of developing, maintaining and operating the Manila North Harbor and other port facilities. The authorized capital stock of MNHPI is P=700.0 million, divided into 7,000,000 shares with the par The movements in the service concession assets follow: value of P=100.0 per share. On the basis of the subscribed capital stock, MNHPI is 35.0% and 65.0% owned by MPIC and HCPTI, respectively. 2010 MPTC DMWC Total On August 14, 2009, MNHPI formally submitted its bid to be the sole and exclusive operator of the Manila North Harbor. In a letter dated (In Thousands)

October 8, 2009, the Notice of Award of the Contract for the Development, Management and Maintenance of the Manila North Harbor (the Cost: Contract) was made to MNHPI by the Philippine Ports Authority (PPA). The Contract, which was dated November 19, 2009, is effective for Balance at beginning of year a period of 25 years, renewable for another 25 years under such terms and conditions as the parties may agree unless sooner modified, P=17,240,867 P=49,336,382 P=66,577,249 Additions cancelled or terminated. Under the Contract, a fixed fee totaling P=6,818.8 million shall be remitted to the PPA based on a schedule of 1,253,064 8,185,487 9,438,551 payments from year 1 to year 25, with the first payment to be made after the date of takeover of operations by MNHPI. Balance at end of year 18,493,931 57,521,869 76,015,800 Accumulated amortization: Balance at beginning of year 654,124 3,737,718 4,391,842 On June 28, 2010, upon inconclusive negotiation over the consortium, MPIC divested all of its shares of common stock of MNHPI Additions (see Note 24) 611,430 1,664,405 2,275,835 representing 35.0% of the outstanding capital stock of MNHPI with prior approval from the PPA. The Company recognized gain from the Balance at end of year disposal in the amount of P=81.4 million presented as “Other income” (see Note 29). 1,265,554 5,402,123 6,667,677 P=17,228,377 P=52,119,746 P=69,348,123 DMWC. Prior to July 17, 2008, MPIC has 50.0% interest in DMWC, a joint venture with DMCI. DMWC was incorporated to acquire equity interest, purchase, negotiate or otherwise deal with or dispose of stocks, bonds of Maynilad.

Metro Pacific Investments Corporation 159

2009 MPTC DMWC Total (In Thousands)

Cost: Balance at beginning of year P=16,921,047 P=41,029,537 P=57,950,584 Additions 319,820 8,306,845 8,626,665 Balance at end of year 17,240,867 49,336,382 66,577,249 Accumulated amortization: Balance at beginning of year 75,146 1,211,310 1,286,456 Additions (see Note 24) 578,978 2,526,408 3,105,386 Balance at end of year 654,124 3,737,718 4,391,842 P=16,586,743 P=45,598,664 P=62,185,407

The cost of service concession assets consists of fair value of the concession agreement at the date of business combination computed using multi-period excess earnings method, present value of additional estimated future concession fee payments as a result of extension or revised concession agreement or term and costs of rehabilitation works or additional constructions.

Maynilad’s Service Concession Agreement with MWSS As discussed in Note 2, Maynilad entered into a Concession Agreement with MWSS, a government-owned and controlled corporation organized and existing pursuant to Republic Act (RA) No. 6234 (the Charter), as clarified and amended, with respect to the MWSS West Service Area. Under the Concession Agreement, Maynilad is entitled to the following rate adjustments:

a. annual standard rates adjustment to compensate for increases in the Consumer Price Index (CPI) subject to rates adjustment limit;

b. extraordinary price adjustment (EPA) to account for the financial consequences of the occurrence of certain unforeseen events subject to grounds stipulated in the Concession Agreement; and

c. rate rebasing (Rate Rebasing) mechanism which allows rates to be adjusted every five (5) years to enable Maynilad to recover expenditures efficiently and prudently incurred, Philippine business taxes and payments corresponding to debt service on concession fees and concessionaire’s loans incurred to finance such expenditures.

Extension of Maynilad’s Concession Agreement. On September 10, 2009, the MWSS Board of Trustees (BoT) approved the extension of the expiry of its Concession Agreement with the Company by an additional (15) years or from May 6, 2022 to May 6, 2037. Subsequently, on September 16, 2009, the MWSS Administrator wrote the Department of Finance (DoF) to inform them of the Board’s decision and to seek DoF’s written consent to the extension, as well as its extension of the letter of undertaking covering the government’s obligation under the Concession Agreement. On April 22, 2010, the DoF (by authority from the Office of the President of the ROP) approved the extension of the expiry of Maynilad’s Concession Agreement. The significant commitments under the extension follow:

a. to mitigate tariff increases; b. to increase the share in the current operating budget support to MWSS by 100% as part of the concession fees starting 2010; and c. to increase total investments.

The DoF further clarified that the extension of the government’s undertaking shall be effective only upon an increase in the Maynilad’s Performance Bond from US$30.0 million to US$90.0 million for the third rate Rebasing Period. Subsequently, Maynilad submitted a Performance Bond in the increased amount of US$90.0 million to MWSS on May 31, 2010.

Maynilad revised the estimated useful life of its service concession assets from 15 years to 27 years effective September 10, 2009 and applied such change in estimate prospectively. In accordance with PAS 38, the useful life of the service concession agreement for the water business was revised, to include the renewal period approved by the MWSS. Though Maynilad’s extension is still subject to a written consent from the Department of Finance (DoF) as of December 31, 2009, Maynilad revised the estimated useful life of the service concession assets effective September 10, 2009 (MWSS approval date) due to the following: (1) there is evidence, based on a precedent approval of the DoF, that the term of the Concession Agreement will be extended. Management believes that a similar approval will be granted to them by the DoF as the extension of both concessions is critical to the attainment of the objectives of the extension; and (2) the cost of renewal is not significant when compared with the future economic benefits expected to flow to Maynilad from the renewal of the Concession Agreement. The change in estimated useful life resulted in a reduction in amortization expense in 2009 by P=395.7 million.

160 2010 Annual Report Maynilad recognized additional concession fees, which were capitalized to service concession assets, amounting to P=410.5 million in 2010 and P=3.8 billion in 2009. The additional concession fees in 2010 pertain to the drawn portion of MWSS loans relating to new project while additional concession fees in 2009 pertain to: a. Incremental MOE resulting from the extension of the life of the Concession Agreement to 2037; and b. Incremental concession fees pertaining to MWSS loans from ADB and BNP Paribas amounting to P=1.0 billion at present value.

MNTC’s Supplemental Toll Operation Agreement (STOA) PNCC is the franchise holder for the construction, operation and maintenance of toll facilities in the North and South Luzon Tollways and the Metro Manila Expressway by virtue of Presidential Decree (PD) No. 1113 issued on March 31, 1977, as amended by PD No. 1894 issued on December 22, 1983. PNCC has an existing Toll Operation Agreement (TOA) with the Government of the ROP, by and through the TRB.

Pursuant to the Joint Venture Agreement (JVA) entered into by PNCC and MPTDC (then First Philippine Infrastructure Development Corp.) on August 29, 1995, PNCC assigned its rights, interests and privileges under its franchise to construct, operate and maintain toll facilities in the NLE in favor of MNTC, including the design, funding and rehabilitation of the NLE, and installation of the appropriate collection system therein. MPTDC, in turn, assigned all its rights, interests and privileges to the Binictican-Bo. Tipo road project, as defined in the Memorandum of Understanding dated March 6, 1995, to MNTC, which assumed all the rights and obligations as a necessary and integral part of the NLE project. The assignment of PNCC’s usufructuary rights, interests and privileges under its franchise, to the extent of the portion pertaining to the NLE, was approved by the then President of the ROP. On October 10, 1995, the Department of Justice issued Opinion No. 102, Series of 1995, affirming the authority of the TRB to grant authority to operate a toll facility and to issue the necessary Toll Operation Certificate in favor of PNCC and its joint venture partner, as reiterated and affirmed by the Secretary of Justice in his letter to the Secretary of Public Works and Highways dated November 24, 1995, for the proper and orderly construction, operation and maintenance of the NLE as a toll road during the service concession period.

In April 1998, the ROP (Grantor), acting by and through the TRB, PNCC (Franchisee) and MNTC (Concessionaire) executed the STOA for the Manila-North Expressway, whereby the ROP granted MNTC the rights, obligations and privileges including the authority to finance, design, construct, operate and maintain the project roads as toll roads (the “Concession”) commencing upon the date the STOA comes into effect until December 31, 2030 or 30 years after the issuance of the TOP for the last completed phase, whichever is earlier, unless further extended pursuant to the STOA.

The PNCC franchise expired on May 1, 2007. Pursuant to the STOA, the TRB issued the necessary TOC for the NLE in order to allow the continuation of the Concession. MPTC pays a certain amount to PNCC.

Also, under the STOA, MNTC shall pay for Grantor’s project overhead expenses based on certain percentages of total construction costs or of periodic maintenance works on the project roads. Fees billed by TRB amounted to P=8.2 million, P=6.0 million and P=11.7 million in 2010, 2009 and 2008, respectively.

Upon expiry of the service concession period, MNTC shall handover the project roads to the Grantor without cost, free from any and all liens and encumbrances and fully operational and in good working condition, including any and all existing land required, works, toll road facilities and equipment found therein directly related to and in connection with the operation of the toll road facilities.

In 2010, MNTC signed the Amended STOA for the NLE which includes the integration of Segment 10 into Phase II; amendment of adjustment formula for the Authorized Toll Rate by removing the foreign exchange factor; adoption of an integrated operations period for Phase 1 and Segment 8.1; extension of the Concession Period until December 31, 2037; modification of alignments of Phase II Segments 9 and 10; adoption of two open system tolling zones; and the extension of the effectivity of the toll rate formula.

Extension of MNTC’s Concession Agreement. In October 2008, TRB approved the extension of the service concession term for Phase I and Segment 8.1 of the Project from the original term ending 2030 to December 2037, subject to the following conditions: (a) the immediate submission of an updated implementation schedule, including preparatory activities and studies for Phase II and III of the Project; and (b) TRB to conduct an audit in the determination of applicable toll rates.

The first condition is a basic component of any project development while the fulfillment of the second condition depends on the initiative of TRB given that MNTC’s books are always available for TRB’s audit. On the basis of the foregoing, management believes that the conditions will be easily complied with no additional cost, thus, as allowed under PAS 38, starting October 2008, the revised life was used by MNTC for purposes of computing amortization. The change in estimated useful life resulted in a reduction in amortization expense in 2008 by P=33.0 million.

Capitalization of Borrowing Costs. Additions to service concession assets in 2010 and 2009 pertain mainly to the construction costs of Segment 8.1 and pre-construction costs for Segments 9 and 10 of Phase II of the Project. Borrowing costs capitalized amounted to P=35.2 million and P=31.7 million for the years ended December 31, 2010 and 2009, respectively. There were no borrowing costs capitalized in 2008 as the actual construction of Segment 8.1 started only in April 2009. The interest rate used to determine the amount of borrowing costs eligible for capitalization was 9.6% in 2010 and 2009.

Metro Pacific Investments Corporation 161 14. Property and Equipment

This account consists of:

Acquisition of December 31, Subsidiaries Disposals/ December 31, 2009 (Note 4) Additions Reclassifications 2010 (In Thousands)

Cost Land P=– P=271,902 P=– (P=20,000) P=251,902 Leasehold improvements 6,739 – 4,938 – 11,677 Building and building improvements 168,086 294,165 3,450 (100,307) 365,394 Office and other equipment, furniture and fixtures 414,259 15,587 72,709 (7,197) 495,358 Transportation equipment 249,200 168,540 61,084 (22,915) 455,909 Instruments, tools and other equipment 316,239 130,456 128,056 1,230 575,981 Library books – 11,237 695 – 11,932 1,154,523 891,887 270,932 (149,189) 2,168,153 Accumulated Depreciation Leasehold improvements 2,553 – 1,106 – 3,659 Building and building improvements 4,789 – 24,340 (4,378) 24,751 Office and other equipment, furniture and fixtures 243,091 – 77,560 (5,152) 315,499 Transportation equipment 99,962 – 72,609 (10,524) 162,047 Instruments, tools and other equipment 169,723 – 81,350 – 251,073 Library books – – 2,315 101 2,416 520,118 – 259,280 (19,953) 759,445 634,405 891,887 11,652 (129,236) 1,408,708 Construction-in-progress – – 14,527 – 14,527 P=634,405 P=891,887 P=26,179 (P=129,236) P=1,423,235

December 31, Disposals/ December 31, 2008 Additions Reclassifications 2009 (In Thousands) Cost Leasehold improvements P=2,716 P=4,023 P=– P=6,739 Building and building improvements 95,920 73,767 (1,601) 168,086 Office and other equipment, furniture and fixtures 203,178 48,087 162,994 414,259 Transportation equipment 199,887 29,822 19,491 249,200 Instruments, tools and other equipment 219,776 35,074 61,389 316,239 721,477 190,773 242,273 1,154,523 Accumulated Depreciation Leasehold improvements 1,770 783 – 2,553 Building and building improvements 843 4,761 (815) 4,789 Office and other equipment, furniture and fixtures 26,714 74,254 142,123 243,091 Transportation equipment 24,133 44,026 31,803 99,962 Instruments, tools and other equipment 25,420 61,306 82,997 169,723 78,880 185,130 256,108 520,118 P=642,597 P=5,643 (P=13,835) P=634,405

Building and building improvements in the amount of P=96.1 million was reclassified and formed part as additional to service concession assets in 2010 (see Note 13).

Depreciation is computed on a straight-line basis over the following estimated useful lives of property and equipment:

Leasehold improvements 2–5 years or lease term whichever is shorter Building and building improvements 5–30 years Office and other equipment, furniture and fixtures 2–5 years Transportation equipment 2–5 years Instruments, tools and other equipment 2–5 years

As further discussed in Note 19, all existing and future assets of MNTC are mortgaged in favor of the lenders in line with the requirements of the Mortgage Assignment and Pledge Agreement known as the Master Security Agreement (MSA). The land as presented here is used as colletaral for RMCI’s long-term debt. 162 2010 Annual Report 15. Other Noncurrent Assets

This account consists of:

2010 2009 (In Thousands)

Software costs - net of accumulated amortization of P=15,000 in 2010 and 2009 P=51,449 P=19,908 Miscellaneous deposits 48,602 71,734 Long-term cash deposits 6,985 – Pension assets (see Note 27) – 18,095 Others 42,134 21,829 P=149,170 P=131,566

Miscellaneous deposits mainly represent rental deposits and deposits for restoration works.

Long-term cash deposits represent time deposits with maturities of more than one year and earn interest at the respective long-term cash deposit rates (see Note 4).

16. Accounts Payable and Other Current Liabilities

This account consists of:

2010 2009 (In Thousands)

Trade payables P=1,755,673 P=1,432,453 Accrued construction costs (see Note 21) 3,109,514 1,726,337 Accrued expenses: Personnel costs 387,516 482,119 Outside services 215,823 200,772 Utilities and other related charges 196,061 122,192 Repairs and maintenance 69,267 43,305 Professional fees 58,852 60,455 Others (see Note 27) 132,708 368,676 Interest and other financing charges payable 848,296 1,035,659 Output taxes payable 265,837 85,355 Dividends payable (see Notes 21 and 23) 208,365 170,477 Withholding taxes payable 73,701 39,216 Unearned rental income and other deposits 42,546 2,441 Accounts payable 26,611 7,350 Retention payable 25,864 16,901 Provision for ESOP (see Notes 4 and 29) – 259,336 Others 294,419 164,923 P=7,711,053 P=6,217,967

Trade payables includes unpaid billings of creditors, suppliers and contractors. It also includes liabilities relating to assets held in trust used in Maynilad’s operations amounting to P=97.3 million as of December 31, 2010 and 2009 (see Note 36). Trade payables are noninterest-bearing and are normally settled on 30 to 60 day terms.

Accrued construction costs represent unbilled construction costs from contractors and normally settled upon receipt of billings and within a year (see Note 21).

Accrued expenses representing certain claims or potential claims to the Company, amounting to P=1,314.1 million as of December 31, 2009, were reclassified to provisions to conform with 2010 presentation. The reclassification is only within current liabilities and no third consolidated balance sheet is needed.

Interest payable mainly represents accrued interest on long-term debt and is generally settled semi-annually.

Metro Pacific Investments Corporation 163 In 2009, provision for ESOP represents the excess of the carrying value of Maynilad’s shares held by DMWC that will be issued to Maynilad’s employees in compliance with Maynilad’s concession agreement over the amounts to be paid by Maynilad to DMWC. The transfer of the shares was completed in 2010 and as discussed in Note 4, the transaction was accounted as a sale of non-controlling interest and any gain or loss is recognized to equity, hence the provision was reversed in 2010 (see Notes 4 and 20).

Retention payable is the amount withheld (equal to 10.0% of the contract price) by the Company until the completion of the construction of a specific project.

17. Provisions

Movements in this account follow:

December 31, 2010 Warranties and Guarantees Heavy Other (see Note 34) Maintenance Provisions Total (In Thousands)

Balance at the beginning of year P=516,323 P=415,827 P=1,353,788 P=2,285,938 Additions (see Notes 24 and 29) – 61,502 260,722 322,224 Payments – (80,636) (31,027) (111,663) 516,323 396,693 1,583,483 2,496,499 Less current portion 516,323 88,350 1,583,483 2,188,156 P=– P=308,343 P=– P=308,343

December 31, 2009 Heavy Warranties Maintenance Other and Guarantees and Others Provisions Total (In Thousands)

Balance at the beginning of year P=461,476 P=170,275 P=985,962 P=1,617,713 Additions (see Notes 24 and 29) 54,847 229,083 411,098 695,028 Accretion of interest (see Note 28) – 16,469 – 16,469 Payments – – (43,272) (43,272) Balance at end of year 516,323 415,827 1,353,788 2,285,938 Less current portion 516,323 – 1,353,788 1,870,111 P=– P=415,827 P=– P=415,827

Provisions include estimated expenses related to the concluded and ongoing debt settlement negotiations and certain warranties and guarantees extended by MPC in relation to debt for asset swap arrangements entered in prior years. Certain warranties and guarantees are secured by Pacific Plaza Tower (PPT) condominium units and BLC shares (see Notes 9 and 10).

Provision for heavy maintenance pertains to the contractual obligations of MNTC to restore the service concession assets to a specified level of serviceability. MNTC recognizes provision as the obligation arises which is a consequence of the use of the roads and therefore it is proportional to the number of vehicles using the road and increasing in measurable annual increments.

Other provisions consist of claims and potential claims against a subsidiary and estimated liabilities for certain fees under the STOA and Operation and Maintenance Agreement entered into by MNTC. Other provisions includes the accruals that were reclassified from accrued expenses to conform with 2010 presentation as discussed in Note 16.

18. Service Concession Fees Payable

This account consists of:

2010 2009 (In Thousands)

Service concession fees payable P=9,130,225 P=10,280,140 Less current portion 1,179,026 1,208,467 P=7,951,199 P=9,071,673

Concession fees relate to and arise from Maynilad’s service concession agreement and are denominated in various currencies. These are payable monthly following an amortization table up to the end of concession period and are noninterest-bearing.

164 2010 Annual Report The schedule of undiscounted estimated future concession fee payments, based on the original life of the Concession Agreement, is as follows:

In Original Currency Foreign Peso Loans/ Currency Loans Project Local Total Peso Year (Translated to US$) Support Equivalent* (In Millions) 2011 $38.9 P=399.1 P=2,104.5 2012 20.2 397.0 1,282.6 2013 16.8 396.7 1,133.2 2014 17.2 396.8 1,150.8 2015-2037 65.9 9,098.1 11,987.2 $159.0 P=10,687.7 P=17,658.3 * Translated using the December 31, 2010 exchange rate of P=43.84:US$1.

Concession fee payments relating to the extension of the Concession Agreement is only determinable upon loan drawdown of MWSS and their actual construction of the related concession projects. Additional concession fees relating to the extension amounted to P=410.5 million in 2010 and P=3.8 billion in 2009.

19. Long-term Debt

This account consists of:

December 31, 2010 Convertible Preferred Long-term Convertible Loans Shares Bonds Notes Total (In Thousands) DMWC and a subsidiary, Maynilad P=16,434,638 P=– P=– P=– P=16,434,638 MPTC and a subsidiary, MNTC 9,560,008 – – – 9,560,008 MPIC 6,648,750 – – – 6,648,750 RMCI and a subsidiary, RCI 204,429 – – – 204,429 MPC – 57,267 13,590 37,231 108,088 32,847,825 57,267 13,590 37,231 32,955,913 Less unamortized debt issue cost 432,913 – – – 432,913 32,414,912 57,267 13,590 37,231 32,523,000 Less current portion of long-term debt - net of unamortized debt issue cost of P=14.0 million 2,845,856 57,267 13,590 37,231 2,953,944 P=29,569,056 P=– P=– P=– P=29,569,056

December 31, 2009 Convertible Preferred Long-term Convertible Loans Shares Bonds Notes Total (In Thousands) MPIC P=17,916,250 P=– P=– P=– P=17,916,250 DMWC and subsidiary (Maynilad) 16,729,638 – – – 16,729,638 MPTC and subsidiary (MNTC) 8,759,838 – – – 8,759,838 MPC – 57,267 14,322 37,231 108,820 43,405,726 57,267 14,322 37,231 43,514,546 Less unamortized debt issue cost 728,146 – – – 728,146 42,677,580 57,267 14,322 37,231 42,786,400 Less current portion of long-term debt - net of unamortized debt issue cost of P=32.1 million 849,275 57,267 14,322 37,231 958,095 P=41,828,305 P=– P=– P=– P=41,828,305

Metro Pacific Investments Corporation 165 The movements in unamortized debt issue cost are as follows:

2010 2009 (In Thousands) Balance at beginning of year P=728,146 P=522,751 Amortization during the year charged to interest expense (see Note 28) (201,092) (24,637) Debt issue cost paid during the year 121,573 230,032 Reversal of debt issue cost (see Note 12) (221,694) – Foreign exchange adjustments 5,980 – Balance at end of year P=432,913 P=728,146

The repayments of loans based on existing terms are scheduled as follows:

2010 2009 (In Thousands) Current P=2,966,649 P=990,221 2012 1,298,149 1,403,271 2013 6,432,369 2,197,473 2014 and onwards 22,258,746 38,923,581 P=32,955,913 P=43,514,546

DMWC and Subsidiary Maynilad

Loans. On June 30, 2008, Maynilad entered into an Omnibus Notes Facility and Security Agreement (the Maynilad Omnibus Agreement) with certain local banks (Noteholders) for US$365.0 million notes (“the Notes”) for the purpose of financing the capital expenditures and payment of advances from shareholders. The Notes comprise Series 1 amounting to US$240.0 million and Series 2 amounting to US$125.0 million. Series 1 is a peso-denominated loan which consists of US$120.0 million fixed-rate note and US$120.0 million floating- rate note. Series 2 is a US$125.0 million floating-rate dollar-denominated note. The Notes are payable 10 years from the issue date.

Series 1 Fixed and Floating Rate Note. Bears interest of fixed benchmark rate plus 2.0% spread per annum and is payable within ten years to commence at the end of the 36th month after the initial issue date.

Series 2 Floating Rate Note. Bears interest of LIBOR and CDS rate plus 2.0% spread per annum and is payable within ten years to commence at the end of the 36th month after the initial issue date.

Maynilad’s existing Noteholders are secured by a first ranking mortgage over all of Maynilad’s mortgageable assets and an assignment of all rights, title and interest of Maynilad to its assigned accounts, accounts receivable, project documents and performance guarantee with Banco De Oro Unibank, Inc. as collateral agent. The Noteholders are secured further by a third party mortgage of Maynilad’s shares held by DMWC representing 40.9% of the outstanding shares of Maynilad and a voting trust over 31.0% of the outstanding shares of Maynilad. The third party mortgage and voting trust over the Maynilad shares shall cease, terminate, and become void at such time that Maynilad’s non-revenue water or NRW is reduced to 45.0%.

Debt Issuance Costs. All legal, professional and registration fees incurred in relation to the availment of the Notes, totaling P=451.8 million, were capitalized starting July 2008. Debt issuance costs are amortized using the effective interest rate method. Amortization of debt issuance costs amounting to P=80.8 million in 2010, P=24.6 million in 2009 and P=13.0 million in 2008 is presented as part of “Interest expense” account in the consolidated statements of income.

Covenants. The Omnibus Agreement contains provisions regarding the maintenance of certain financial ratios such as debt-to-equity ratio and debt-service-coverage ratio, and maintenance of debt service reserve account. As of December 31, 2010 and 2009, Maynilad has complied with these ratios.

As of December 31, 2010 and 2009, outstanding balance of the Notes amounted to P=16,434.6 million and P=16,729.6 million, respectively.

166 2010 Annual Report MPTC and Subsidiary MNTC

Loans consist of:

2010 2009 (In Thousands) Fixed Rate Corporate Notes (FXCN) P=5,401,205 P=5,485,651 Philippine National Bank Loan (PNB) 2,100,000 577,000 Asian Development Bank Loan (ADB) - Direct and Complementary Finance Scheme (CFS) 819,756 1,016,532 USD Bank Facility (USD) 616,006 845,702 Credit Agricole Corporate and Investment Bank (formerly Calyon S.A. Corporate and Investment Bank) (COFACE) 314,946 421,806 Export Finance and Insurance Corporation (EFIC) 308,095 413,147 P=9,560,008 P=8,759,838

In 2001, MNTC entered into a Common Terms Agreement (CTA) with the lenders, the security trustee, the co-security trustee and inter- creditor agent. The CTA specifies the mechanics on the funding under the term facilities, payment and prepayments, as well as the conditions precedent to drawdown set forth by the secured lenders. The CTA also contains covenants concerning restrictions with respect to, among others, waiver, modification, amendment or assignment of the key project agreements, hedge agreements, restricted payments, and the maximum debt-to-base equity ratio and the level of the debt-service-coverage ratio. Total financing facility availed by MNTC under the original CTA amounted to US$252.2 million.

The loans were granted under a limited-recourse project finance structure. Substantially all existing and future assets of MNTC are mortgaged in favor of the lenders in line with the requirements of the Mortgage, Assignment and Pledge Agreement, known as the Master Security Agreement (MSA). In addition, MPTDC and Egis Projects S.A. (Egis) provided completion support as agreed under the Sponsor Support Agreement (SSA).

On November 8, 2006, MNTC refinanced its outstanding loans through partial prepayment and restructuring of MNTC’s U.S. dollar- denominated long-term debt using the proceeds of a P=5.5 billion FXCN issue. The refinanced debt package consisted of a total of US$100.0 million in U.S. dollar term loan facilities participated in by majority of the original project lenders and a P=5.5 billion FXCN issue participated in by sixteen (16) qualified local institutional investors (Issuer).

The aggregate U.S. dollar term loan facilities consist of direct loan facilities from multi-lateral and bi-lateral institutions like ADB and EFIC and syndicated facilities, including a covered loan from COFACE, the French export credit agency, participated in by a mix of four (4) foreign commercial banks. The loans are payable in 16 equal semi-annual installments starting December 15, 2006 up to June 15, 2014 which is the original maturity date.

The FXCNs are payable within seven years from issue date under a bullet-like structure, i.e., 94.0% of the principal is payable on maturity date (November 17, 2013) while the balance of 6.0% is payable over the term of the notes in minimal annual installments. The simultaneous prepayment and drawdown on refinancing date (November 17, 2006) was facilitated through a US$96.0 million Conversion Bridge Facility (Bridge Loan) provided by Mizuho Corporate Bank, Ltd. (Singapore). This was a cash-secured temporary dollar facility backed by the FXCN proceeds that allowed MNTC to obtain the necessary dollars for the lump sum prepayment on refinancing date. The Bridge Loan was fully paid on December 5, 2006. Under the Notes Purchase Agreement covering the FXCN, the Issuer may at its option redeem the notes prior to the maturity date in whole but not in part subject to the terms and conditions of the agreement.

In connection with the refinancing, the CTA, MSA and other loan agreements were amended to reflect the revised covenants and security package covering all MNTC’s debt on a parri-passu basis. The major amendments are: (a) the removal of pledge of shares and other forms of sponsor support in the security package; (b) the release of trapped cash in the form of maintenance reserves, the principal portion of the debt reserve, and undrawn base equity contributions; (c) the reduction of assigned contracts; (d) the removal of assignment of operator assets and contracts as well as PNCC rights under certain contracts; and (e) the relaxation of the loan covenants. Certain agreements like the SSA were terminated and the sponsor guarantees along with other elements of the original security package were released effective November 17, 2006.

On November 13, 2008, MNTC entered into an amendment agreement to the CTA to reflect the replacement of FPHC by MPIC as project sponsor. On January 19, 2009, the CTA was further amended mainly to incorporate the option to convert the ADB Direct Loan from U.S. dollar to Philippine peso which took effect on March 11, 2009. As a result of the conversion, MNTC recognized a loss on extinguishment of debt amounting to P=9.9 million (see Note 29).

On March 16, 2009, MNTC also entered into a seven-year term loan agreement for a facility amount of P=2.1 billion with PNB to finance the project cost of Segment 8.1. The PNB Loan qualified as senior debt which entitles the lender to share in the same security package as Phase I lenders. As of December 31, 2010 and 2009, loan drawdowns on the facility amounted to P=2.1 billion and P=577.0 million, respectively.

Metro Pacific Investments Corporation 167 On April 27, 2009, MNTC entered into a credit agreement with Security Bank for a standby letter of credit facility of up to P=100.0 million for a period of 24 months to secure MNTC’s Segment 8.1 construction obligation in favor of the TRB. The letter of credit for an amount of P=80.3 million was issued effective April 27, 2009. There were no availments on the letter of credit as of December 31, 2010 and 2009.

Interest rates on direct US Dollar loan facilities, consisting of fixed rates, range from 8.03% to 8.25% in 2010 and 2009. Interest rates on syndicated US Dollar loan facilities, consisting of fixed and floating rates, range from 3.39% to 6.13% in 2010 and 4.0% to 6.13% in 2009.

Interest rate on PNB Loan is fixed at 9.61% in 2009. This was converted to floating interest rate upon re-pricing on December 15, 2010. Interest rates range from 2.16%-9.61% per annum in 2010.

Interest rate on ADB Direct is floating based on PHIREF plus a margin of 4.66% in 2010 and 2009.

The security for the outstanding loans is embodied in the following agreements:

Trust and Retention Agreement (TRA) with the secured lenders’ designated trustees and the inter-creditor agent. The TRA provides for the establishment and regulation of the security accounts and the security account collateral where the inflows and outflows of project revenues may be monitored. The security accounts form part of “Cash and cash equivalents” account in the consolidated balance sheets.

The MSA which grants to the trustees, on behalf of the secured lenders, the security interest in MNTC’s various assets. The agreement provides for the establishment of real estate mortgage and chattel mortgage as well as the assignment of key project agreements, insurances, and bank accounts and investments in favor of the co-security trustee for the benefit of the secured lenders.

On December 7, 2010, MNTC issued an irrevocable prepayment notice indicating its intention to prepay in full all outstanding amounts under the US Dollar loan facilities on January 14, 2011. The costs and fees incurred for the prepayment of the US Dollar loan facilities and ADB Direct amounting to P=103.9 million was included as part of the amortized cost of the loans.

On December 21, 2010, MNTC entered into a Notes Facility Agreement with local financing institutions for a P=2.7 billion short-term unsecured and subordinated notes facility. Proceeds of the notes which were fully drawn on January 11, 2011 were used for the prepayment of the US Dollar loans and other corporate purposes. The notes are payable every three months, up to a maximum term of one year from initial drawdown date.

As of December 31, 2010 and 2009, MNTC is in compliance with the required financial ratios and other loan covenants.

MPIC

P=12.0 Billion Loan. On November 6, 2009, the Company entered into a P=12.0 billion Omnibus Agreement with various financing institutions for the purpose of partially financing the Company’s series of acquisitions of Meralco common shares. The loan is available in two drawdowns, on which the first drawdown shall not be less than P=11.0 billion while the second drawdown shall not exceed the loan amount. The loan shall be payable in semi-annual installments and bears an interest rate based on a spread of 2.5% over the benchmark rate. The benchmark rate is the interpolated 9-year rate to be determined by referring to 7 to 10 year bids from PDST-F.

On November 13, 2009, the Company made its first drawdown amounting to P=11.2 billion. As of December 31, 2009, outstanding balance of the current and noncurrent portion of this loan amounted to P=120.0 million and P=11,080.0 million, respectively.

All legal and professional fees incurred in relation to the debt, totaling P=230.0 million, were capitalized. Debt issue costs are amortized using the effective interest method. Amortization of debt issue costs attributed to this loan, amounting to P=2.8 million for the year ended December 31, 2009, is presented as part of “Interest expense” account in the consolidated statement of income (see Note 28).

The loan was secured by a pledge on Meralco shares owned by the Company or by any third party procured by the Company. The Company shall, from the date of the pledge over the Meralco shares maintain the loan to value ratio at 50.0%. As of December 31, 2009, the market value of the Company’s investment in Meralco, based on quoted price of P=204.0 per share, amounted to P=33,375.0 million (see Note 12) and MPIC is in compliance with the required ratio.

The Omnibus Agreement also provides for the maintenance of a Debt Service Account (DSA) to be used by the Company to service interest and principal payments. The Company shall fund the DSA no later than 15 days prior to the relevant payment dates for the principal and interest.

On March 30, 2010, however, the Company preterminated the P=11.2 billion loan to be able to release its Meralco shareholdings from being pledged and transferred it to Beacon Electric in connection with the OA as discussed in Note 12. Unamortized debt issue cost of P=221.7 million was reversed and charged to Beacon Electric pursuant to a Letter of Agreement. Interest expense incurred in 2010, including amortization of debt issue cost of P=5.4 million, amounted to P=310.2 million.

168 2010 Annual Report P=4.5 Billion Bridge Financing Facility. On August 3, 2009, MPIC incurred indebtedness of P=4,500.0 million by drawing on the Bridge

Financing (the “Promissory Note”) obtained from local banks, in order to consummate the purchase of common shares of Meralco in the open market amounting to P=4,441.6 million (see Note 12). The principal amounts of these promissory notes are payable in a single payment sixty days from the execution of the promissory notes or on October 3, 2009. Interest on the outstanding principal amount of the Promissory Note is payable monthly in arrears on each interest payment date for the interest period then ending at a fixed rate which shall be equal to the 30-day PDST-F rate prevailing on an Interest Rate Setting Date plus a spread of 3.5%. The Promissory Note is secured by a pledge of 48,385,278 shares of common stock of Meralco, of which 13,350,000 shares are owned by the MPHI and 35,035,278 shares are owned by Crogan, as a third party pledgor at that time. On September 28, 2009, the principal amount of the Promissory Note and any accrued interest therein were paid and the pledged shares of Meralco have been released.

P=6.8 Billion Loan. On November 4, 2008, MPIC entered into an Omnibus Notes Facility and Security Agreement (the MPIC Omnibus Agreement) with a certain local bank for a P=6.8 billion note (the Note) for the purpose of partially financing its acquisition of MPTC common shares. The note bears a fixed interest rate equivalent to a 10-year Philippine Dealing System Treasury-Fixing (PDST-F) interest prevailing on one banking day prior to November 13, 2008 (Issue Date) plus applicable margin of 1.75% or such rate not exceeding 2.25% per annum, as agreed between the parties, subject to a floor of nine percent (9.0%) per annum. Interest shall be paid semi-annually commencing on the Issue Date. The Note is payable in twenty (20) consecutive semi-annual installments to commence at the end of the 9th month after Issue Date. After four (4) years from the Issue Date, MPIC may redeem in whole or in part the Note on any interest payment date falling thereafter.

All legal and professional fees incurred in relation to the debt totaling P=85.0 million were recognized as debt issue costs and amortized using the effective interest method over the term of the Note. Amortization of debt issuance costs, amounting to P=8.3 million, P=7.6 million and P=1.1 million is presented as part of “Interest expense” account in the consolidated statements of income for the years ended December 31, 2010, 2009 and 2008, respectively.

As a continuing security for the due and punctual payment and performance of the Note, MPIC pledged the acquired MPTC shares.

The MPIC Omnibus Agreement also provides for the maintenance of a DSA from the Issue Date until payment in full of all amounts due to the lenders for the purpose of holding funds on reserve to service MPIC’s payments of the Notes. The DSA amounting to P=267.7 million and P=270.2 million as of December 31, 2010 and 2009, respectively, is presented as part of “Other current assets” account in the consolidated balance sheets (see Note 11).

Moreover, the MPIC Omnibus Agreement requires MPIC to ensure during the terms of the Notes that its debt-to-equity ratio does not exceed 70:30, and its debt-service-coverage ratio is at a minimum of 1.3x. As of December 31, 2010 and 2009, MPIC is in compliance with the required financial ratios.

As of December 31, 2010 and 2009, outstanding balance of this loan amounted to P=6,648.8 million and P=6,716.3 million, respectively.

Effective February 13, 2011, the interest rate on the Note was repriced to 9.2% from 10.7%.

RMCI In 2008, RMCI obtained a loan from a local bank in the amount of P=300.0 million to pay off its outstanding loan from two other local banks. The loan, which is payable quarterly, bears interest rates of 2.0% per annum over PDS Treasury Fixing rate. As of December 31, 2010, outstanding balance of this loan amounted to P=171.4 million.

In 2010, RMCI obtained additional loan from the same local bank amounting to P=36.0 million to finance the purchase of one unit Magnetic Resonance Imaging equipment. The loan, which is payable quarterly, bears interest rate based on the prevailing market rates. As of December 31, 2010, outstanding balance of this loan amounted to P=33.0 million.

Total interest expense relating to these loans amounted to P=9.56 million from May 31 to December 31, 2010.

These loans are secured by continuing suretyship of some of the stockholders of RMCI and real mortgage constituted over various parcel land and improvements of RMCI and RCI with aggregate carrying amounts of P=251.9 million (see Note 14).

The loan agreement provides for certain restrictions with respect to, among others, incurrence of any other loans, advances or other obligations. These restrictions were complied with by RMCI.

Metro Pacific Investments Corporation 169 MPC

Convertible Preferred Shares Restructured into Term Loan. On July 23, 1999, MPC issued convertible preferred shares at a subscription price of P=1,000.0 per share or an aggregate subscription price of P=720.0 million. The shares carried a dividend rate of 10.0% per annum, with a premium to be paid on redemption that will equate to a cumulative yield over the full term of 15.0% per annum. The shares are also redeemable after three years, with conversions permitted throughout the period at a conversion price of P=2.25 per share, representing a premium of 12.5% over the prevailing market price. MPC accrued and paid dividends of P=72.0 million on the shares up to December 31, 2001, but was unable to meet obligations from January 1, 2002 onwards. Consequently, the preferred shareholders opted to exercise its put option and demanded redemption of the shares, thereby warranting the reclassification of the portion of the equity represented by the preferred shares into debt in July 2002.

On various dates in 2009 and 2008, a total of P=462.8 million of shares due from redemption were settled via asset-for-debt exchange of PPT condominium units, Central Country Estate, Inc. shares and certain Landco properties. Out of the P=720.0 million convertible preferred shares, P=200.0 million were restructured into term loans of which as of December 31, 2010 and 2009, P=57.3 million, remains outstanding and forms part of “Current portion of long-term debt” account in the consolidated balance sheets.

Long-term Bonds. These long-term bonds were issued by Metro Pacific Company Limited (MPCL), a subsidiary of MPC, on April 11, 1996. The bonds, which are all guaranteed by MPC, are unsecured and bear a fixed interest rate of 2.5% per annum payable annually in arrears. The bonds can be converted into common shares of MPC from June 11, 1996 to March 28, 2003 at a conversion price of P=5.08 per share adjusted for the stock dividend in 1997 of 33.0%, and based on a fixed rate of exchange of P=26.19:US$1.00.

The bondholders have the option to have the bonds redeemed in whole or in part on April 11, 2001 at 128.9% of their principal amount, together with accrued interest. Through January 2001, a subsidiary bought back from the market about US$12.2 million of the outstanding principal amount at an average unit price of 120.0% of the face value of the bond for a total purchase price of US$14.7 million including premium and accrued interest. As at the redemption date on April 28, 2001, bondholders of US$66.3 million of the total US$66.6 million outstanding bonds opted for redemption and were paid a total of US$87.1 million including interest and premium.

As the guarantor, MPC assumed the balance of US$0.3 million following MPCL’s default in payment. The balance as of December 31, 2010 and 2009 remains at US$0.3 million (P=13.6 million and P=14.3 million as of December 31, 2010 and 2009, respectively) and form part of “Current portion of long-term debt” account in the consolidated balance sheet.

Convertible Notes. Convertible notes represent the unsettled balance of three-year convertible notes issued by MPC at par in 1999 with an aggregate value of P=1,514.0 million.

The notes bear interest at the rate of 9.5% per annum, payable semi-annually in arrears, with a premium on redemption to provide for a yield of 12.0% per annum. The notes are convertible into common shares of MPC at a price of P=2.25 per share. The notes were issued to the creditors of Nenaco in order to refinance the latter’s obligations that matured on September 30, 2002.

Prior to their maturity dates in 2002, negotiations for settlement of the notes were initiated and resulted in the restructuring of P=744.0 million into a five-year to ten-year loan, bearing annual interest based on the 91-day Treasury Bill rate plus spread of 3.0%, and the settlement through dacion of property with carrying value of P=193.0 million. Between 2003 and 2006, the debts were partially settled primarily via dacion of MPC and Landco’s certain assets.

As of December 31, 2010 and 2009, convertible notes amounting to P=37.2 million remains outstanding and forms part of the “Current portion of long-term debt” account in the consolidated balance sheets.

20. Deferred Credits and Other Long-term Liabilities

2010 2009 (In Thousands) Deferred credits P=1,450,886 P=703,769 Contingent liabilities arising from business combinations 992,428 1,183,560 Accrued interest payable to MWSS 985,292 985,292 Customers’ guaranty deposits 522,585 494,453 LTIP payable (see Note 27) 133,009 – Financial guarantee obligation (see Note 21) 65,413 65,569 Payables arising from rate rebasing exercise – 942,279 Others 12,544 – 4,162,157 4,374,922 Less current portion – 942,279 P=4,162,157 P=3,432,643

170 2010 Annual Report Deferred Credits and Payables from Rate Rebasing Exercise Maynilad’s second Rebasing Adjustment was supposed to have taken effect and be implemented beginning January 1, 2009 pursuant to the Concession Agreement and the Transitional and Clarificatory Agreement (TCA) dated August 9, 2007. In a letter to MWSS and the Regulatory Office dated March 20, 2009, Maynilad submitted a tariff scheme proposal pending the full implementation of the rate rebasing adjustment or “R”.

On April 16, 2009, after a careful evaluation of such proposal, the Regulatory Office issued MWSS-RO Resolution No. 209-069, which recommended that Maynilad be authorized to implement, on a staggered basis, the “R” equivalent to 22.60% of the then prevailing current basic charge or P=5.02 per cubic meter in addition to the inflationary increase (“C”) equivalent to P=2.42 per cubic meter, which was implemented effective February 20, 2009. The said recommendations of the Regulatory Office were approved and confirmed by the MWSS BOT. After completion of the required publication pursuant to Section 12 of the MWSS Charter, such approved tariff scheme was implemented by Maynilad pursuant to and in accordance with the said resolutions. The new “R” took effect on May 4, 2009. In addition, the new base foreign exchange rate was changed from P=51.86 to P=48.045, effective May 4, 2009. As a result of the change in the base foreign exchange rate, deferred credits pertaining to remaining unrealized foreign exchange gains were derecognized in 2009.

Under this resolution, the MWSS resolved, among others, two pending issues that had an impact on the new “R” that took effect on May 4, 2009. These issues pertain to the excess collection of Accelerated Extraordinary Price Adjustment (AEPA) and realized foreign exchange gains arising from the prepayment of SBLC and Tranche B Concession fees. These were treated as part of the opening cash position, thus, were taken into consideration when the new “R” was set. Consequently, these deferred credits will no longer be subject to the FCDA mechanism that will be reflected in future billings.

In addition, to further mitigate the impact of the rate increase, the Regulatory Office further required the simultaneous implementation of the following: (1) the Prepayment Adjustment (PA), and (2) the Payment Incentive Adjustment (PIA) within an accelerated period of two (2) years, resulting in a downward adjustment of 8.15% or -P=2.22 per cubic meter and 5.73% or -P=1.56, respectively, based on the 2009 average basic charge which already includes the staggered “R” and the “C”. Payables arising from rate rebasing, which are recorded at present value, consist of PA amounting to P=1.0 billion and PIA amounting to P=709.7 million. As of December 31, 2009, these payables arising from rate rebasing amounted to P=942.3 million (shown as current liabilities in the 2009 consolidated balance sheet). As of December 31, 2010, these payables were fully applied against billings.

The above MWSS resolutions resulted in a derecognition of deferred credits of about P=2.1 billion and a recognition of a provision for PIA of about P=709.7 million, with a net effect of about P=1.4 billion recognized as “Other income” in the 2009 consolidated statement of income (see Note 29).

Contingent Liabilities Arising from Business Combination In relation to various acquisitions made, the Company recognized several contingent liabilities relating to the acquired entities and therefore portion of the cost of business combination was allocated to these contingent liabilities.

In 2010, these contingent liabilities includes the ongoing disputes of Maynilad with MWSS as further discussed in Note 34 and the contingent liability of EMHMC in relation to the contingent consideration as discussed in Note 4. In 2009, these contingent liabilities also include contingent liability with respect to the Cost of Living Allowance (COLA) claims for the supervisor-employees of Maynilad Water Supervisors Associations (“MWSA”) and the estimated net input VAT that should be paid by the Company’s tollway business should VAT be implemented on a retroactive basis as further discussed in Note 34. Following the decision of the Court of Appeals on January 31, 2011 and the issuance of RMC 63-2010 on July 19, 2010 confirming the imposition of VAT on a prospective basis, these contingent liabilities were reversed in 2010.

Movements of the Company’s contingent liabilities for the years ended December 31, 2010 and 2009 are as follows:

2010 2009 (In Thousands) Balance at beginning of year P=1,183,560 P=1,183,560 Additions (see Note 4) 305,803 – Reversals (see Note 29) (496,935) – Balance at end of year P=992,428 P=1,183,560

Accrued Interest Payable to MWSS In connection with Maynilad’s disputes with MWSS over certain charges billed by MWSS relating to (a) the basis of the computation of interest; (b) MWSS cost of borrowings; and (c) additional penalties, and as further discussed in Note 34, Maynilad has accrued interest on its payable to MWSS based on the terms of the Concession Agreement, which was disputed by Maynilad before the Rehabilitation Court. These already amounted to P=985.3 million as of December 31, 2010 and 2009 and have been charged to interest expense in prior years. Maynilad maintains that the accrued interest on its payable to MWSS has been adequately replaced by the Tranche B Concession Fees discussed in Note 34. Maynilad’s position is consistent with the Receiver’s recommendation which was upheld by the Rehabilitation Court. However, Maynilad did not reverse this accrued interest pending final resolution of MWSS’ disputed claims pursuant to the procedures prescribed under the TCA.

Metro Pacific Investments Corporation 171 Customers’ Guaranty Deposits Customers’ guaranty deposits serve to guarantee payment of bills by customers. These deposits are non-interest bearing and normally refunded upon termination of water service connection and are initially measured at fair value. After initial recognition, these deposits are subsequently measured at amortized cost using the effective interest rate method. The discount is amortized over the remaining concession period using the effective interest rate method.

Others These represent security and occupancy rights deposits in connection with occupancy agreements on Medical Arts Building of RMCI, of which occupancy rights deposits shall be retained for ten (10) to fifty (50) years and are non interest-bearing.

21. Related Party Transactions

Enterprises and individuals that directly, or indirectly through one or more intermediaries, control, or are controlled by, or under common control with the Company, including holding companies, subsidiaries and fellow subsidiaries are related parties of the Company. Associates and individuals owning, directly or indirectly, an interest in the voting power of the Company that gives them significant influence over the enterprise, key management personnel, including directors and officers of the Company and close members of the family of these individuals and companies associated with these individuals also constitute related parties. In considering each possible related entity relationship, attention is directed to the substance of the relationship, and not merely the legal form.

The following table provides the total amount of transactions with related parties for the relevant year:

Income from Management Guarantee Operator’s Interest Utilities Utility Interest Fees Fees Fees Income PNCC Fee (see Notes 24 Rentals Facilities Expense (see Note 29) (see Note 29) (see Note 24) (see Note 28) (see Note 24) and 25) (see Note 24) (see Note 29) (see Note 28) TMC 2010 P=56,000 P=23,256 P=1,339,567 P=10,899 P=– P=– P=– P=– P=– 2009 50,603 18,453 1,338,522 12,354 – – – – – 2008 1,800 2,299 187,632 1,344 – – – – – PNCC 2010 – – – – 348,358 – – – – 2009 – – – – 291,872 – – – – 2008 – – – – 38,026 – – – – Meralco 2010 – – – – – 107,200 – – – 2009 – – – – – 105,000 – – – 2008 – – – – – – – – – PLDT 2010 – – – – – – 6,151 63,422 – 2009 – – – – – – 6,382 – – 2008 – – – – – – 4,511 – –

MPHI 2010 – – – – – – – – 371,590 2009 – – – – – – – – – 2008 – – – – – – – – 13,903 2010 P=56,000 P=23,256 P=1,339,567 P=10,899 P=348,358 P=107,200 P=6,151 P=63,422 P=371,590 2009 50,603 18,453 1,338,522 12,354 291,872 105,000 6,382 – – 2008 1,800 2,299 187,632 1,344 38,026 – 4,511 – 13,903

In the normal course of business, the Company also has other transactions with related parties which consist mainly of availment of non- interest bearing cash advances with no fixed repayment terms.

TMC Transactions with TMC, an associate, follow:

TMC provides services as operator to the NLE under the O&M. The O&M contains the terms and conditions for the operation and maintenance by TMC of Phase I of the NLE and subsequently, of Segment 7, and sets forth the scope of its services. TMC is assisted by Transroute Philippines, Inc. as service provider in accordance with the Technical Assistance Agreement (TAA). Under the O&M, MNTC pays TMC a minimum fixed annual amount currently set at P=637.1 million for the NLE and for Segment 7, to be escalated on a quarterly basis plus a variable component. The O&M, which also provides for certain bonuses and penalties as described in the O&M, shall be effective for the entire service concession period.

On May 7, 2010, MNTC and TMC agreed to reduce, effective on February 11, 2010, the minimum fixed annual amount from P=637.1 million to P=605.4 million for the NLE and from P=40.6 million to P=38.8 million for the Segment 7 in view of the expiration of the TAA on February 10, 2010 of the Project and due to the reduction of six Point of Sales facilities being operated and maintained by TMC.

172 2010 Annual Report Moreover, on May 27, 2010, pursuant to the O&M and the TRB’s approval to integrate the operations period of Phase I and Segment 8.1, portion of Phase II of the Project, and to extend the concession term, MNTC and TMC agreed to extend the O&M to cover Segment 8.1 from June 1, 2010 until December 31, 2037. Consequently, MNTC agreed to pay TMC an annual base fee for the operations and maintenance of Segment 8.1 in the amount of P=33.6 million effective on June 5, 2010. The fee for Segment 8.1 is also subject to escalation on a quarterly basis plus a variable component.

Total operator’s fee recognized in the 2010 and 2009 consolidated statements of income amounted to P=1,339.6 million and P=1,338.5 million, respectively. Total operator’s fee recognized in the 2008 consolidated statement of income amounted to P=187.6 million which corresponds to operator’s fee from November 13, 2008, acquisition date of MPTC, up to December 31, 2008 (see Note 24).

TMC also pays annual guarantee fee to MPTDC equivalent to 2.5% of the gross value of the corporate guarantee issued by MPTDC. The guarantee was issued in favor of MNTC for the liability of TMC under the O&M. Total guarantee fees recognized by MPIC in the 2010 and 2009 consolidated statements of income (included under “Other income” account) amounted to P=23.3 million and P=18.5 million, respectively. Total guarantee fee recognized by MPIC in the 2008 consolidated statement of income amounted to P=2.3 million which corresponds to guarantee fee from November 13, 2008, acquisition date of MPTC up to December 31, 2008 (see Note 29).

MPTC recognized a receivable from TMC equivalent to the financial guarantee obligation recorded as the present value of the guaranteed portion of the liability of TMC under the O&M. Receivable on financial guarantee obligation from TMC and the financial guarantee obligation amounted toP=65.4 million and P=65.6 million as of December 31, 2010 and 2009, respectively. Interest income on receivable from TMC and interest expense on financial guarantee obligation amounted to P=10.9 million in 2010 and P=12.4 million in 2009. Interest income and interest expense for 2008 which amounted to P=1.3 million corresponds to interest from November 13, 2008, acquisition date of MPTC, up to December 31, 2008 (see Note 28).

In 2008, TMC appointed MPTDC to perform management and financial services for a fixed monthly fee of P=1.2 million for a period of 12 months. The management contract between TMC and MPTDC was not subsequently renewed. In 2009, MPTC replaced MPTDC to perform management and financial services for TMC for a fee amounting to P=50.6 million. In 2010, MPTC billed TMC for P=56.0 million for managerial and financial advisory services. MPTC and TMC are in the process of formalizing the management agreement. Total management fees amounted to P=56.0 million in 2010 and P=50.6 million in 2009. Income for 2008 which amounted to P=1.8 million corresponds to fees from November 13, 2008, acquisition date of MPTC, up to December 31, 2008. These income are included in “Other income” account in the 2010 and 2009 consolidated statements of income (see Note 29).

Due from TMC amounted to P=125.8 million and P=142.7 million as of December 31, 2010 and 2009, respectively. Due to TMC amounted toP=260.4 million and P=281.7 million as of December 31, 2010 and 2009, respectively.

PNCC PNNC is a non-controlling stockholder in MNTC. In consideration of the assignment by PNCC of its usufructuary rights, interests and privileges under its franchise, PNCC is entitled to receive a payment equivalent to 6.0% and 2.0% of the toll revenue from the NLE and Segment 7, respectively. Any unpaid balance carried forward will accrue interest at the rate of the latest Philippine 91-day Treasury bill rate plus 1.0% per annum. This entitlement, as affirmed in the Shareholders’ Agreement (SA), shall be subordinated to operating expenses and the requirements of the financing agreements and shall be paid out subject to availability of funds. In December 2006, MNTC entered into a letter agreement with PNCC to set out the detailed procedure for the payment.

The PNCC franchise expired in May 2007. However, since the payment is a continuing obligation under the SA, PNCC continues to receive the same payment.

Prior to the letter of TRB, MNTC had been remitting payments directly to PNCC on a semi-annual basis. On December 2, 2010, MNTC received a letter from the TRB dated November 30, 2010, citing a decision of the Supreme Court dated October 19, 2010 directing MNTC to remit forthwith to the National Treasury, through TRB, all payments representing PNCC’s percentage share of the toll revenues and dividends, if any, arising out of PNCC’s participation in the NLE Project. In the said decision, the Supreme Court ruled, among others, that after the expiration of the franchise of PNCC, its share/participation in the JVAs and STOAs, inclusive of its percentage share in toll fees collected by JV companies currently operating the expressways, shall accrue to the Philippine Government.

On the basis of the conflicting claims of PNCC and TRB to the revenue share and dividends, on December 8, 2010, MNTC filed a motion for clarification asking the Supreme Court to clarify the entity to which MNTC should remit its payments which was then due on December 20, 2010. Pending resolution by the Supreme Court of the motion for clarification, and pursuant to a BOD resolution dated December 23, 2010, MNTC filed a petition for consignation with the Regional Trial Court (RTC) of Caloocan for the latter to hold the payments in trust and deliver to the party ultimately adjudged by the Supreme Court sto be entitled to it, unless PNCC and the TRB, in the meantime, resolve the matter between themselves, in which the case the funds should be delivered and disposed of pursuant to their agreement and settlement.

Metro Pacific Investments Corporation 173 On December 29, 2010, MNTC through a letter sent by its legal counsel, informed PNCC and TRB of the consignation made to the RTC of Caloocan. Moreover, in a resolution dated January 18, 2011, the Supreme Court directed MNTC to remit to the National Treasury PNCC’s percentage share of toll revenues and dividends arising out of PNCC’s participation in the NLE Project.

As of December 31, 2010 and 2009, MNTC has unpaid dividends to PNCC amounting to P=181.7 million and P=143.6 million, respectively (see Note 16).

Meralco In 2009 and until March 31, 2010, Meralco is a significant associate of the Company. In the ordinary course of business, Meralco provides electricity to MPIC and certain subsidiaries’ offices within its franchise area. The rates charged by Meralco are the same as those with unrelated parties. Total electricity costs amounted to P=105.0 million for the period October 2, 2009 to December 31, 2009. Total electricity costs for the period January 1 to March 30, 2010 amounted to P=107.2 million. As of December 31, 2009, outstanding utilities payable to Meralco amounted to P=33.4 million, which is included under “Accounts payable and other current liabilities” in the consolidated balance sheets.

PLDT PLDT is an associate of FPC, thus a related party. The balance represents fees payable to PLDT for various administrative assistance extended to the Company. It also includes unpaid rentals from lease of office space. Rentals and other fees accruing to PLDT amounted to P=6.2 million,P=6.4 million and P=4.5 million for the period December 31, 2010, 2009 and 2008, respectively.

On March 17, 2010, MNTC and PLDT entered into an agreement with respect to the commercial aspect of the Utility Facilities Contract for the Fiber Optic Overlay along Phase I of the NLE which is currently being negotiated between MNTC and PLDT. Pending the final contract, in March 2010, PLDT already paid P=52.2 million for one-time exclusivity fee and one-time access fee and P=1.3 million for annual fee for the year ended December 31, 2010.

In December 2010, MNTC also billed PLDT P=9.8 million for one-time access fee and one-time exclusivity fee and P=0.1 million for the annual fee for the Fiber Optic Overlay along Phase II Segment 8.1. Total income amounting to P=63.4 million for the year ended December 31, 2010 is recorded under “Income from utility facilities” account in “Other income”(see Note 29).

As of March 3, 2011, MNTC and PLDT are in the process of finalizing the Utility Facilities Contract.

DMCI DMCI is a non-controlling stockholder in DMWC, thus a related party. Maynilad entered into construction contracts with DMCI totaling P=1.6 billion in 2010 and P=2.2 billion in 2009. Unpaid construction contracts amounted to P=358.0 million and P=370.2 million as of December 31, 2010 and 2009, respectively, and are presented as part of “Accounts payable and other current liabilities” account (see Note 16).

In January 2009, DMWC extended non-interest bearing cash advances to DMCI amounting to P=243.7 million. As of December 31, 2010, unpaid amount is P=234.6 million.

Smart Communications, Inc. (Smart) Smart is a wholly owned subsidiary of PLDT, thus a related party. The balance represents various non-interest bearing advances received in prior years for the Company’s operations.

MPHI The following are transactions with MPHI, a majority stockholder of MPIC, in 2010 and 2009:

The Company entered into a Placement and Subscription Agreements with MPHI on September 19, 2009 in order to raise capital (see Note 22).

Also, refer to Note 22 for other transactions with MPHI.

Issuance of Convertible Bonds. On March 22, 2010, MPIC issued to MPHI Peso denominated bonds convertible to common shares of MPIC at P=3.25 per share with total face value of P=6.6 billion due after three years from date of issuance (the redemption date). The bonds pay fixed interest of 4.5%, payable semi-annually every March 31st and September 30th of each year commencing on September 30, 2010.

174 2010 Annual Report Call Option. MPIC has the right to early redeem the bonds, in whole or in part (except in the case described in item 2 below (in which case, MPIC must wholly redeem the bonds), anytime from the date immediately following the first anniversary of the issue date at the early redemption amount if 1) the volume weighted average price of MPIC’s common shares for thirty (30) trading days prior to the date of the giving of the notice is at least 140.0% of the conversion price in effect on the last such trading day or 2) at least 90.0% in principal amount of the convertible bonds has already been converted, redeemed or purchased and cancelled. The early redemption amount, with respect to each convertible bond unit, on the interest payment date immediately preceding the intended early redemption date is as follows:

Interest Payment Date Early Redemption Amount March 30, 2011 P=101.01 September 30, 2011 101.54 March 30, 2012 102.08 September 30, 2012 102.64

Equity Conversion Option. MPHI, on other hand, has the option to convert the bonds for MPIC common shares based on the initial conversion price of P=3.25 per share. Adjustments to initial conversion price would be made on the following instances:

Consolidation, subdivision or reclassification Capitalization of profits or reserves by way of stock dividends or otherwise Capital distribution Right issues of common shares or option over common shares Modification of rights and conversion Other offers to holders of common shares

This option is exercisable after March 30, 2011 up to and including the 10th business day immediately preceding the redemption date.

The embedded call option is clearly and closely related to the bonds, therefore, was not bifurcated. On the other hand, the embedded equity conversion option is an equity instrument such that the initial carrying amount of the convertible bonds was allocated to its equity and liability components, where the equity component was assigned the residual amount after deducting from the initial fair value of the bonds the amount separately determined for the liability component. To separate the liability component from the equity component, the redemption amount of the bond as well as the future interest cash flows were discounted to arrive at its present value using MART 1 rate plus spread of 2.5%.

The present value of the bonds at the date of issuance amounted to P=6,166.1 million and the assigned value to the equity component is P=400.9 million, presented net of related tax of P=120.3 million under “Equity component of convertible notes” account in the equity section of the 2010 consolidated balance sheet (see Note 22). Related interest (including amortization of discount) for 2010 amounted to P=371.6 million, of which P=74.2 million is unpaid as of December 31, 2010 and presented as current portion of “Due to related parties” account in the consolidated balance sheet (see Note 28). The carrying value of the bonds amounted to P=6,314.1 million as of December 31, 2010.

On March 3, 2011, the BOD approved the amendment of the convertible bonds to allow allotment and issuance of MPIC common shares out of an increase in its authorized capital stock upon conversion by MPHI. The convertible bonds requires that MPIC common shares will be available for issuance on conversion date. Thus, MPIC common shares must be allotted and issued out of unissued capital.

SEC requires that at least 25.0% of the intended increase in authorized capital stock must be subscribed and 25.0% of the subscription must be paid up. Subscription to the proposed increase in the authorized capital stock will be made by MPHI and will be paid through conversion of debt to equity.

Others Other transactions with related parties (MPIF, HCPTI, Landco, MNHPI, FPC and others) mainly relate to advances to finance various real estate projects as well as intercompany charges for share in certain operating and administrative advances. These intercompany accounts are non-interest bearing.

Also refer to Note 12 for other related parties transactions with respect to the Company’s acquisition of Meralco shares and investment in Beacon Electric.

Outstanding balances of receivable from/payable to related parties are carried in the consolidated balance sheets under the following accounts:

2010 2009 (In Thousands) Due from related parties P=504,840 P=566,649 Due to related parties 6,783,636 429,718

Metro Pacific Investments Corporation 175 Composition of amounts due to/from related parties follows:

2010 2009 (In Thousands) Due from related parties: DMCI P=234,579 P=247,207 TMC 125,766 142,737 Metro Pacific Investments Foundation, Inc. (MPIF) 106,579 32,576 FPC 4,751 1,584 HCPTI – 105,000 Landco – 97,413 MNHPI – 4,042 Others 33,165 4,708 504,840 635,267 Less allowance for impairment – 68,618 504,840 566,649 Less current portion 439,427 501,080 P=65,413 P=65,569

Due to related parties: MPHI P=6,388,391 P=16,667 TMC 260,422 281,734 Smart 71,786 71,786 Landco 41,061 40,899 PLDT 14,687 11,204 DMCI 1,526 3,494 Others 5,763 3,934 6,783,636 429,718 Less current portion 469,495 429,718 P=6,314,141 P=–

Directors’ Remuneration Annual remuneration of the directors amounted to P=3.4 million, P=4.4 million and P=1.2 million in 2010, 2009 and 2008, respectively.

Non-executive directors are entitled to a per diem allowance of P=50 thousand for each attendance in the Parent Company’s BOD meetings. The Parent Company’s By-Laws provide that an amount equivalent to 1.0% of net profit after tax of the Parent Company shall be allocated and distributed among the directors of the Parent Company who are not officers of the Parent Company or its subsidiaries and affiliates, in such manner as the BOD may deem proper. There are no other special arrangements pursuant to which any director will be compensated.

Compensation of Key Management Personnel Compensation of key management personnel of the Company are as follows:

2010 2009 2008 (In Thousands) Short-term employee benefits P=330,994 P=146,294 P=97,195 LTIP expense (see Note 27) 133,009 – – ESOP expense (see Note 33) 34,376 50,036 – Retirement costs 37,990 8,924 1,225 Other long-term benefits 6,712 2,641 338 P=543,081 P=207,895 P=98,758

176 2010 Annual Report 22. Equity

Details of authorized and issued capital stock follow:

2010 2009 2008 No. of Shares Amount No. of Shares Amount No. of Shares Amount (In Thousands) (In Thousands) (In Thousands)

Authorized common shares - P=1.0 par value 22,688,518,336 P=22,688,518 22,688,518,336 P=22,688,518 11,950,000,000 P=11,950,000 Authorized preferred shares: Class A - P=0.01 par value 5,000,000,000 50,000 5,000,000,000 50,000 5,000,000,000 50,000 Class B - P=1.0 par value 1,500,000,000 1,500,000 1,500,000,000 1,500,000 – – 29,188,518,336 P=24,238,518 29,188,518,336 P=24,238,518 16,950,000,000 P=12,000,000

Issued - common shares: Balance at beginning of year 20,128,154,522 P=20,128,155 7,027,726,813 P=7,027,727 1,342,918,793 P=1,342,919 Exercise of stock option plan (see Note 33) 27,310,000 27,310 13,945,000 13,945 – – Issuance on existing subscriptions from MPHI – – 2,389,040,000 2,389,040 – – Additional subscriptions of MPHI – – 4,770,000,000 4,770,000 3,791,525,175 3,791,525 Conversion of advances/loan from MPHI to equity – – 672,129,584 672,130 1,893,282,845 1,893,283 Issuance on existing subscriptions from LAWL – – 791,110,491 791,110 Issuance in exchange for Meralco shares (see Notes 12 and 21) – – 4,464,202,634 4,464,203 – – Balance at end of year 20,155,464,522 P= 20,155,465 20,128,154,522 P=20,128,155 7,027,726,813 P=7,027,727

Issued - preferred shares - Conversion of advances from MPHI to equity (see Note 21) 5,000,000,000 P=50,000 5,000,000,000 P=50,000 – P=–

Total number of stockholders 1,380 – 1,378 – 1,386 –

Authorized Capital Stock MPIC was incorporated with original authorized capital stock of 100,000 common shares having par value of P=1.0 per share. On March 27, 2006, the MPIC’s BOD approved a resolution to increase its authorized capital stock to 4,600,000,000 common shares with a par value of P=1.0 per share. Such increase in authorized capital stock was approved by the SEC on June 5, 2006.

On October 23, 2006, MPIC purchased from MPHI, MPRI, Intalink B.V., and FPIL (all related parties of MPIC and major shareholders of MPC) 725,160,154 MPC common shares or 76.1% interest. MPIC issued 181,290,038 common shares in exchange for 725,160,154 MPC common shares.

On November 28, 2006, the closing date of the Tender Offer, and as result of a Tender Offer made by MPIC, a total of 195,367,956 MPC shares were tendered equivalent to 48,841,989 MPIC common shares and 146,525,967 MPIC warrants. Out of the total warrants available for conversion, 143,976,804 warrants were converted as of December 31, 2007 and 2,549,163 warrants expired on December 15, 2007.

On August 12, 2008, the SEC approved the increased in MPIC’s authorized capital stock to P=12.0 billion divided into 11.95 billion common shares with a par value of P=1 per share and 5.0 billion preferred shares with par value of P=0.01 per share from 4.6 billion common shares at P=1.0 par value.

Further on October 9, 2008, the MPIC’s BOD approved the increase in the authorized capital stock of MPIC from P=12.0 billion to up to P=21.6 billion divided into 20.0 billion common shares with a par value of P=1.0 per share, 5.0 billion Class A preferred shares with a par value of P=0.01 per share and 1.5 billion Class B preferred shares with a par value of P=1.0 per share. On February 13, 2009, the SEC approved such increase in the MPIC’s authorized capital stock.

On May 28, 2009, MPIC stockholders and BOD approved the increase of the authorized capital stock from P=21.6 billion to P=31.6 billion, divided into 28.5 billion common shares with the par value of P=1.0 per share, 5 billion Class A preferred shares with a par value of P=0.01 per share and 3.0 billion Class B Preferred Shares at P=1.0 par value per share.

On December 21, 2009, the SEC approved the increase of the authorized capital stock from P=21.6 billion to P=24.2 billion, divided into 22.7 billion common shares with the par value of P=1.0 per share, 5 billion Class A preferred shares with a par value of P=0.01 per share and 1.5 billion Class B Preferred Shares at P=1.0 par value per share.

As of December 31, 2010, the application to increase the Company’s authorized capital stock by an additional 5.8 billion common shares with par value of P=1.0 per share and 1.5 billion Class B Preferred Shares at P=1.0 par value per share is yet to be filed with and approved by the SEC.

Metro Pacific Investments Corporation 177 Issued Common Shares The following issuances of shares to MPHI were approved by the MPIC’s BOD on June 30, 2008:

3,791,525,175 common shares at a price of P=2 per share; and Conversion of P=2.0 billion MPHI convertible loans to 1,893,282,845 common shares.

Issuances to MPHI during 2009 are as follows:

On February 13, MPHI’s deposit for future stock subscriptions amounting to P=4.8 billion have been applied for payment of its subscription to 2,389,040,000 common shares from the increase in authorized capital stock as approved by SEC.

On September 19, the Company undertook a re-launch of its shares and as a result, a total of 4,770,000,000 common shares were issued to MPHI. Information on the Re-launch of MPIC shares are provided below.

On December 21, advances by MPHI to MPIC amounting to P=2,016.4 million were also converted into 672,129,584 common shares at P=3.0 per share. Detailed information related to the conversion are provided below.

Other issuances of the Company during 2009 are as follows:

On July 9, the subscription of LAWL of 791,110,491 common shares of the Company for P=2,029.2 million was likewise issued. On December 19, 2008, a Memorandum of Agreement (MOA) was executed among MPIC, MPHI and LAWL, where LAWL agreed to subscribe to 791,110,491 new common shares of MPIC at approximately P=2.56 per share or P=2,029.2 million (subscription price) through execution of a Subscription Agreement and MPIC agreed to purchase and acquire from LAWL 236,000 Class B Maynilad shares at P=8,598.36 per share or P=2,029.2 million (purchase price) thru execution of a Deed of Sale.

The above transaction resulted in MPIC’s acquisition of the 5.8% interest held by LAWL in Maynilad in exchange for a 7.7% interest in MPIC.

On October 2, a total of 4,464,202,634 common shares were issued to BTF and Crogan/MPHI. The proceeds of which were used in the purchase of certain Meralco shares held by BTF and Crogan (see Notes 12 and 21).

Executive Stock Option Plan At various dates in 2010 and 2009, a total of 27.3 million and 13.9 million common shares, respectively, were issued in connection with the Parent Company stock option plan (see Note 33).

Issued Class A Preferred Shares On July 29, 2009, the Company issued to MPHI 5.0 billion Class A Preferred Shares with a par value of P=0.01 per share. The holders of the Class A Preferred Shares (the “Class A Preferred Shareholders”) shall be entitled to vote and receive a preferential cash dividends at the rate of ten percent (10.0%) per annum, to be calculated based on the par value of the Class A Preferred Shares, upon declaration made at the sole option of the BOD.

Dividends on the Class A Preferred Shares shall be paid out of the Company’s unrestricted retained earnings. Such dividends shall be cumulative from and after the issue date of the Class A Preferred Shares, whether or not in any period the amount thereof is covered by available unrestricted retained earnings.

No dividends shall be paid or declared and set apart for payment, or other distribution made in respect of the common shares, unless the full accumulated dividends on all Class A Preferred Shares for all past dividend periods and for the then current dividend period shall have been paid or declared and set apart for payment by the Company. Class A Preferred Shareholders shall not be entitled to any participation or share in the retained earnings remaining after dividend payments shall have been made on the Class A Preferred Shares in accordance with the foregoing paragraphs.

As of December 31, 2010 and 2009, unrecognized cumulative dividends on Class A Preferred Shares amounted to P=1.9 million and P=2.5 million, respectively.

Class B Preferred Shares Class B Preferred Shares may be issued from time to time in one or more series as the BOD may determine. The BOD shall establish and designate each particular series of Class B Preferred Shares, to fix the number of shares to be included in each of such series, and to determine the cash dividend rate, which in no case to exceed 10.0% per annum, the amount and the price, and the rate, period and manner of conversion and redemption, of the Class B Preferred Shares for each of such series. To the extent not set forth in the Article Seventh of the Company’s Articles of Incorporation, the specific terms and restrictions of each series of the Class B Preferred Shares shall be specified in the “Enabling Resolutions” as may be adopted by the BOD. Dividends shall be cumulative from and after the date of issue of the Class B Preferred Shares, whether or not in any period the amount thereof is covered by available unrestricted retained earnings. No dividends shall be declared or paid on the common shares or Class A Preferred A Shares unless the full accumulated dividends on all Class B Preferred Shares for all past dividend periods and for the then current dividend period shall have been declared and paid by the

178 2010 Annual Report Company. The holders of Class B Preferred Shares shall not be entitled to any participation or share in the retained earnings remaining after dividend payments shall have been made on the Class B Preferred Shares.

Holders of Class B Preferred Shares may be convertible to common shares of the Company at such rate, in such manner and within such period as may be fixed in the Enabling Resolutions for such series.

Class B Preferred Shares shall be redeemable in such manner and within such period as may be fixed in the Enabling Resolutions for such series. Any and all Class B Preferred Shares redeemed, whether pursuant to a share conversion or otherwise, shall not be considered retired and may be re-issued by the Company.

In the event of liquidation, dissolution, bankruptcy or winding up of the affairs of the Company, the holders of Class B Preferred Shares shall be entitled to be paid in full or ratably to the extent that the remaining assets of the Company will permit, an amount equivalent to the issue price of such Class B Preferred Shares plus all accumulated and unpaid dividends up to the then current dividend period, before any assets of the Company shall be paid or distributed to the holders of the common shares or Class A Preferred Shares.

Deposit for Future Stock Subscriptions This represents subscriptions from exercise of ESOP of which the corresponding shares were not issued as of December 31, 2010. Those shares were issued in January 2011.

Equity Restructuring On July 14, 2010, the SEC approved the equity restructuring of MPIC to wipe out deficit amounting to P=403.6 million as of December 31, 2009 subject to the condition that the remaining additional paid-in capital amounting to P=27,456.4 million shall not be used to wipe out future losses without prior approval of the SEC.

Also, on December 17, 2009, the SEC approved the equity restructuring of MPIC to wipe out the deficit amounting to P=1,620.9 million as of December 31, 2008 subject to the condition that the remaining additional paid-in capital amounting to P=4,132.9 million shall not be used to wipe out future losses without prior approval of the SEC.

Cash Dividends On August 4, 2010, the BOD also approved the declaration of a cash dividend of P=0.01 per share to common shareholders on record as of August 19, 2010 which was paid on September 16, 2010. Total dividend declared and paid to common shareholders amounted to P=201.3 million and the dividend declaration was made on the basis of the Company’s retained earnings as of the end of July 2010.

As required by Articles of Incorporation of the Company, on the same date, the BOD also declared a cash dividend in the aggregate amount of P=5.7 million to the outstanding Class A Preferred Shares of the Company. The dividend was paid on September 16, 2010.

Other Reserves This account consists of:

2010 2009 2008 (In Thousands) Effect of MPIC acquisition of MPC shares(i) P=690,386 P=690,386 P=690,386 Day 1 loss on convertible notes(ii) (286,122) (286,122) (286,122) Equity component of a financial instrument - net of tax (see Note 21) 280,612 – – Loss on sale of non-controlling interest (see Notes 4 and 23) (122,109) – – Other reserve from ESOP (see Note 33) 66,467 46,827 – Loss on acquisition of non-controlling interest (see Note 4) (513) – – P=628,721 P=451,091 P=404,264 i. This relates to the difference between the par value of MPC shares in exchanged for MPIC shares in relation to the Company’s acquisition of MPC shares through an MPIC share swap in 2006. ii. Day 1 loss relates to the convertible note issued to MPHI in 2007 which were converted to equity in 2008.

Metro Pacific Investments Corporation 179 Transactions Related to Issuances of Shares

Conversion of Advances to Equity. Further to the resolutions of the BOD and stockholders passed on May 28, 2009 authorizing the increase in the capital stock of MPIC, the BOD of MPIC resolved to implement the capitalization and/or conversion by MPHI of its advances to MPIC in the amount of P=2,016.4 million. On December 21, 2009, MPIC issued 672,129,584 common shares in favor of MPHI at a subscription price of P=3.0 per share. Also on July 1, 2009, MPIC issued 5,000,000,000 shares of Class A Preferred Shares with par value of P=0.01 per share to MPHI as payment of MPIC’s P=50.0 million advances from MPHI. Holder of Class A Preferred Shares shall be entitled to vote and receive preferential cash dividends at the rate of ten percent (10%) per annum, to be calculated based on the par value of the Class A Preferred Shares, upon declaration made at the sole option of the BOD.

Re-launch of MPIC Shares. On September 19, 2009, MPIC undertook a “Re-launch” of its shares. A ‘‘Re-Launch’’ is a public offering or an old-for-new share placement that would result in an offering to public shareholders of a minimum of 15.0% of MPIC’s fully diluted equity or US$100.0 million worth of shares (valued at the Re-launch Issue Price), whichever is lower, in the PSE. The Re-launch Price is P=3.0 per share.

Placement and Subscription Agreement. In connection with the Re-launch of MPIC shares, MPIC entered into a Placement Agreement and Subscription Agreement, both dated September 19, 2009, with MPHI in order to raise capital. As stated in the Placement Agreement, MPHI shall offer its 4.15 billion MPIC Common Shares (the “Firm Shares”) with a par value of P=1.0 per share at P=3.0 per share offer price to purchasers procured by CLSA Singapore Pte. Ltd. and UBS AG, the Lead Managers. In addition and by virtue of the Over-Allotment Option, the Lead Managers may require MPHI to sell an additional 620.0 million MPIC common shares (the “Option Shares”). The 4.15 billion and the 620.0 million MPIC common shares (aggregate total of 4.77 billion MPIC common shares) are referred to in the Placement Agreement as the “Offer Shares.”

MPHI, pursuant to a Greenshoe Agreement dated September 19, 2009 (the “Greenshoe Agreement”), unconditionally and irrevocably granted the Lead Managers the Over-allotment Option to require MPHI to sell up to the number of Option Shares to the Lead Managers at the Offering Price (P=3.0/share) to purchasers procured by the Lead Managers.

With the proceeds of the Offer and pursuant to the Subscription Agreement, MPHI conditionally agreed to subscribe for, and MPIC conditionally agreed to issue and sell, (i) new common shares in an amount equal to the aggregate number of Firm Shares sold by MPHI in the Offer and (ii) an additional number of new common shares in an amount agreed between MPIC and MPHI, each at a price equivalent to the Offering Price of P=3.0 per share.

The Subscription Agreement provided that MPIC will not directly receive any proceeds from the Offer, but MPHI agreed to subscribe for, and MPIC agreed to issue, new common shares in an amount equal to the aggregate number of Firm Shares sold by MPHI in the Offer (the “Subscription Shares”) at a price equivalent to the Offering Price. Neither will MPIC receive any proceeds in the event that the Over- allotment Option is exercised. In the event, however, that the gross proceeds realized by MPIC from its issuance of the Subscription Shares is less than the Peso equivalent, as of the date of the Subscription Agreement, of US$300.0 million, MPHI has agreed to likewise subscribe for, and MPIC has agreed to issue, additional new common shares at the same Offering Price per Share (P=3.0), the number of which shall be up to but shall not exceed the aggregate number of Option Shares actually sold by MPHI as a result of the exercise by CLSA of its Over-allotment Option and the gross proceeds of which, when aggregated with the gross proceeds realized by MPIC from the Subscription Shares, shall not exceed the Peso equivalent, as of the date of the Agreement, of US$300.0 million (the “Additional Subscription Shares”).

MPHI was able to sell through the Lead Managers the total Offer Shares of 4.77 billion MPIC common shares (4.15 billion Firm Shares and 620.0 million Option Shares). Likewise, failure to meet the condition as provided in the Subscription Agreement and as discussed above, MPHI subscribed for and MPIC issued to MPHI the same number of new MPIC common shares. The proceeds of P=14,310.0 million, net of transaction costs of P=561.2 million which were capitalized, add up to the capital of the Company. MPHI ownership interest in MPIC was reduced to 56.6% from 97.26% partly as a result of consummation of the aforementioned agreements.

Issuances in Relation to the Acquisition of Meralco Shares. In relation to the acquisition of the investment in Meralco, MPIC entered into separate subscription agreements with each of BTF and MPHI wherein they subscribed to 3,159,162,337 and 1,305,040,296 common shares of MPIC, respectively. Proceeds of said subscriptions were used to partially fund MPIC's acquisition of a certain number Meralco common shares held by BTF/New Gallant and Crogan. The agreed subscription price was P=3.0 per share but the subscription was recorded at P=3.2 per share or for a total subscription price of P=14,285.4 million which represents the fair value of MPIC shares on October 2, 2009, the acquisition date of the investment in Meralco (see Note 12).

180 2010 Annual Report 23. Non-controlling Interest

Movements in this account follow:

2010 2009 (In Thousands) Balance at beginning of year P=9,010,166 P=7,854,107 Share in other comprehensive income (see Note 30) 9,832 6,768 Share in net income 2,439,523 2,070,211 Dividends paid to non-controlling stockholders (810,578) (472,620) Loss on disposal of a non-controlling interest (see Note 4) 210,198 – Non-controlling interest arising from business combinations (see Note 4) 201,888 – Disposal of a subsidiary (see Note 6) – (448,300) Balance at end of year P=11,061,029 P=9,010,166

As of December 31, 2010 and 2009, the Company has unpaid dividends to non-controlling shareholders amounting to P=208.4 million and P=170.5 million, respectively, included under “Accounts payable and other current liabilities” account in the consolidated balance sheets (see Note 16).

Other transactions relating to non-controlling interest include transfer of designated ESOP shares of Maynilad held by DMWC to intended recipients and acquisition of non-controlling interest in MSIHI. These resulted in equity transfer from equity attributable to owners of the Parent Company to non-controlling interest amounting to P=210.2 million (see Note 4).

24. Costs of Services

This account consists of:

2010 2009 2008 (In Thousands) Amortization of service concession assets (see Note 13) P=2,275,835 P=3,105,386 P=1,286,456 Operator’s fees (see Note 21) 1,339,567 1,338,522 187,632 Personnel costs (see Notes 26 and 27) 786,348 848,236 392,620 Utilities (see Note 21) 519,831 379,931 86,616 Repairs and maintenance 484,594 409,061 104,596 Contracted services 383,610 226,863 37,909 PNCC fees (see Note 21) 348,358 291,872 38,026 Cost of medical services and supplies (see Note 9 ) 215,438 – – Materials and supplies (see Note 9) 206,413 229,241 104,325 Rentals (see Note 21) 103,810 22,859 13,777 Provision for heavy maintenance (see Note 17) 54,912 204,538 25,451 Insurance 43,512 42,172 5,297 Toll collection and medical services 21,331 20,906 2,826 Others 62,264 1,078 85,484 P=6,845,823 P=7,120,665 P=2,371,015

Cost of services relates to MNTC, Maynilad, RMCI and EMHMC operations.

Metro Pacific Investments Corporation 181 25. General and Administrative Expenses

This account consists of:

2010 2009 2008 (In Thousands) Personnel costs (see Notes 26 and 27) P=1,276,110 P=673,031 P=384,151 Provision for input vat 334,070 308,809 – Outside services 284,669 257,637 146,572 Depreciation and amortization (see Note 14) 259,182 185,130 30,323 Professional fees 178,106 201,780 157,531 Administrative supplies 175,341 26,375 1,202 Taxes and licenses 158,162 181,728 149,359 Commissions 109,933 102,727 45,173 Transportation and travel 106,932 69,779 78,379 Utilities (see Note 21) 86,101 49,156 114,557 Provision for corporate initiatives 78,458 98,180 – Public relation 73,454 15,962 – Entertainment, amusement and representation 68,727 95,097 40,310 Advertising and promotion 68,615 65,647 14,420 Rentals (see Note 21) 67,593 61,583 22,911 Insurance 56,890 65,180 25,175 Repairs and maintenance 54,134 36,830 69,348 Provision for doubtful accounts (see Note 8) 39,307 226,266 115,145 Maintenance and operating expenses of MWSS 13,025 98,038 – Business development costs 8,267 5,537 82 Association dues 1,101 634 121 Miscellaneous 146,550 124,578 47,958 P=3,644,727 P=2,949,684 P=1,442,717

26. Personnel Costs

This account consists of:

2010 2009 2008 (In Thousands) Salaries and wages P=1,432,674 P=1,039,860 P=580,621 LTIP expense 133,009 – – Retirement costs (see Note 27) 53,223 112,645 59,603 Provision for ESOP (see Note 33) 34,375 50,036 – Other employee benefits 409,177 318,726 136,547 P=2,062,458 P=1,521,267 P=776,771

27. Employee Benefits

Long-Term Incentive Plan (LTIP) On December 16, 2010, MPIC’s BOD approved, in principle, the broad outline of MPIC’s strategic plans for 2010 to 2012 focusing on the development of new revenue streams to drive future growth while protecting the existing core business. To ensure the proper execution of the three-year plan, particularly with respect to the manpower resources being committed to such plans, the 2010 to 2012 LTIP, upon endorsement of the Compensation Committee, was approved by the BOD to cover the period from January 1, 2010 to December 31, 2012, or the 2010 to 2012 Performance Cycle. The payment under the 2010 to 2012 LTIP is intended to be made at the end of the 2010 to 2012 Performance Cycle (without interim payments) and contingent upon the achievement of an approved target core income of the Company by the end of the 2010 to 2012 Performance Cycle.

Total amount of LTIP under this plan is fixed upon achievement of the target Core Income and is not affected by changes in future salaries of the employees covered. The liability of the 2010 to 2012 LTIP were determined using the projected unit credit method. The long term employee benefit liability comprises the present value of the defined benefit obligation (using discount rate based on government bonds) at the end of the reporting period.

182 2010 Annual Report The total cost of the LTIP recognized as expense which was presented as part of “Personnel costs” amounted to P=133.0 million. As of December 31, 2010, the accrued LTIP is as follows:

Amount (In Thousands)

Balance at beginning of year P=– Current service cost 126,671 Interest 2,777 Actuarial loss 3,561 Balance at end of year P=133,009

Pension

Defined Contribution Retirement Plan. Retirement benefits of the Parent Company’s employees are provided through a defined contribution scheme as approved by the BOD on August 4, 2010. The Parent Company operates a Retirement Plan (the Plan) which is a contributory plan wherein the Parent Company undertakes to contribute a predetermined amount to the individual account of each employee and the employee gets whatever is standing to his credit, upon separation, from the bank. The Plan is managed and administered by a Retirement Committee and a trustee bank had been appointed to hold and invest the assets of the retirement fund in accordance with the provisions of the Plan.

MPIC contributions to the Plan are made based on the employee’s monthly basic salary which is at 10.0%. Additionally, an employee has an option to make a personal contribution to the fund, at an amount not exceeding 40.0% of his monthly salary. The employer then provides an additional contribution to the fund which aims to match the employee’s contribution but only up to a maximum of 5.0% of the employees’s monthly salary. Although the plan has a defined contribution format, MPIC regularly monitors compliance with R.A. 7641, otherwise known as “The Retirement Pay Law”. As of December 31, 2010, MPIC was in compliance with the requirements of R.A. 7641.

The Plan’s investment portfolio seeks to achieve regular income and long-term capital growth and consistent performance over its own portfolio benchmark. In order to attain this objective, the trustee’s mandate is to invest in a diversified portfolio of bonds and equities, both domestic and international. There are three portfolios which an employee can chose from (i) 100.0% fixed income securities; (ii) 80.0% for debt and fixed income securities while 20.0% is allotted to equity securities; (iii) 60.0% for debt and fixed income securities while 40.0% is allotted to equity securities.

The allocation of the fair value of the beneficial trust fund’s assets for MPIC pension plan as of December 31, 2010 is as follows:

Aggressive Moderate Conservative Investments in: Government securities 6.2% 7.8% 39.9% Unit trust funds 23.6% 13.4% Bonds 8.4% 5.9% 0.6% Cash in banks 61.7% 72.8% 59.2% Receivables and others 0.1% 0.1% 0.3% 100.0% 100.0% 100.0%

The Company record expenses for their contribution to the defined contribution plans when the employee renders service to the Parent Company, essentially coinciding with their cash contributions to the Plan. During the year, the Company recorded retirement expense under this scheme amounting to P=28.5 million, included included in “Personnel costs” under “Cost of services” and “General and administrative expenses” account in the consolidated statement of income. The Company also initially set up a fund to a trustee bank in the amount of P=31.4 million. Unfunded accrued retirement liability under this scheme as of December 31, 2010 amounted to P=6.2 million.

MPIC currently expects to make approximately P=22.0 million of cash contributions to their pension plan in 2011.

Defined Benefit Retirement Plan. DMWC, MPTC and RMCI have funded noncontributory retirement benefit plan covering all their eligible regular employees. Actuarial valuation study are being performed on annual basis to determine the retirement obligations of these companies.

Metro Pacific Investments Corporation 183 The following tables summarize the components of the retirement costs under the defined benefit plan included in “Personnel costs” under “Cost of services” and “General and administrative expenses” account in the consolidated statements of income and “Pension assets” under “Other noncurrent assets” account and “Accrued retirement cost” account in the consolidated balance sheets.

2010 2009 2008 (In Thousands)

Current service cost P=46,349 P=57,100 P=35,899 Interest cost 55,253 66,700 30,267 Expected return on plan assets (43,804) (11,155) (6,563) Curtailment gain (33,083) – – Retirement costs for the year P=24,715 P=112,645 P=59,603

Actual return on plan assets P=960 P=75,592 P=1,400

Movements in the present value of defined benefit obligation (PVDBO) are as follows:

2010 2009 2008 (In Thousands)

Balance at beginning of year P=537,821 P=518,030 P=53,724 Interest cost 55,253 66,700 30,267 Current service cost 60,010 57,100 35,899 Actuarial loss (gain) 340,101 (88,434) (95,336) Curtailment gain (43,074) – – Benefits paid (47,991)* (15,575)* (5,331) PVDBO from acquired subsidiaries 92,138 – 551,122 994,258 537,821 570,345 Less discontinued operation – – 52,315 Balance at end of year P=994,258 P=537,821 P=518,030 * In 2010, benefits paid exclude payments for involuntary separation amounting to P=20.3 million. In 2009, includes benefits paid out of Maynilad’s operating fund amounting to P=4.7 million.

Movements in the fair value of plan assets (FVPA) are as follows:

2010 2009 2008 (In Thousands)

Balance at beginning of year P=544,056 P=278,877 P=2,118 FVPA from acquired subsidiaries 115,820 – 315,474 Return on plan assets 43,804 70,055 (36,737) Contributions during the year 46,123 200,411 – Benefits paid (33,315) (10,871) – Actuarial loss 75,637 5,584 140 792,125 544,056 280,995 Less discontinued operation – – 2,118 Balance at end of year P=792,125 P=544,056 P=278,877

DMWC, MPTC and RMCI expect to contribute P=36.0 million, P=26.2 million and P=6.8 million to their respective plan assets in 2010.

The reconciliation of the PVDBO to the accrued retirement cost (pension assets) recognized in the consolidated balance sheets follows:

2010 2009 2008 (In Thousands)

PVDBO P=994,258 P=537,821 P=518,030 FVPA (792,125) (544,056) (278,877) Unfunded (excess) PVDBO 202,133 (6,235) 239,153 Actuarial (loss) gain* (152,704) (11,860) 19,898 Payments – – (5,331) Accrued retirement cost (pension assets) 49,429 (18,095) 253,720 *Included under “Other income and Other expense” accounts in the consolidated statements of income (see Note 29).

Actuarial gains and losses are recognized in full in the year the gains or losses occurred. Net actuarial losses amounted to P=152.7 million in 2010 and P=11.9 million in 2009 and net actuarial gain of P=19.9 million in 2008.

184 2010 Annual Report The major categories of plan assets as a percentage of the fair value of total plan assets are as follows:

2010 RMCI DMWC MPTC Investments in: Government securities – 64.2% 71.4% Unit trust funds – 13.0% – Equity securities – 20.1% – Perpetual preferred shares – – 13.3% Cash in banks 57.0% 1.7% 7.1% Receivables and others 43.0% 1.0% 8.2% 100.0% 100.0% 100.0%

2009 DMWC MPTC Investments in: Government securities 55.8% 39.8% Unit trust funds 18.2% – Equity securities 15.2% – Perpetual preferred shares – 16.9% Cash in banks 9.8% 20.1% Receivables and others 1.0% 23.2% 100.0% 100.0%

The principal assumptions used to determine pension benefit obligations as of December 31, 2010, 2009 and 2008 are as follows:

2010 2009 2008 Discount rates 7.9%–8.6% 9.6%–10.7% 8.3%–37.6% Rates of increase in compensation 2.0%–10.0% 7.0%–10.0% 4.0%–8.0% Expected rate of return on plan assets 3.5%–15.0% 5.0%–7.8% 10.0%

The overall expected rates of return on assets were determined based on the market prices prevailing on that date, applicable to the period over which the obligation is to be settled.

The unfunded status and experience adjustments for the current period and for preceding periods follow:

2010 2009 2008 2007 PVDBO P=994,258 P=537,821 P=518,030 P=53,724 FVPA (792,125) (544,056) (278,877) (2,118) P=202,133 (P=6,235) P=239,153 P=51,606

Experience adjustments on retirement obligation P=76,619 P=54,297 P=11,001 P=–

Experience adjustments on plan assets - gain P=2,606 P=5,584 P=– P=–

28. Interest Income and Interest Expense

The following are the sources of the Company’s interest income:

2010 2009 2008 (In Thousands)

Cash and cash equivalents and short- term deposits (see Note 7) P=238,242 P=248,429 P=89,373 Notes receivable (see Note 8) 200,857 117,963 – Accretion on noncurrent financial assets 97,379 99,489 – Investments in bonds (see Note 10) 24,916 13,004 1,149 Receivable on financial guarantee (see Note 21) 10,899 12,354 1,344 Accretion on miscellaneous deposits – – 4,888 Others 2,089 7,982 182,079 P=574,382 P=499,221 P=278,833

Metro Pacific Investments Corporation 185 The following are the sources of the Company’s interest expense:

2010 2009 2008 (In Thousands)

Long-term debt (see Note 19) P=3,194,244 P=3,261,773 P=878,712 Accretion on service concession fees payable 688,475 529,447 240,843 Due to related parties (see Note 21) 223,575 – 13,903 Amortization of debt issue costs (see Note 19) 201,092 24,637 14,030 Discount on due to related parties (see Note 21) 148,015 – – Accretion on financial liability (see Note 19) 59,990 103,897 12,598 Financial guarantee obligation (see Note 21) 10,899 12,354 1,344 Lenders’ fees and bank charges 9,391 14,330 – Notes payable (see Note 19) – 49,351 – Provision for heavy maintenance (see Note 17) – 16,469 – Others 7,903 – – P=4,543,584 P=4,012,258 P=1,161,430

29. Other Income and Other Expense

Other income consists of:

2010 2009 2008 (In Thousands) Reversal of contingent liabilities (see Note 20) P=496,935 P=– P=– Reversal of provision for ESOP (see Note 16) 259,336 – – Reversal of accruals(a) 204,888 – – Gain on sale of investments (see Notes 6 and 12) 147,073 – 51,333 Management fees (see Note 21) 73,612 68,551 19,389 Income from utility facilities (see Note 21) 63,748 – – Gain on remeasurement from step up acquisition (see Note 4) 54,400 – – Income from toll service facilities 23,840 10,120 – Guarantee fees (see Note 21) 23,256 18,453 2,299 Rental income 3,606 2,896 3,332 Gain on sale of property and equipment 1,920 13 409 FCDA (see Note 20) – 1,243,286 313,986 Other income from rate rebasing resolutions - net (see Note 20) – 1,404,059 – Reversal of provision for decline in value of assets(b) – 57,086 262,461 Gain on dilution of non-controlling interest(c) – – 757,591 Gain on debt settlement - net(d) – – 173,025 Actuarial gain (see Note 27) – – 19,898 Others 81,666 24,959 55,554 P=1,434,280 P=2,829,423 P=1,659,277

186 2010 Annual Report Other expense consists of:

2010 2009 2008 (In Thousands) FCDA (see Note 20) P=1,271,411 P=– P=– Other provisions(e) 366,947 341,873 35,830 Mark-to-market loss on derivatives (see Note 38) 292,997 19,219 12,832 Actuarial loss (see Note 27) 152,704 11,860 – Day 1 loss (see Note 8) 20,100 – – Provision for ESOP (see Note 16) – 75,896 183,440 Provision for decline in value of assets (f) – 68,618 367,251 Write-off of deposits from restoration works and materials on site – 37,908 – Loss on extinguishment of loans (see Note 19) – 9,896 – Commission expense – – 100,491 Others 409,334 11,435 89,542 P=2,513,493 P=576,705 P=789,386 a. Represents reversal of excess accruals for certain obligations and payables, recognized in prior years, over actual settlements during the year. b. Reversal of previous impairment provisions on investment in AFS financial assets (BLC shares) in 2009 and certain claims from Nenaco in 2008 which was based on the expected recoverable value or recovered amount. c. Represents gain on dilution of non-controlling interest due to DMWC’s subscription of additional 10.15% ownership interest in Maynilad pursuant to the Subscription Agreement between DMWC and Maynilad entered into in 2008. Non-controlling interest in Maynilad was diluted from 16.03% to 5.88% which resulted in a gain of P=757.6 million representing the difference of the subscription price and net assets of Maynilad attributable to non-controlling interest acquired. d. Represents gain on settlement of unsecured notes payable through cash and various asset-for-debt exchanges in 2008. e. Represents provision for estimated claims and tax liabilities. f. Provision for decline in value was provided for the following assets to recognize these at recoverable amounts:

2009 2008 (In Thousands) Due from related parties (see Note 21) P=68,618 P=– Investments in associates (see Note 12) – 188,093 Property and equipment (see Note 14) – 120,153 AFS financial assets (see Note 10) – 55,760 Investment properties – 3,245 P=68,618 P=367,251

As discussed in Note 6, an impairment loss of P=431.2 million was provided to recognize the assets of disposal group at their realizable values. The impairment loss was allocated on the following accounts based on their carrying values as of December 31, 2008:

2008 (In Thousands) Provision for decline in value of assets P=367,251 Provision for impairment of receivables (see Note 25) 63,940 P=431,191

Metro Pacific Investments Corporation 187 30. Other Comprehensive Income Reserve

Income Tax Income Tax Income Tax Attributable Related Related to Related to AFS to Parent Cash Flow to Cash Revaluation Revaluation AFS Financial Financial Company Non-controlling Hedge Flow Hedge Increment Increment Assets Asset Total owners Interest (In Thousands) Balance at January 1, 2010 (P=22,676) P=6,803 (P=141,561) P=42,468 P=– P=– (P=114,966) (P=109,743) (P=5,223) Net movement in cash flow hedge 19,199 (5,760) – – – – 13,439 9,017 4,422 Change in fair value of AFS – – – – 23,493 (7,048) 16,445 11,035 5,410 Balance at December 31, 2010 (P=3,477) P=1,043 (P=141,561) P=42,468 P=23,493 (P=7,048) (P=85,082) (P=89,691) P=4,609

Balance at January 1, 2009 (P=52,069) P=15,621 (P=141,561) P=42,468 P=– P=– (P=135,541) (P=123,550) (P=11,991) Net movement in cash flow hedge 29,393 (8,818) – – – – 20,575 13,807 6,768 Balance at December 31, 2009 (P=22,676) P=6,803 (P=141,561) P=42,468 P=– P=– (P=114,966) (P=109,743) (P=5,223)

Balance at January 1, 2008 P=– P=– P=– P=– (P=14,060) P=– (P=14,060) (P=14,060) P=– Net movement in cash flow hedge (52,069) 15,621 – – – – (36,448) (24,457) (11,991) Increase in revaluation increment – – (141,561) 42,468 – – (99,093) (99,093) – Change in fair value of AFS – – 14,060 – 14,060 14,060 – Balance at December 31, 2008 (P=52,069) P=15,621 (P=141,561) P=42,468 P=– P=– (P=135,541) (P=123,550) (P=11,991)

Cash Flow Hedge Reserve. This relates to the effective portion of the cash flow hedge.

Revaluation Increment Reserve. The revaluation increment represents the increase in the value of net asset of DMWC relative to MPIC’s previously held interest when MPIC obtained control of DMWC in 2008, through potential voting rights and without increase in ownership interest at acquisition date.

AFS Financial Assets Reserve . This relates to fair value changes on AFS financial assets (see Note 10).

31. Income Tax

a. The components of the Company’s deferred tax assets and deferred tax liabilities are as follows:

Deferred Tax Assets

2010 2009 (In Thousands) Excess of fair values over book values P=183,614 P=27,907 Accrued retirement cost and other accrued expenses 86,603 54,168 Unamortized past service cost 5,071 2,810 Provision for heavy maintenance – 111,912 Unamortized pre-operating expenses – 13,769 Cumulative translation adjustments – 4,426 P=275,288 P=214,992

Deferred Tax Liabilities

2010 2009 (In Thousands) Excess of fair values over book values P=2,278,761 P=2,247,328 Difference in depreciation method 406,391 318,309 Unrealized foreign exchange gain - net 99,258 68,954 Debt issue cost on convertible bonds 93,123 – Unamortized forex losses capitalized as service concession assets 24,045 24,046 Improvement of facilities 10,729 – Fair value changes of derivative instruments 5,760 9,573 Others 19,551 4,482 P=2,937,618 P=2,672,692

188 2010 Annual Report b. The Company has the following temporary differences for which no deferred tax assets have been recognized since management believes that it is not probable that these will be realized in the near future.

2010 2009 (In Thousands) NOLCO P=4,229,849 P=4,325,201 Allowance for doubtful accounts 1,411,675 3,727,068 Provisions and other accruals 732,804 525,358 Allowance for decline in value of land and land development costs 127,003 127,003 Accrued retirement cost and others 36,189 127,475 Unrealized foreign exchange gain 29,823 10,231 Unamortized pre-operating expenses Day 1 loss 20,100 – MCIT 2,273 6,363 P=6,589,716 P=8,848,699 c. As of December 31, 2010 and 2009, NOLCO of the Parent Company and various subsidiaries amounting to P=4,452.3 million and P=4,325.2 million, respectively, can be carried forward and claimed as deduction from regular taxable income as follows:

Year Incurred Amount Applied Expired Balance Expiry Year (In Thousands) 2010 P=1,506,940 P=– P=– P=1,506,940 2013 2009 1,296,559 – – 1,296,559 2012 2008 2,791,313 – (1,142,512) 1,648,801 2011 2007 237,329 – (237,329) – 2010 P=5,832,141 P=– (P=1,379,841) P=4,452,300 d. The carryforward benefits of MCIT amounting to P=10.9 million and P=6.4 million as of December 31, 2010 and 2009, respectively, can be claimed as tax credits against future income taxes payable as follows:

Year Incurred Amount Applied Expired Balance Expiry Year (In Thousands) 2010 P=4,856 P=– P=– P=4,856 2013 2009 5,423 – – 5,423 2012 2008 940 – (350) 590 2011 P=11,219 P=– (P=350) P=10,869

MCIT of discontinued operations as of December 31, 2008 amounting to P=18.9 million is excluded from the above table. e. The current provision for income tax in 2010, 2009 and 2008 comprises of the following:

2010 2009 2008 (In Thousands) RCIT P=51,941 P=11,229 P=4,197 MCIT 4,856 678 1,124 Final tax 46,106 23,652 2,099 P=102,903 P=35,559 P=7,420

Metro Pacific Investments Corporation 189 The reconciliation of provision for income tax computed at the statutory income tax rate to provision for income tax as shown in the consolidated statements of income is summarized as follows:

2010 2009 2008 (In Thousands) Income from continuing operations before income tax P=5,412,829 P=4,331,888 P=925,566

Income tax at statutory tax rate of 30.0% in 2010 and 2009 and 35.0% in 2008 P=1,623,849 P=1,299,566 P=323,948 Net income under ITH (2,079,056) (1,448,317) (304,455) Write-off of deferred tax asset 368,510 – – Nondeductible (nontaxable) expenses (gain) - net (136,680) 228,870 126,016 Share in net earnings of associates and joint ventures (149,554) (129,671) (50,262) Changes in unrecognized deferred tax assets and others 490,597 67,550 (100,980) Various income subjected to lower final tax rates - net (57,643) (35,224) (23,349) Final tax on interest income 46,106 23,652 2,099 Application of NOLCO against RCIT – (76,296) – Expiration of MCIT – – 7,673 Fair value adjustment on certain financial instruments – – (35,180) Effect of change in tax rates – – (8,588) Others (3,975) – – P=102,154 (P=69,870) (P=63,078)

On May 24, 2005, the Congress of the Philippines issued Republic Act 9337 (RA 9337) effective November 1, 2005. Pursuant to RA 9337, RCIT rate for domestic corporations and resident and non-resident foreign corporations increased to 35.0% from 32.0% beginning November 1, 2005 and the rate reduced to 30.0% beginning January 1, 2009.

Registration with the Board of Investments (BOI) Maynilad and MNTC are both registered with the BOI as a new operator of water supply and sewerage system for the West Service Area on a pioneer status for Maynilad and as a preferred pioneer enterprise as a new operator of the NLE for MNTC under the Omnibus Investment Code of 1987, otherwise known as Executive Order No. 226.

Under the terms of the registration, Maynilad and MNTC are subject to certain requirements, principally that of maintaining at least 60.0% Filipino ownership or voting equity. As registered enterprises, Maynilad and MNTC are entitled to certain tax and nontax incentives, including ITH for six years beginning on Commencement Date or from actual start of commercial operations whichever comes first but not earlier than the date of registration subject to certain conditions.

On October 16, 2001, the BOI has granted MNTC’s request for an extension of the ITH reckoning date from December 1999 to first quarter of 2004. On July 29, 2009, upon the request of MNTC and after filing the necessary application, the BOI has granted an extension of MNTC’s ITH up to December 31, 2010.

On April 16, 2008, the BOI granted the request of Maynilad for the extension of the period for the ITH availment from August 2001 - July 2007 to January 2003 - December 2008. On October 20, 2008, Maynilad filed an application for an ITH bonus year. The application was for the extension of the availment of the ITH incentive by Maynilad for one (1) year or for the period January 1, 2009 to December 31, 2009. The BOI approved Maynilad’s application on December 22, 2008.

190 2010 Annual Report On December 16, 2009, Maynilad was issued with BOI Registration Certificate Nos. 2009-188 and 2009-189 as a new operator of the 1500 MLD and 900 MLD Bulk Water Supply and Distribution Projects pertaining to the La Mesa Treatment Plants 1 and 2, respectively. The registrations entitle Maynilad to incentives which include an Income Tax Holiday (ITH) for six years from January 2010 or actual start of commercial operations, whichever is earlier but in no case earlier than the date of registration. Registration as new operator of 200 MLD Bulk Water Supply and Distribution Project (Putatan, Muntinlupa) was likewise approved by the BOI. The Certificates of Registration were issued in December 2009. This also entitles the Project to a six year income tax holiday commencing on January 2011 or actual start of commercial operations. The ITH incentives shall be limited to the sales/revenue generated from the operation of the three plants which substantially cover total capacity of Maynilad.

As one of the conditions of the BOI for the ITH bonus year, Maynilad and MNTC have to undertake Corporate Social Responsibilities (CSR) activities during the actual availment of the bonus year. There are other specific conditions that have to be complied also by Maynilad and MNTC.

The granting of ITH to Maynilad and MNTC significantly impacted the determination of income tax provisions especially on deferred taxes such that temporary differences that will reverse in the ITH period have not been recognized.

ITH incentive enjoyed by MNTC amounted to P=486.3 million, P=461.3 million and P=405.0 million in 2010, 2009 and 2008, respectively. As of December 31, 2010, commercial operations of the Project of Maynilad have not yet started. The ITH incentives shall be limited to the sales/revenue generated from the operation of the three plants which substantially cover the total capacity of Maynilad.

32. Earnings (Loss) per Share

The calculation of earnings (loss) per share for the years ended December 31 follows:

2010 2009 2008 (In Thousands, Except for Per Share Amounts) Net income (loss) attributable to owners of the Parent Company from: Continuing operations (a) P=2,871,152 P=2,306,253 P=532,633 Discontinued operations (b) – (6,601) (7,088) Net income attributable to owners of the Parent Company 2,871,152 2,299,652 525,545 Effect of dividends on preference equity holders of the Parent Company (c) (5,000) – – (d) 2,866,152 2,299,652 525,545 Effect of potentially dilutive instruments (e) – – 8,188 (f) P=2,866,152 P=2,299,652 P=533,733

Outstanding common shares at the beginning of the year P=20,128,155 P=7,027,727 P=1,342,919 Effect of issuance of common shares during the year 7,130 4,869,725 2,123,645 Weighted average number of common shares for basic earnings per share (g) 20,135,285 11,897,452 3,466,564 Effects of potential dilution from: ESOP 28,446 31,279 18,277 Convertible options (see Note 19) – – 1,260,460 Deposit for future stock subscriptions (see Note 22): MPHI – 385,591 508,271 LAWL – 413,978 26,009 Weighted average number of common shares adjusted for the effects of potential dilution (h) P=20,163,731 P=12,728,300 P=5,279,581

Metro Pacific Investments Corporation 191

2010 2009 2008 (In Thousands, Except for Per Share Amounts) Basic earnings (loss) per share: Income from continuing operations after income tax [(a+c)/g] P=0.142 P=0.194 P=0.154 Income (loss) from discontinued operations after income tax (b/g) – (0.001) (0.002) (d/g) P=0.142 P=0.193 P=0.152

Diluted earnings (loss) per share: Income from continuing operations after income tax [(a+e)/h] P=0.142 P=0.181 P=0.103 Income (loss) from discontinued operations after income tax (b/h) – (0.001) (0.002) (f/h) P=0.142 P=0.180 P=0.101

Weighted average number of shares issued and outstanding is derived by multiplying the number of shares outstanding at the beginning of the year, adjusted by the number of shares issued during the year, with a time-weighting factor. The time-weighting factor is the number of days that the common shares are outstanding as a proportion to the total number of days in the year.

Basic earnings per share attributable to owners of the Parent Company amounts are calculated by dividing net income for the year attributable to owners of Parent Company by the weighted average number of common shares outstanding during the year.

Diluted earnings per share attributable to owners of the Parent Company is calculated in the same manner assuming that, the weighted average number of common shares outstanding is adjusted for potential common shares from the assumed exercise of convertible options and stock warrants, and issuance of common shares representing deposit for future stock subscription and subscriptions receivable. Outstanding convertible options and stock warrants will have a dilutive effect only when the average market price of the underlying common shares during the year exceeds the exercise price of the option. Where the outstanding convertible options and stock warrants have no dilutive effect, diluted earnings per share is the same as basic earnings per share attributable to owners of the Parent Company.

In 2010, 2009 and 2008, the ESOP are considered in the computation of the diluted earnings and certain grants were considered dilutive. Outstanding stock options 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. In 2009 and 2008, deposits for future stock subscription from MPHI (see Note 22) and subscription receivable from LAWL (see Note 22) for purposes of identifying dilutive potential ordinary shares are deemed to have been converted into ordinary shares at the beginning of the period or if later, the date of the issue of the potential ordinary shares. These are considered dilutive since conversion to ordinary shares would decrease earnings per share. In 2008, the convertible options that were converted into ordinary shares during the year are included in the calculation of diluted earnings per share from the beginning of the year to the date of conversion; the resulting ordinary shares are included in both basic and diluted earnings per share.

33. Share-based Payment

On June 24, 2007, the shareholders of MPIC approved a share option scheme (the Plan) under which MPIC’s directors may at their discretion, invite executives of MPIC upon the regularization of employment of eligible executives, to take up share option of MPIC to obtain an ownership interest in MPIC and for the purpose of long-term employment motivation. The scheme became effective on June 14, 2007 and is valid for ten (10) years. An amended plan was approved by the stockholders on February 20, 2009.

As amended, the overall limit on the number of shares which may be issued upon exercise of all options to be granted and yet to be exercised under the Plan must not exceed 5.0% of the shares in issue from time to time. The maximum number of shares in respect of which options may be granted under the Plan shall not exceed 5.0% of the issued shares of MPIC on June 14, 2007 or the date when an event of any change in the corporate structure or capitalization affecting the Company’s shares occurred, as the case may be.

The exercise price in relation to each option shall be determined by the Company’s Compensation Committee, but shall not be lower than the highest of: (i) the closing price of the shares for one or more board lots of such shares on the PSE on the option offer date; (ii) the average closing price of the shares for one or more board lots of such shares on the PSE for the five (5) business days on which dealings in the shares are made immediately preceding the option offer date; and (iii) the par value of the shares.

First Grant. On December 9, 2008 and March 10, 2009, the Company has granted options in respect of 123,925,245 common shares to its senior management. Details of the said tranches follow: (a) Tranche A for 61,000,000 shares, 50.0% of which vested immediately on January 2, 2009 with an exercise price of P=2.12 per share and (b) Tranche B for 62,925,245 shares, 50.0% of which vested on March 10, 2009 with an exercise price of P=2.73 per share. The remaining 50.0% of each said tranche will vest on the first (1st) anniversary of the initial vesting date. The share options automatically vest on their respective vesting schedules. The grantees of the said option may exercise in whole or in part their respective options at any time after vesting but prior to the expiration of three (3) years after all of the options shares for such tranche have vested.

192 2010 Annual Report ESOP expense for the First Grant included in “Personnel costs” under “General and administrative expenses” account in the consolidated statements of income, amounted to P=4.5 million and P=50.0 million for the years ended December 31, 2010 and 2009, respectively (see Note 26).

The following table illustrates the number of, exercise prices of, and movements in share options during the year:

Tranche A Tranche B Number Number of shares Exercise price of shares Exercise price Outstanding at January 1, 2009 61,000,000 P=2.12 – P=– Granted during the year – – 62,925,245 2.73 Exercised during the year* 7,365,000 2.12 6,580,000 2.73 Outstanding at December 31, 2009 53,635,000 2.12 56,345,245 2.73 Granted during the year – – – – Exercised during the year* 17,310,000 2.12 15,000,000 2.73 Forfeited during the year 10,250,000 2.12 11,845,245 2.73 Outstanding at December 31, 2010 26,075,000 P=2.12 29,500,000 P=2.73

Exercisable at December 31, 2009 23,135,000 P=2.12 24,882,623 P=2.73 Exercisable at December 31, 2010 26,075,000 P=2.12 29,500,000 P=2.73 * In 2010 and 2009, P=13.7 million and P=3.2 million, respectively, of the total ESOP expense recognized under “Other reserves” in the consolidated balance sheets pertaining to the options exercises were transferred to additional paid-in capital.

The weighted average remaining contractual life for the share options outstanding for the first grant as of December 31, 2010 and 2009 is 1.4 years and 2.4 years, respectively.

The fair value of the options granted is estimated at the date of grant using Black-Scholes-Merton formula, taking into account the terms and conditions upon which the options were granted. The following tables list the inputs to the model used for the ESOP in 2009:

Tranche A Tranche B 50.0% 50.0% 50.0% 50.0% vesting on vesting on vesting on vesting on January 2, 2009 January 2, 2010 March 10, 2009 March 10, 2010 Grant date December 9, 2008 March 10, 2009 Spot price P=2.10 P=2.10 P=2.70 P=2.70 Exercise price P=2.12 P=2.12 P=2.73 P=2.73 Risk-free rate 5.92% 6.60% 4.24% 4.82% Expected volatility* 94.07% 58.10% 61.25% 66.43% Term to vesting (in days) 24 389 61 365 * The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may also not necessarily the actual outcome.

Second and Third Grant. In consideration of the SEC’s current policy to exclude the independent directors from ESOP grant and pending MPIC’s consequent position paper filed with the SEC maintaining the validity of the grant to independent directors, the Compensation Committee modified the resolution it adopted on July 2, 2010. The Compensation Committee approved a modified plan excluding the independent directors from ESOP grant, without prejudice to reinstatement, as approved by SEC on September 20, 2010.

In the modified plan, MPIC allocated and set aside stock options relating to an additional 145,000,000 common shares, of which (a) a total of 94,300,000 common shares was granted to its new directors and senior management officers, as well as, members of the management committees of certain MPIC subsidiaries at the exercise price of P=2.73 per common share on July 2, 2010 (the “Second Grant”) and (b) another 10,000,000 common shares was granted at the exercise price of P=3.50 on December 21, 2010 to officers of MPIC subsidiary (the “Third Grant”).

ESOP expense for the second and third grants included in “Personnel Costs” under “General and Administrative Expenses” account in the consolidated statement of income amounted to P=29.9 million for the year ended December 31, 2010 (see Note 26).

The second and third ESOP grants remain unvested and unexercisable as of December 31, 2010. The weighted average remaining contractual life for the share options outstanding as of December 31, 2010 for the second and third grant is 4.6 years and 5.0 years, respectively.

Metro Pacific Investments Corporation 193 The fair value of the options granted is estimated at the date of grant using Black-Scholes-Merton formula, taking into account the terms and conditions upon which the options were granted. The following tables list the inputs to the model used for the ESOP in July 2010 and December 2010:

The Second Grant – July 2, 2010

Tranche A Tranche B 50.0% Vesting 50.0% Vesting 35.0% on January 1, on January 1, 50.0% Vesting 35.0% Vesting Vesting 2011 2012 on July 2, 2011 on July 2, 2012 on July 2, 2013 Grant date July 2, 2010 July 2, 2010 Spot price P=2.65 P=2.65 P=2.65 P=2.65 P=2.65 Exercise price P=2.73 P=2.73 P=2.73 P=2.73 P=2.73 Risk-free rate 4.16% 4.92% 4.61% 5.21% 5.67% Expected volatility* 48.33% 69.83% 69.27% 67.52% 76.60% Term to vesting (in days) 183 548 365 731 1,096

The Third Grant – December 21, 2010

30.0% vesting on 35.0% vesting on 35.0% vesting on August 1, 2011 August 1, 2012 August 1, 2013 Grant date December 21, 2010 Spot price P=3.47 P=3.47 P=3.47 Exercise price P=3.5 P=3.50 P=3.50 Risk-free rate 1.62% 2.83% 3.73% Expected volatility* 46.62% 68.23% 72.82% Term to vesting (in days) 223 589 954 * The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may also not necessarily the actual outcome

Carrying value of the ESOP recognized under “Other reserves” in the equity section of the consolidated balance sheet for the second and third grants amounted to P=66.5 million as of December 31, 2010 (see Note 30).

Total ESOP expense for 2010 and 2009 amounted to P=34.4 million and P=50.0 million, respectively, included in “Personnel costs” under “General and administrative expenses” account in the consolidated statements of income (see Note 26).

34. Contingencies

Maynilad The following are the contingencies involving Maynilad:

a. Additional Tranche B Concession Fees and interest penalty are being claimed by MWSS in excess of the amount recommended by the Receiver. Such additional charges being claimed by MWSS (in addition to other miscellaneous claims) amounted to P=4.0 billion as of December 31, 2010 and P=3.8 billion as of December 31, 2009. The Rehabilitation Court has resolved to deny and disallow the said disputed claims of MWSS in its December 19, 2007 Order, upholding the recommendations of the Receiver on the matter. Following the termination of the Maynilad’s rehabilitation proceedings, Maynilad and MWSS are seeking to resolve this matter in accordance with the dispute resolution requirements of the TCA.

b. On October 13, 2005, the Municipality of Norzagaray, Bulacan jointly assessed Maynilad and Manila Water Company, Inc. (the “Concessionaires”) for real property taxes on certain common purpose facilities purportedly due from 1998 to 2005 amounting to P=357.1 million. It is the position of the Concessionaires that these properties are owned by the ROP and that the same are exempt from taxation.

On February 2, 2007, the Concessionaires received an updated assessment of real property tax, which included real property tax purportedly due for 2006 of P=35.7 million and interest of 2.0% per month of P=93.6 million. The supposed joint liability of the Concessionaires for real property tax, including interests, as of June 30, 2007 amounted to P=554.2 million.

The Local Board of Assessment Appeals (“LBAA”) ruled in favor of the Municipality of Norzagaray, Bulacan. The Concessionaires elevated the ruling of the LBAA to the Central Board of Assessment Appeals (“CBAA”) by filing separate appeals.

194 2010 Annual Report The CBAA has given due course to Maynilad’s appeal and an ocular inspection of the common purpose facilities was conducted by the CBAA on December 14, 2010.

Although the case had been set for pre-trial by the CBAA, the pre-trial of the case is put on hold pending the resolution of two (2) motions filed by the Concessionaires. The case is set for hearing on March 17, 2011. c. Two petitions for review on certiorari filed separately by Maynilad and MWSS, questioning the jurisdiction of the National Water Resources Board (“NWRB”) to hear and decide a complaint with prayer for the issuance of a cease and desist order against Maynilad, MWSS and the MWSS-RO initiated by certain civil society groups, are pending (in two consolidated cases) before the Supreme Court. Such complaint, which is yet to be decided upon by the NWRB, depending upon the final determination by the Supreme Court on the issue of the NWRB’s jurisdiction on the matter, is contesting the approval by the MWSS BoT of the MWSS-RO resolution approving the rebased tariff of P=30.19 per cubic meter (average all-in tariff) effective January 1, 2005 for Maynilad. The rulings of the Court of Appeals being assailed by the petitions before the Supreme Court pronounced, among others, that the NWRB is empowered to review the subject average all-in tariff rate of P=30.19 per cubic meter. d. On November 24, 2006, the Labor Arbiter issued a decision, ordering the payment of COLA to the supervisor-employees of MWSA “retroactive to the date when they were hired by the respondent company in 1997, with legal interest from the date of promulgation of the decision” until full payment of the award as computed and claimed by MWSA. On September 7, 2007, the National Labor Relations Commission (“NLRC”) reversed and set aside the decision of the Labor Arbiter.

On December 10, 2007, in pursuance of its efforts to effect an early exit from corporate rehabilitation, Maynilad executed a Compromise Agreement with the MWSA for the settlement of certain claims of the MWSA, wherein Maynilad agreed to pay MWSA residual benefits equivalent to its claim for COLA for 23 months, from August 1997 to June 1999.

Meanwhile, MWSA elevated the decision of the NLRC to the Court of Appeals and asked that the Labor Arbiter’s decision dated November 10, 2006 be affirmed in toto, but only in relation to the MWSA’s claim for COLA from July 1999 up to the present time.

In a decision dated May 31, 2010, the Court of Appeals (i) granted the Petition for Certiorari filed by MWSA and reinstated the Labor Arbiter’s Decision dated November 24, 2006; and, (ii) annulled and set aside the NLRC Decision dated September 7, 2007.

Maynilad filed its motion for reconsideration from the Court of Appeal’s decision.

On January 31, 2011, the Court of Appeals granted the motion for reconsideration filed by Maynilad reinstating and affirming the September 7, 2007 Decision and October 23, 2007 Resolution of the NLRC. e. Maynilad is a party to various civil and labor cases relating to breach of contracts with damages, illegal dismissal of employees, and nonpayment of backwages, benefits and performance bonus, among others.

Maynilad and its legal counsel has assessed that, after considering certain provisions made, the eventual liability from these lawsuits or claims, if any, will not have a material effect on the consolidated financial statements. With respect to the COLA, Maynilad reversed the related provision in 2010 for Maynilad’s supervisors who are members of the MWSA amounting to P=78.0 million in light of the decision of the Court of Appeals.

MPTC, MPTDC and MNTC

Value Added Tax. When RA 9337 took effect, the BIR issued Revenue Regulation (RR) No. 16-2005 on September 1, 2005, which, for the first time, expressly referred to toll road operations as being subject to VAT. This notwithstanding VAT Ruling 078-99 issued in August 9, 1999 where BIR categorically ruled that MNTC, as assignee of PNCC franchise, is entitled to the tax exemption privileges of PNCC and is exempt from VAT on its gross receipts from the operation of the NLE.

However, the TRB, in its letter dated October 28, 2005, directed MNTC (and all Philippine toll expressway companies) to defer the imposition of VAT on toll fees.

On December 21, 2009, BIR issued RMC No. 72-2009 as a reiteration of RMC No. 52-2005 imposing VAT on the tollway operators. However, on January 21, 2010, Tollways Association of the Philippines (TAP) issued a letter to tollway operators referring to a letter issued by TRB to TAP dated December 29, 2009 reiterating TRB’s previous instruction to all toll operators to defer the imposition of VAT on toll fees until further orders from their office. The TRB directive resulted from the Cabinet meeting held last December 29, 2009 at Baguio City where the deferment of the implementation of RMC No. 72-2009 was discussed.

Metro Pacific Investments Corporation 195 On March 2010, the BIR issued RMC 30-2010 directing the imposition of the 12.0% VAT starting April 1, 2010, with coverage initially limited to private vehicles. However, on March 30, 2010, the TAP issued a letter to tollway operators referring to a letter issued by TRB to TAP dated March 30, 2010 directing the deferment of collection of VAT on toll fees until further orders from their office.

To fully implement the imposition of the VAT on toll fees, the BIR issued RMC No. 63-2010 dated July 19, 2010 which states that:

The VAT shall be imposed on the gross receipts of tollway operators from all types of vehicles starting August 16, 2010.

Tollway operators who have been assessed for VAT liabilities on receipts from toll fees for prior periods can apply for Abatement of the tax liability, surcharge and interest under Section 204 of the National Internal Revenue Code (NIRC) and RR No. 13-2001.

The accumulated input VAT account of the toll companies shall have a zero balance on August 16, 2010. Any input VAT that will thenceforth be reflected in the books of accounts and other accounting records of tollway operators will have to be for purchases of goods and services delivered/rendered and invoiced/receipted on or after August 16, 2010.

All tollway operators are required to comply with the invoice/receipt format prescribed under RMC No. 40-2005.

Meanwhile, on August 4, 2010, MNTC, in accordance with RMC No. 63-2010, applied for abatement of alleged VAT liabilities for taxable years 2006 and 2007. The BIR has yet to resolve the application for abatement of MNTC.

On August 13, 2010, the Supreme Court issued a TRO on the imposition of the 12.0% VAT on tollway operators. The TRO has not been lifted as of March 3, 2011.

In view of the foregoing and in the light of the quick response of the Cabinet and the TRB on the BIR RMC No.72-2009 and TRO issued by the Supreme Court on the imposition of VAT, MNTC continues to defer the imposition of VAT on toll fees from motorists and correspondingly, with VAT being a passed-on tax, MNTC did not recognize any VAT liability.

MNTC, together with other toll road operators, continues to discuss the issue of VAT with the concerned government agencies.

In relation to the issue on VAT, the BIR has issued the following VAT assessments:

MNTC received a Formal Letter of Demand from the BIR on March 16, 2009 requesting MNTC to pay deficiency VAT plus penalties amounting to P=1,010.5 million for taxable year 2006.

MNTC received a Final Assessment Notice from the BIR dated November 15, 2009, assessing MNTC for deficiency VAT plus penalties amounting to P=557.6 million for taxable year 2007.

MNTC received a Notice of Informal Assessment from the BIR dated October 5, 2009, assessing MNTC for deficiency VAT plus penalties amounting to P=470.9 million for taxable year 2008.

On May 21, 2010, the BIR issued a Notice of Informal Conference assessing MNTC for deficiency VAT plus penalties amounting to P=1.0 billion for taxable year 2009. Included also in the Notice is the increase of the deficiency VAT for taxable year 2008 from P=470.9 million to P=1.2 billion (including penalties).

Notwithstanding the foregoing, management believes, in consultation with its legal counsel, that in any event, the STOA amongst MNTC, ROP, acting by and through the TRB, and PNCC, provides MNTC with legal recourse in order to protect its lawful interests in case there is a change in existing laws which makes the performance by MNTC of its obligations materially more expensive.

Local Business Tax. In 2008, MNTC has received a Final Demand from the municipality of Guiguinto, Bulacan to pay the local business tax assessments for the years 2005 to 2007 amounting to P=67.4 million, inclusive of surcharges and penalties. MNTC, together, with its legal counsel protested claiming that its predecessor, PNCC has never been subjected to LBT and as such MNTC continued the customary practice of obtaining the business permits solely from the local government unit where its principal office is located. The case is still pending before the RTC of Malolos, Bulacan.

On November 19, 2009, TRB informed MNTC that TRB’s BOD has approved MNTC’s request to intervene in the LBT case for the purposes of protecting the interests of the government and the motoring public, avoiding any disruption in the operation of the NLE as a limited access facility and resisting collateral attack in the validity of the STOA. TRB also advised MNTC that on November 12, 2009, the Omnibus Motion (i) for Intervention and (ii) to admit attached Manifestation and Motion in Intervention was filed by the Office of the Solicitor General on behalf of TRB praying for the issuance of a TRO and a writ of preliminary injunction to enjoin the municipality from closing MNTC’s business particularly with respect to its operations of the Burol-Tabang and Burol-Sta.Rita toll exits and any facility that is indispensable in the operation of the tollway.

196 2010 Annual Report In March 2010, MNTC received a final demand letter from the municipality of Guiguinto, Bulacan to pay LBT, permits, and regulatory fees. On March 12, 2010, the RTC of Malolos, Bulacan denied MNTC’s application for the issuance of a TRO and/or writ of preliminary injunction. On March 15, 2010, MNTC filed with the Court of Appeals a petition for certiorari (with application for the issuance of a TRO and/or a writ of preliminary injunction) to annul or set aside the orders of the RTC of Malolos, Bulacan denying MNTC’s application for the issuance of a writ of preliminary injunction. The Court of Appeals, in its decision dated July 23, 2010, dismissed the petition. On August 17, 2010, MNTC filed a motion for reconsideration. On December 3, 2010, the Court of Appeals denied the motion for reconsideration.

Meanwhile, on July 22, 2010, MNTC filed another complaint with the RTC of Malolos, Bulacan seeking to annul and set aside the illegal assessment for unpaid local business taxes in the total amount of P=34.0 million, inclusive of surcharges and penalties, for the years 2008 and 2009 issued against MNTC by the Municipal Treasurer of Guiguinto, Province of Bulacan in February 2010.

The cases are pending before the RTC of Malolos, Bulacan as of March 3, 2011.

As of March 3, 2011, MNTC is in the process of discussing the issue on the prospective allocation of the LBT with the Bureau of Local Government Finance.

Real Property Tax. In 2008, MNTC received real property tax assessments covering the toll roads located in the Municipality of Guiguinto amounting to P=2.9 million for the years 2005 to 2008. MNTC appealed before the Local Board of Assessment Appeals (LBAA) of Bulacan and prayed for the cancellation of the assessment. The case is still pending before the LBAA of Bulacan.

In 2004, MPTDC (then FPIDC) has received real property tax assessments covering Segment 7 located in the province of Bataan for the period from 1997 to June 2005 amounting to P=98.5 million for alleged delinquency property tax. MPTDC appealed before the LBAA of Bataan and prayed for the cancellation of the assessment. In the said appeal, MPTDC invoked that the property is owned by the ROP, hence, exempt from real property tax. The case is still pending before the LBAA of Bataan.

The outcome of these claims cannot be presently determined. Management believes that these claims will not have a significant impact on the Company’s consolidated financial statements. As with regards to the real property tax, management and its legal counsel believes that the STOA also provides MNTC with legal recourse in order to protect its lawful interests in case there is a change in existing laws which makes the performance by MNTC of its obligations materially more expensive.

Others. MNTC is a co-respondent [together with TRB, PNCC, other tollways operators, TMC, MPTDC and BHC] in two Supreme Court cases, where, based on the following allegations, the petitioners’ claims that the STOA is null and void:

the negotiation and execution of the STOA failed to undergo public bidding in accordance with applicable laws and regulations of the Philippines;

the STOA granted to MNTC a 30-year franchise for the construction, maintenance and operation of the NLE in violation of the Presidential Decrees under which the PNCC’s franchise were granted and the Philippine Constitution; and

the provisions of the STOA providing for the establishment and adjustment of toll rates violate the statutory requirement for the TRB to conduct public hearings on the level of authorized toll rates.

The Supreme Court, in a decision dated October 19, 2010, among others, declared as valid and constitutional the STOA. Petitioner Francisco filed a motion for reconsideration dated November 5, 2010 while some of the petitioners in Marcos, et al. v. TRB et al. filed a partial motion for reconsideration dated October 8, 2010. On January 24, 2011, MNTC filed a consolidated comment to the aforementioned motions for reconsideration. Management believes that the petitioners’ claims are without merit and is vigorously contesting the case. As of March 3, 2011, the cases are still pending.

MNTC is also a party to other cases and claims arising from the ordinary course of business filed by third parties which are either pending decisions by the courts or are subject to settlement agreements. The outcome of these claims cannot be presently determined. In the opinion of management and MPTC’s legal counsel, the eventual liability from these lawsuits or claims, if any, will not have a material adverse effect on MPTC’s financial position and financial performance, as well as in the consolidated financial statements.

MPC

Donor’s Tax. MPC received on January 14, 2011 a Final Assessment Notice (FAN) demanding the payment of approximately P=199.7 million as deficiency donor’s tax (including surcharge and interest as of January 31, 2011) on the excess of the book value over the selling price of several shares of stock in BLC which MPC sold to a third party. The assessment was based on the finding of the Bureau of Internal Revenue-Large Taxpayer Service (“BIR-LTS”) that the transaction is subject to donor’s tax as a “deemed gift” transaction under Section 100 of the 1997 National Internal Revenue Tax Code (“the Tax Code”).

Metro Pacific Investments Corporation 197 On February 14, 2011, MPC filed its formal protest to the FAN raising among others, the following arguments: (1) The transaction subject to the FAN is covered by a validly existing ruling from the BIR (BIR RULING [DA-(DT-065) 715-09]) stating that the transaction is not subject to donor’s tax under Section 100 of the Tax Code; (2) The Supreme Court itself recognized that the “deemed gift” provision of the Tax Code admits of exceptions, particularly when the transaction is at an arms-length and made in good faith; and (3) BIR RR 6-2008, which the BIR is using as basis in assessing deficiency donor’s tax, cannot amend the Supreme Court’s interpretation of Section 100 of the Tax Code.

Because of the above reasons, MPC believes that no provision for the assessment is necessary as of December 31, 2010.

Others. Under the agreement relating to the repayment of the Larouge loan, signed between MPC, Ayala Land Inc. (ALI) and Greenfield Development Corp. (GDC) on April 17, 2003, certain obligations/warranties by MPC will remain outstanding for certain periods ranging from one to three years and covered by security arrangements. Under the agreement, MPC shall indemnify ALI and GDC to the extent of MPC’s derivative share in BLC/FBDC for certain secured indemnity obligations and other obligations resulting from any breach of warranties and representations.

The security offered for the above obligations includes:

Pledge of 5.0% interest of MPC in BLC;

Additional pledge of 1.6% interest in BLC subject to the release of certain BLC shares from an existing pledgee which has a prior lien; and

Second mortgage on the parent company’s NCBD property, subject to the approval of the first mortgagee.

ALI and GDC have formally advised MPC in their letter dated September 19, 2003 that they are allocating the first two pledges above for possible payment of secured indemnity obligations enumerated in their letter. Total estimated indemnity is P=1.1 billion.

MPC has already provided for P=317.8 million in prior years, determined on the basis of certain possible taxes that will be claimed by ALI and GDC.

The above warranty has expired last April 17, 2007. However, due to pending taxes included in the warranties, the provision amounting to P=402.8 million has remained in the books. In 2009, additional provision loss made amounting to P=54.8 million, which represents the excess of the proceeds from sale of certain BLC over its carrying value, as this may still be subject for refund in connection with the pending taxes and warranties as herein discussed (see Note 17).

The outcome of these claims cannot be presently determined. In the opinion of management and MPC’s legal counsel, the eventual liability from these lawsuits or claims, if any, will not have a material adverse effect on MPC’s financial position and financial performance, as well as in the consolidated financial statements.

Other disclosures required by PAS 37 were not provided as it may prejudice the Company’s position in on-going claims, litigations and assessments.

35. Significant Contracts, Agreements and Commitments

The significant contracts entered into by MPIC, Maynilad and MNTC are as follows:

MPIC On November 20, 2009, MPIC entered into and became a party to the Amended, Consolidated and Restated Cooperation Agreement (the “Agreement”) covering certain shares of voting common stock in Meralco by the Lopez Group and PLDT Group (collectively referred to as the “Parties”). MPIC and PCEV are considered part of the PLDT Group for purposes of the Agreement. The Agreement provided among others a standstill arrangement, voting arrangement, right of first refusal and tag-along rights and governance provisions with respect to their shareholdings in Meralco.

Also on November 20, 2009, MPIC granted FPUC, a subsidiary of FPHC, a short-term loan amounting to P=11.2 billion. Such loan was interest bearing and matured on June 30, 2010, and was included under “Receivables” in the consolidated balance sheet as of December 31, 2009. This loan was collected on March 30, 2010 prior to its maturity (see Note 8).

On November 5, 2009, FPHC agreed to grant MPIC a call option (right to a call option) relating to approximately 74.6 million common shares of Meralco owned by FPHC (equivalent to 6.7% of the total outstanding common shares of Meralco). On March 1, 2010, MPIC assigned the right to a call option to Beacon Electric. Concurrently, FPHC granted the call option to Beacon Electric which then exercised the call to acquire the 74.6 million shares in Meralco on March 30, 2010.

198 2010 Annual Report See also Note 12 for the Omnibus Agreement between MPIC, Piltel and Beacon Electric and the Assignment of the Right to Call Option to Beacon Electric.

In 2010, MPIC also entered into contracts with various shareholders of MRT companies and MNRTC in connection with a possible acquisition of these companies.

See also Note 11 for the agreements between MPIC and various shareholders of MRT 3 companies.

Maynilad In relation to the Concession Agreement, Maynilad entered into the following contracts with the East Concessionaire: a. Interconnection Agreement wherein the two Concessionaires shall form an unincorporated joint venture that will manage, operate, and maintain interconnection facilities. The terms of the agreement provide, among others, the cost and the volume of water to be transferred between zones; and b. Common Purpose Facilities Agreement that provides for the operation, maintenance, renewal, and as appropriate, decommissioning of the Common Purpose Facilities, and performance of other functions pursuant to and in accordance with the provisions of the Concession Agreement and performance of such other functions relating to the Concession (and the Concession of the East Concessionaire) as Maynilad and the East Concessionaire may choose to delegate to the Joint Venture, subject to the approval of MWSS.

Significant commitments under the Concession Agreement follow: a. Payment of Concession Fees (see Note 18) b. Posting of performance bond (see Note 11)

Under Section 6.9 of the Concession Agreement, Maynilad is required to post a performance bond to secure the performance of its obligations under certain provisions of the Concession Agreement. The aggregate amount drawable in one or more installments under such performance bond during the Rate Rebasing Period to which it relates is set out below.

Aggregate Amount Drawable Under Rate Rebasing Period Performance Bond (In Millions) First (August 1, 1997–December 31, 2002) US$120.0 Second (January 1, 2003–December 31, 2007) 120.0 Third (January 1, 2008–December 31, 2012) 90.0 Fourth (January 1, 2013–December 31, 2017) 80.0 Fifth (January 1, 2018–May 6, 2022) 60.0

Within 30 days from the commencement of each renewal date, Maynilad shall cause the performance bond to be reinstated to the full amount set forth above applicable for the year.

In connection with the implementation of the Selection Process by MWSS, Maynilad and MWSS executed the Agreement on the performance bond on December 15, 2006, incorporating the terms and conditions of MWSS BOT Resolution No. 2006-249 dated November 17, 2006 which approved certain adjustments to the obligation of Maynilad to post the performance bond under Section 6.9 of the Concession Agreement. These adjustments are summarized as follows:

i. The aggregate amount drawable in one or more installments under each performance bond during the Rate Rebasing Period to which it relates had been adjusted to US$30.0 million until the Expiration Date;

Based on the draft of the Letter of Consent and Undertaking to be signed by the DoF in connection with the extension of the Concession Agreement, the extension of the undertaking letter from May 7, 2022 to May 6, 2032 shall only be effective upon the increase in the present minimum level of the Performance Bond from the present level of US$30.0 million to US$90.0 million for the Third Rate Rebasing Period. The Performance Bond will be required to be posted within six (6) months from the date of the issuance of the letter. The amount of the Performance Bond for the period covering 2013 to 2037 shall be mutually agreed upon in writing by the MWSS and Maynilad consistent with the provisions of the Concession Agreement.

Metro Pacific Investments Corporation 199 On April 22, 2010, Maynilad and MWSS entered into a Memorandum of Agreement and Confirmation (MOA) confirming the extension of the term of the Concession Agreement for another 15 years. On May 25, 2010, in connection with the MOA, Maynilad posted the Surety Bond for the amount of US$90 million issued by Prudential Guarantee and Assurance, Inc. (the Surety) in favor of MWSS, as security for Maynilad’s proper and timely performance of its obligations under the Concession Agreement. The liability of the Surety under this bond will expire on December 31, 2012.

c. Payment of half of MWSS and MWSS-RO’s budgeted expenditures for the subsequent years, provided the aggregate annual budgeted expenditures do not exceed P=200.0 million, subject to CPI adjustments. As a result of the extension of the life of the Concession Agreement, the annual budgeted expenditures shall increase by 100.0%, subject to CPI adjustments, effective January 2010.

d. To meet certain specific commitments in respect to the provision of water and sewerage services in the West Service Area, unless modified by the MWSS-RO due to unforeseen circumstances.

e. To operate, maintain, renew and, as appropriate, decommission facilities in a manner consistent with the National Building Standards and best industrial practices so that, at all times, the water and sewerage system in the West Service Area is capable of meeting the service obligations (as such obligations may be revised from time to time by the MWSS-RO following consultation with Maynilad).

f. To repair and correct, on a priority basis, any defect in the facilities that could adversely affect public health or welfare, or cause damage to persons or third-party property.

g. To ensure that at all times Maynilad has sufficient financial, material and personnel resources available to meet its obligations under the Concession Agreement.

h. Non-incurrence of debt or liability that would mature beyond the term of the Concession Agreement, without the prior notice of MWSS.

Failure of Maynilad to perform any of its obligations under the Concession Agreement of a kind or to a degree which, in a reasonable opinion of the MWSS-RO, amounts to an effective abandonment of the Concession Agreement and which failure continues for at least 30 days after written notice from the MWSS-RO, may cause the Concession Agreement terminated.

Operating Lease Commitment. Maynilad leases the office space, branches and service vehicles, where service outlets are located for certain periods up to 2010, renewable under certain terms and conditions to be agreed upon by the parties. Total rent expense for the above operating leases amounted to P=160.4 million in 2010, P=77.2 million in 2009 and P=66.7 million in 2008, respectively.

Future minimum operating lease payments are as follows:

Period Covered Amount (In Millions)

Not later than one year P=70.6 More than one year and not later than five years 247.3 More than 5 years 9.7

MPTC

NLEx Concession Agreement. Obligations and commitments of MNTC under the NLEx Concession Agreement are discussed in Notes 2 and 13.

SCTEx Concession Agreement. In 2010, MNTC participated in a public bidding conducted by the Bases Conversion and Development Authority (BCDA) for the right to manage, operate and maintain the SCTEx on an “as is, where is” basis for a period until October 30, 2043. MNTC’s technical proposal met the requirements of BCDA but its financial proposal failed to meet the minimum financial requirements. However, MNTC was given the opportunity to improve its financial proposal and, as a result, BCDA formally awarded MNTC in June 9, 2010, the right to enter into a concession agreement with BCDA for the management, operation and maintenance of SCTEx. On November 8, 2010, the parties entered into a Concession Agreement under which BCDA granted MNTC the usufructuary rights to and the right to manage, maintain and operate the 94-kilometer SCTEx for a period of 25 years, extendable by another 8 years. In granting the concession, BCDA has also assigned to MNTC its rights under the Toll Operations Agreement (TOA) it signed with the Toll Regulatory Board (TRB) including the right to collect toll fees. The assignment is subject to certain conditions including, among others, the necessary Philippine Government approvals and the execution of a STOA.

In consideration of the assignment, MNTC will pay BCDA a semi-annual concession fees amounting to the peso equivalent of BCDA’s yen-denominated debt service obligation to Japan International Cooperation Agency (JICA) for the period from effective date until year 2016. From 2017 to 2043, MNTC will pay, as concession fee, 20.0% of the gross revenues from the SCTEx.

200 2010 Annual Report In order to secure its obligation to pay concession fees to BCDA and perform committed maintenance, enhancement, and improvement works amounting to about P=20.3 billion, as well as emergency works estimated at approximately P=231.0 million, MNTC has to issue a standby letter of credit (LC) effective for one (1) year which shall be automatically renewed every year until the end of the concession. The LC amount shall be in the approximate amount of P=1.3 billion per annum from 2011 to 2016.

As of March 3, 2011, the parties are still in the process of obtaining certain consents and formalizing the STOA and therefore the SCTEx had not been assigned and turned over to MNTC.

Others. On April 14, 2009, MNTC, under a competitive bidding, has awarded the Civil Works contract to Leighton Contractors (Asia) Limited (LCAL), a construction unit of Leighton International Limited. The Civil Works Construction Agreement was executed by MNTC and LCAL in relation to the construction of the 2.7 kilometer Segment 8.1 stretching from Mindanao Avenue to NLE. Total civil works construction contract was set at P=1,458.8 million, as may be adjusted from time to time pursuant to the terms of the agreement.

The Construction Notice to Proceed was issued by the Company to LCAL on April 14, 2009, and mobilization works commenced on April 22, 2009. The construction of Segment 8.1 has already been substantially completed as of Juen 5, 2010.

Unapplied mobilization advances to LCAL, included as part of “Advances to contractors and consultants” in the consolidated balance sheet, amounted to P=219.8 million as of December 31, 2009.

36. Assets Held in Trust

Materials and Supplies Maynilad has the right to use any items of inventory owned by MWSS in carrying out its responsibility under the Concession Agreement, subject to the obligation to return the same at the end of the concession period, in kind or in value at its current rate, subject to CPI adjustments.

Facilities Maynilad had been granted with the right to operate, maintain in good working order, repair, decommission and refurbish the movable property required to provide the water and sewerage services under the Concession Agreement. MWSS shall retain legal title to all movable property in existence at the Commencement Date. However, upon expiration of the useful life of any such movable property as may be determined by Maynilad, such movable property shall be returned to MWSS in its then-current condition at no charge to MWSS or Maynilad (see Note 13).

The Concession Agreement also provides Maynilad and the East Concessionaire to have equal access to MWSS facilities involved in the provision of water supply and sewerage services in both West and East Service Areas including, but not limited to, the MWSS management information system, billing system, telemetry system, central control room and central records.

The net book value of the facilities transferred to Maynilad on Commencement Date based on MWSS’ closing audit report amounted to P=7.3 billion with a sound value of P=13.8 billion.

MWSS’ corporate headquarters are made available to Maynilad and the East Concessionaire for a one-year period beginning on the Commencement Date, subject to yearly renewal with the consent of the parties concerned. As of December 31, 2010, the lease had been renewed for another year.

37. Financial Risk Management Objectives and Policies

The Company’s principal financial instruments consist mainly of borrowings from a related party and third party lenders and creditors, proceeds of which were used for the acquisition of investments and in financing operations. The Company has other financial assets and financial liabilities such as cash and cash equivalents, short-term deposits, receivables, AFS financial assets, accounts payable and other current liabilities, concession fees payable and other related party transactions which arise directly from the Company’s operations.

The Company also enters into derivative transactions, particularly interest rate swaps and cross currency swaps to manage the interest rate and foreign currency risks arising from its long-term debts.

The main risks arising from the Company’s financial instruments are interest rate risk, foreign currency risk, liquidity risk and credit risk. The BOD reviews and approves policies of managing each of these risks and they are summarized below.

Interest Rate Risk Interest rate risk is the risk that the fair value or future cashflows of a financial instrument will fluctuate because of changes in market interest rates. As of December 31, 2010 and 2009, the Company is subject to fair value and cash flow interest rate risks. Fixed rate financial instruments are subject to fair value interest rate risk while floating rate financial instruments are subject to cash flow interest rate risk.

Metro Pacific Investments Corporation 201 MPIC. The Parent Company's interest rate risk relates primarily to its long-term debt, specifically to the MPIC Omnibus Agreement for a P=6.8 billion note bearing a fixed interest rate. This fixed Peso borrowing locks in the Parent Company's financing costs despite changes in market interest rates.

In light of the decrease in market interest rates in 2010, the interest rate on the note was repriced to 9.2% from 10.7% effective February 13, 2011. This rate, however, is still subject to significant progressions of market interest rates and may be increased when deemed appropriate by the lender.

MNTC. MNTC’s exposure to interest rate risk relates primarily to its long-term debt obligations with floating interest rates. In accordance with its interest rate management policy, MNTC converted certain of its outstanding loans into fixed-rate debt, effectively locking in the interest rate on majority of its loan obligations and reducing exposure to interest rate fluctuations. This was done through the exercise of various fixed-rate funding options that were provided under some of the loan facilities - EFIC, ADB Direct and COFACE.

During 2008 and 2009, to further reduce its interest rate risk exposure, MNTC entered into a series of derivative transactions, particularly, cross currency swaps and interest rate swaps (see Note 38). Under the cross currency swap transactions, the counterparty shall pay semi-annual interest in U.S. Dollar at floating rates equivalent to those of the long-term debt obligations every six months. In exchange, MNTC shall pay its counterparty semi-annual interest in Philippine peso at an agreed-upon fixed rate every six months. Under the interest rate swap transactions, the counterparty shall pay semi-annual interest in Philippine peso at floating rates every six months. In exchange, MNTC shall pay to the counterparty semi-annual interest in Philippine peso at an agreed fixed rate every six months. The following table summarizes the changes in interest rates taking into account the result of the swap transactions:

Notional Amount December 31, December 31, Floating and Fixed Fixed Interest Loan Facility 2010 2009 Interest Rate Rate (In Thousands) ADB-CFS A $7,438 $9,563 LIBOR + 2.75% Margin 8.30% ADB-CFS B 1,312 1,687 LIBOR + 2.75% Margin 8.88% USD Bank Facility 14,022 18,028 LIBOR + 3.00% Margin 9.10% COFACE 6,541 8,409 6.13% 7.60% EFIC 6,562 8,438 8.03% 11.50% $35,875 $46,125

ADB Direct P=380,520 P=489,240 PHIREF + 4.66% Margin 9.40%

The floating rate loans were paid on scheduled repayment dates and the derivative transactions effectively converted the floating rates to fixed rates for two loan facilities in 2008 and another two loan facilities in 2009 resulting in lower percentage of floating rate debt of total outstanding debt.

The cross currency swap on the COFACE Covered Loan features a shift from a fixed interest rate to floating interest rate (see Note 38). Effectively, the cross currency swap converted the COFACE Covered Loan into a floating rate Philippine peso loan. In February 2009, MNTC entered into an interest rate swap transaction to fix the interest rate on the loan facility.

Maynilad. Maynilad’s exposure to market risk for changes in interest rates relates primarily to its interest-bearing loans. The following table shows Maynilad’s financial instruments that are exposed to interest rate risk:

Series 1 Floating Rate Notes Facility P=5.5 billion Floating rate benchmark + 2% spread (3.75% July 10, 2010 to January 11, 2011) Series 2 Corporate Notes Facility US$125.0 million LIBOR+CDS+2% spread (2.89% November 10, 2010 to May 11, 2011)

Maynilad maintains a mix of floating and fixed rate interest-bearing loans, currently at a ratio of 68% floating and 32% fixed per abovementioned Omnibus Notes Facility and Security Agreement. The floating rate interest-bearing loans will increase to a higher portion over time as a greater portion of the fixed rate interest-bearing loan will mature earlier than the floating portion.

RMCI. RMCI’s interest rate risk policy focuses on reducing its overall interest expense and exposure to changes in interest rates. Changes in market interest rates relate primarily to its interest-bearing debt obligations with floating interest rate as it can cause a change in the amount of interest payments.

RMCI manages its interest risk by having a balanced portfolio of fixed and variable rate loans and borrowings.

202 2010 Annual Report MPIC Group. The following tables set out the carrying amount, classified by maturity, of the Company’s interest-bearing financial assets and financial liabilities. Interest on financial instruments classified as floating rate is repriced semi-annually on each interest payment date. Interest on financial instruments classified as fixed rate is fixed until the maturity of the instrument with an exception for the Parent Company’s borrowing as discussed above. The other financial instruments of the Company that are not included in the table below are noninterest-bearing and are therefore not subject to interest rate risk.

U.S. Dollar-Denominated Financial Assets and Financial Liabilities

December 31, 2010 Within More than Interest Rate On Demand 1 Year 2–3 Years 4–5 Years 5 Years Total (In Thousands) Cash and cash equivalents 3.00%-4.50% $1,388 $– $– $– $– $1,388 Fixed rate loans: Service concession fees payable 4.28% – 31,587 – – 93,741 125,328 EFIC 8.03% – 6,562 – – – 6,562 COFACE 6.13% – 6,541 – – – 6,541 MPCL 2.50% 310 – – – – 310 310 44,690 – – 93,741 138,741 Floating rate loans: Maynilad Omnibus LIBOR+CDS+ Agreeement 2% spread (2.89% November 10 to May 11, 2010) – 1,250 – – 123,750 125,000 USD Bank LIBOR +3.00% Margin – 14,022 – – – 14,022 ADB-CFS LIBOR +2.75% Margin – 8,750 – – – 8,750 $– $24,022 $– $– $123,750 $147,772

December 31, 2009 Within More than Interest Rate On Demand 1 Year 2–3 Years 4–5 Years 5 Years Total (In Thousands) Cash and cash equivalents 3.00%-4.50% $24,285 $– $– $– $– $24,285 Short-term deposits 3.00%-4.50% – 52,671 – – – 52,671 24,285 52,671 – – – 76,956 Fixed rate loans: Service concession fees payable 4.61% – 45,802 – – – 45,802 EFIC 8.03% – 1,875 3,750 2,813 – 8,438 COFACE 6.13% – 1,869 3,738 2,803 – 8,410 MPCL 2.50% 310 – – – – 310 310 49,546 7,488 5,616 – 62,960 Floating rate loans: Maynilad Omnibus LIBOR+CDS+ Agreeement 2% spread (3.65% November 10 to May 11, 2010) – – – – 121,829 121,829 USD Bank LIBOR +3.00% Margin – 4,006 8,012 6,009 – 18,027 ADB-CFS LIBOR +2.75% Margin – 2,500 5,000 3,750 – 11,250 $– $6,506 $13,012 $9,759 $121,829 $151,106

Metro Pacific Investments Corporation 203 Peso-Denominated Financial Assets and Financial Liabilities

December 31, 2010 Within More than Interest Rate On Demand 1 Year 2–3 Years 4–5 Years 5 Years Total (In Thousands) Cash and cash equivalents 3.00%-4.50% P=4,737,035 P=– P=– P=– P=– P=4,737,035 Investment in bonds 5.30%-9.00% – – – 424,093 – 424,093 4,737,035 – – 424,093 – 5,161,128 Fixed rate loans: Service concession fees payable 4.28% – 1,238,379 – – 3,004,593 4,242,972 BDO 6.8 B Loan 10.72% – 67,500 135,000 1,721,250 4,725,000 6,648,750 FXCN Noteholders 9.75% – 86,708 5,314,497 – – 5,401,205 Convertible Bond 4.5% – – – 6,811,860 – 6,811,860 Landbank 9.50% 37,231 – – – – 37,231 37,231 1,392,587 5,449,497 8,533,110 7,729,593 23,142,018 Floating rate loans: Maynilad Omnibus Agreement Floating rate benchmark +2% spread (3.75% July 10, 2010 to January 11, 2011) – 438,186 – – 10,172,730 10,610,916 ADB-Direct PHIREF+4.66% Margin – 380,520 – – – 380,520 PNB Loan 9.61%* – 105,000 210,000 1,785,000 – 2,100,000 BDO Loan Floating Rate Note (2% + PDSTF) – 48,857 97,715 54,857 3,000 204,429 – 972,563 307,715 1,839,857 10,175,730 13,295,865 *Converted to floating interest rate upon re-pricing on December 15, 2010. Interest rates range from 2.14%-2.23% per annum as of December 31, 2010.

December 31, 2009 Within More than Interest Rate On Demand 1 Year 2–3 Years 4–5 Years 5 Years Total (In Thousands) Cash and cash equivalents 3.00%-4.50% P=5,756,367 P=– P=– P=– P=– P=5,756,367 Investment in bonds 5.30%-9.00% – – 350,000 50,600 – 400,600 Investment in treasury bills 4.13% – 4,000 – – – 4,000 5,756,367 4,000 350,000 50,600 – 6,160,967 Fixed rate loans: BDO 11B Loan 10.24% – 94,766 489,532 1,599,532 8,789,064 10,972,894 Maynilad Ominbus Agreement Floating rate benchmark +2% spread (3.65% November 10 to May 11, 2010) – – – – 5,338,282 5,338,282 Service concession fees payable 4.61% – – – – 8,576,461 8,576,461 BDO 6.8 B Loan 10.72% – 59,159 115,928 585,059 5,879,625 6,639,771 FXCN Noteholders 9.75% – 55,000 110,000 5,225,000 – 5,390,000 PNB Loan 9.61% – – 57,700 274,075 245,225 577,000 ADB-Direct 9.50% – 108,720 217,440 163,080 – 489,240 Landbank 9.50% 37,231 – – – – 37,231 37,231 317,645 990,600 7,846,746 28,828,657 38,020,879 Floating rate loans: Maynilad Ominbus Agreement Floating rate benchmark +2% spread (3.65% November 10 to May 11, 2010) P=– P=– P=– P=– P=5,338,282 P=5,338,282

204 2010 Annual Report The following table demonstrates the sensitivity of cash flows due to changes in interest rates with all other variables held constant. The estimates in the movement of interest rates were based on the management’s annual financial forecast. There is no other effect on equity other than those affecting the consolidated statement of income:

Increase/ Effect on Decrease Income Before in Basis Points Income Tax (In Thousands)

2010 +50 (P=361,423) –50 361,423 2009 +50 (56,262) –50 56,262

With regard to MNTC’s derivatives transactions, the following table demonstrates the sensitivity of fair value changes due to simultaneous movements in Philippine peso and U.S. Dollar interest rates with all other variables held constant. The sensitivity to the consolidated statement of income pertains to derivatives at FVPL whereas the sensitivity to other comprehensive income pertains to those derivatives accounted for as cash flow hedges:

Increase/Decrease Effect on Income Before Effect on Other in Basis Points Income Tax Comprehensive Income (In Thousands)

2010 +50 (P=16,745) P=– –50 16,982 –

2009 +50 (598) 20,839 –50 612 (21,189)

With regard to MNTC’s derivative transactions, the following table demonstrates the sensitivity of fair value changes due to movements in foreign exchange rates with all variables held constant.

Increase/Decrease Effect on Income Effect on Other in Peso: U.S Dollar Before Comprehensive Exchange Rates Income Tax Income (In Thousands)

2010 +5.0% P=98,064 P=– –5.0% (98,064) – 2009 +5.0% 21,372 94,061 –5.0% (21,372) (94,061)

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. The Company’s foreign currency risk in 2010 results primarily from movements of the Philippine peso against the U.S. Dollar, European Euro and the Japanese Yen.

MPIC. As of December 31, 2010 and 2009, the Parent Company’s exposure to foreign currency risk is minimal.

MNTC. MNTC’s foreign currency risk arises mainly from its U.S. dollar-denominated long-term loans which constitute 38.0% and 25.0% of its outstanding loans as of December 31, 2010 and 2009, respectively. These long-term loans were translated using US$1:P=43.89 and US$1:P=46.36 as of December 31, 2010 and 2009, respectively. Exposure to foreign currency risk was significantly reduced when MNTC undertook a major risk management initiative in 2006 by refinancing around 50.0% of its outstanding U.S. Dollar loans with Peso loans. The exposure was further reduced when MNTC entered into derivative transactions in 2008 and 2009, and subsequently converted the ADB Direct Loan from U.S. Dollar to Peso in March 2009. This allowed MNTC to fully hedge its exposure to variability in cash flows due to foreign currency exchange fluctuations through cross currency swaps. The following table summarizes the features of these hedging transactions:

Principal Loan Facility Effective Date Amount Hedged Swap Rate Notional Amount (In Thousands) ADB-CFS A September 23,2008 $12,750 P=46.33 P=590,708 ADB-CFS B October 3, 2008 2,250 47.05 105,863 COFACE July 2, 2008 11,213 45.00 504,563 USD Bank Facility October 3, 2008 24,038 47.05 1,130,964 EFIC January 5, 2009 10,312 47.42 489,019 $60,563 P=2,821,117

Metro Pacific Investments Corporation 205 In connection with MNTC’s objective of reducing the exposure to foreign currency risk to zero, since revenues are 100.0% Philippine peso- denominated, the authorized toll rate (ATR) adjustment formula was revised with effect from the periodic toll rate adjustment on January 1, 2011. The revised formula removes the foreign exchange component factor, which passes on 50.0% of the foreign currency exposure on bi-annual adjustments following the initial toll rate adjustment.

On January 14, 2011, MNTC’s exposure to foreign exchange currency risk in relation to its long-term loans was eliminated with the full prepayment of its outstanding US Dollar and ADB Direct loans.

Maynilad. The servicing of foreign currency denominated loans of MWSS is among the requirements of the Concession Agreement. Majority of the revenues are generated in Philippine peso. However, there is a mechanism in place as part of the Concession Agreement wherein Maynilad (or the end consumers) can recover currency fluctuations through the FCDA that is approved by the Regulatory Office.

RMCI. Majority of RMCI’s transactions are denominated in Philippine peso. There are only minimal placements in foreign currencies and RMCI does not have any foreign currency denominated debt. As such, RMCI’s foreign currency risk is minimal.

MPIC Group. The Company’s foreign currency denominated financial assets and liabilities as of December 31 are as follows:

2010 U.S. Dollar Euro JPY (In Thousands) Assets: Cash and cash equivalents $1,388 €– ¥– Short-term investments – – – Cash deposits 12,000 – – Due from related parties – – – Derivative assets 929 – – 14,317 – – Liabilities: Accounts payable (164) (147) – Derivative liabilities (4,829) – – Service concession fees payable (75,494) (1,515) (3,878,113) Long-term debts (159,323) – – (239,810) (1,662) (3,878,113) Net foreign currency denominated liabilities ($225,493) (€1,662) (¥3,878,113)

2009 U.S. Dollar Euro JPY SGD (In Thousands) Assets: Cash and cash equivalents $24,285 €– ¥– – Short-term investments 52,671 – – – Due from related parties 5,339 – – – Derivative assets 688 – – – 82,983 – – – Liabilities: Accounts payable (117) (19) – (49) Derivative liabilities (959) – – – Service concession fees payable (82,163) (1,762) (5,005,821) – Long-term debts (167,954) – – – (251,193) (1,781) (5,005,821) (49) Net foreign currency denominated liabilities ($168,210) (€1,781) (¥5,005,821) (49)

206 2010 Annual Report The following table demonstrates sensitivity of cash flows due to changes in foreign exchange rates with all variables held constant. The estimates in the movement of the foreign exchange rates were based on the management’s annual financial forecast. Changes in income before income tax pertain to those financial obligations which are unhedged.

Increase/Decrease in Peso to U.S. Dollar, Euro, JPY Effect on and SGD Foreign Income Before Exchange Rates Exchange Rate Income Tax (In Thousands) 2010: U.S. Dollar +5% 43.84 (494,281) Euro +5% 58.03 (4,822) JPY +5% 0.54 (104,709) U.S. Dollar -5% 43.84 494,281 Euro -5% 58.03 4,822 JPY -5% 0.54 104,709 2009: U.S. Dollar +5% 46.20 (388,565) Euro +5% 66.66 (5,936) JPY +5% 0.51 (127,648) Singapore Dollar +5% 33.95 (83) U.S. Dollar -5% 46.20 388,565 Euro -5% 66.66 5,936 JPY -5% 0.51 127,648 Singapore Dollar -5% 33.95 83

Liquidity Risk

MPIC Group. Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans and facilities and advances from related parties.

The Company monitors its cash position using a cash forecasting system. All expected collections, check disbursements and other cash payments are determined on a daily basis to arrive at the projected cash position to cover its obligations and ensuring that obligations are met as they fall due. The Company monitors its cash flow portion particularly the collections from receivables, receipts of dividends and the funding requirements of operations to ensure an adequate balance of inflows and outflows. The Company also has online facility with its depository banks wherein bank balances are monitored daily to determine the actual Company cash balances at any time. The Company has short-term credit lines amounting to P=900.0 million as of December 31, 2010 and 2009, and cash and cash equivalents and short-term deposits, amounting to P=4,947.8 million and P=8,813.1 million as of December 31, 2010 and 2009, respectively, that are allocated to meet the Company’s short-term liquidity needs.

The Company’s liquidity and funding management process include the following:

Managing the concentration and profile of debt maturities Maintaining debt financing plans Monitoring balance sheet liquidity ratios against internal and regulatory requirements

The table below summarizes the maturity profile of the Company’s financial liabilities at December 31, 2010 and 2009 based on contractual undiscounted payments.

2010 Within More than On Demand 1 Year 1–2 Years 2–3 Years 3–4 Years 4 Years Total (In Thousands)

Accrued expenses P=73,065 P=980,938 P=– P=– P=– P=– P=1,054,003 Accrued construction costs – 3,109,514 – – – – 3,109,514 Trade payables 1,650,074 105,599 – – – – 1,755,673 Accounts payable 11,537 15,074 – – – – 26,611 Interest and other financing charges 279,858 568,438 – – – – 848,296 Dividends payable – 208,365 – – – – 208,365 Retention payable – 25,864 – – – – 25,864 Other current liabilities(a) 21,680 164,931 – – – – 186,611

(Forward)

Metro Pacific Investments Corporation 207 2010 Within More than On Demand 1 Year 1–2 Years 2–3 Years 3–4 Years 4 Years Total (In Thousands)

Due to related parties P=469,497 P=– P=– P=6,811,860 P=– P=– P=7,281,357 Customers’ guaranty deposits(b) – – – – – 522,585 522,585 Financial guarantee obligation(c) – 11,055 – 22,110 – 265,320 298,485 Concession fees payable – 1,970,768 1,022,506 910,730 1,717,616 10,256,498 15,878,118 Long-term debts(c) 108,088 3,938,207 1,791,321 9,901,800 4,506,281 18,287,980 38,533,677 LTIP payable(b) – – – 133,009 – – 133,009 2,613,799 11,098,753 2,813,827 17,779,509 6,223,897 29,332,383 69,862,168 Derivative liabilities: Derivative contracts - receipts – (1,453,761) – – – – (1,453,761) Derivative contracts - payments – 1,665,673 – – – – 1,665,673 – 211,912 – – – – 211,912 P=2,613,799 P=11,310,665 P=2,813,827 P=17,779,509 P=6,223,897 P=29,332,383 P=70,074,080 (a) Excluding statutory payables. (b)Included under “Other long-term liabilities” account in the consolidated balance sheet. (c)Including contractual interest payments.

2009 Within More than On Demand 1 Year 1–2 Years 2–3 Years 3–4 Years 4 Years Total (In Thousands) Accrued expenses P=1,035,087 P=242,432 P=– P=– P=– P=– P=1,277,519 Accrued construction costs 1,726,337 – – – – – 1,726,337 Trade payables 1,432,453 – – – – – 1,432,453 Accounts payable 7,350 – – – – – 7,350 Interest and other financing charges 1,035,659 – – – – – 1,035,659 Dividends payable 26,594 143,883 – – – – 170,477 Retention payable 16,901 – – – – – 16,901 Other current liabilities(a) 106,328 – – – – – 106,328 Due to related parties 102,133 327,585 – – – – 429,718 Customers’ guaranty deposits(b) – – – – – 494,453 494,453 Financial guarantee obligation(c) – 11,055 11,055 11,055 11,055 265,320 309,540 Concession fees payable – 1,208,467 1,462,278 722,244 619,947 6,267,204 10,280,140 Long-term debts(c) – 3,419,454 3,546,083 8,307,910 2,621,236 40,904,255 58,798,938 5,488,842 5,352,876 5,019,416 9,041,209 3,252,238 47,931,232 76,085,813 Derivative liabilities: Derivative contracts - receipts – (460,421) – (894,997) – (622,303) (1,977,721) Derivative contracts - payments – 553,410 – 994,596 – 646,545 2,194,551 – 92,989 – 99,599 – 24,242 216,830 P=5,488,842 P=5,445,865 P=5,019,416 P=9,140,808 P=3,252,238 P=47,955,474 P=76,302,643 (a) Excluding statutory payables. (b)Included under “Other long-term liabilities” account in the consolidated balance sheet. (c)Including contractual interest payments.

Credit Risk Credit risk is the risk that the Company will incur a loss arising from customers, clients or counterparties that fail to discharge their contracted obligations. The Company manages and controls credit risk by setting limits on the amount of risk that the Company is willing to accept for individual counterparties and by monitoring exposures in relation to such limits.

MPIC. MPIC’s exposure to credit risk is equal to the carrying amount of its financial assets. MPIC has no concentration of credit risk.

MNTC. MNTC has indirect exposure to credit risk on its trade receivables from tollway operations since the responsibility for account management and collection is part of the subscription account management function of its operator, TMC. MNTC, through TMC, offers a credit card payment option called automatic debit via credit card (Credit Card ADA) which, to a certain extent, operates like a post-payment account that can have some collection backlog if not managed properly. MNTC’s policy is to provide TMC a 30-day window within which to collect declined Credit Card ADA transactions for the annual period. Any uncollected Credit Card ADA top-ups after the 30-day grace period will be considered as part of the toll collection variance of TMC (ADA variance). In 2010 and 2009, the cut-off date for the determination of the ADA variance is on January 30, 2010 and 2009, respectively, following the 30-day policy. As of January 30, 2010 and 2009, the declined ADA reload transactions in 2010 and 2009 amounted only to P=0.2 million and P=0.1 million, respectively.

There is also credit risk on receivables from MNTC’s hedging counterparty, Mizuho Corporate Bank (Mizuho). Under the hedge agreements, Mizuho shall pay MNTC, in U.S. dollar at specified dates, amounts equal to the semi-annual principal and interest payments for the MNTC’s U.S. Dollar-denominated loans, namely ADB-CFS, USD Bank and COFACE. In exchange, MNTC pays Mizuho equivalent amounts in Philippine Peso at agreed-upon swap rates and fixed interest rates. MNTC manages its counterparty risk by transacting with counterparties of good financial condition and credit rating. Although limiting aggregate exposure on all outstanding derivatives to any individual counterparty would effectively manage settlement risk on derivatives, the CTA stipulated that hedge counterparties would not have voting rights and may not declare an event of default which other counterparties find difficult to accept. To mitigate this exposure, MNTC monitors and assesses on a regular basis the counterparty’s credit rating in Moody’s, S&P and Fitch to obtain reasonable assurance that the counterparty would be able to fulfill its financial obligations under the hedge agreements.

208 2010 Annual Report On December 13, 2010, MNTC issued a notice of prepayment to Mizuho as hedging counterparty indicating MNTC’s intent to cancel the cross currency and interest rate swap transactions on January 14, 2011, the same date as the prepayment of the loans. The cancellation proceeded in accordance with the notice.

Maynilad. Being a basic need service company, historical collections of Maynilad are relatively high, thus, credit risk exposure is widely dispersed. Maynilad billings are payable on the due date, which is normally 14 days from the billing date. However, customers are given 60 days to settle any unpaid bills before disconnection. Receivable balances are monitored on an ongoing basis with the result that the Company’s exposure to bad debts is not significant.

RMCI. RMCI ensures that receivables are entered into with customers and students who have the ability to pay. RMCI’s exposure to impairment losses is not significant since receivable balances are monitored on an ongoing basis.

MPIC Group. The table below shows the maximum exposure to credit risk of the Company without considering the effects of collaterals, credit enhancements and other credit risk mitigation techniques and the net maximum exposure to credit risk of the Company considering the effects of collaterals, credit enhancements and other credit risk mitigation techniques.

Maximum Exposure Net Maximum Exposure 2010 2009 2010 2009 (In Thousands) Financial assets at FVPL - Derivative assets P=34,615 P=31,911 P=34,615 P=31,911 Derivative assets designated as accounting hedges – 7,301 – 7,301 Loans and receivables: Cash and cash equivalents(a) 4,797,886 6,370,480 4,797,886 6,370,480 Short-term deposits 6,138 2,433,418 6,138 2,433,418 Receivables - net 3,055,689 13,475,300 2,876,685 13,475,300 Due from related parties (current and noncurrent)(d) 1,261,227 566,649 1,133,935 420,418 Sinking fund(b) 843,590 796,302 843,590 796,302 Cash deposits(b) 526,080 554,400 526,080 554,400 Long-term cash deposits(c) 6,985 – 6,985 – Miscellaneous deposits(c) 48,602 71,734 48,602 71,734 AFS financial assets(d) 9,070,102 282,787 9,070,102 282,787 HTM investments: Investment in bonds – 400,600 – 400,600 Investment in treasury bills(c) – 4,000 – 4,000 P=19,650,914 P=24,994,882 P=19,344,618 P=24,848,651 (a)Excludes cash on hand amounting to P=143.8 million and P=9.2 million as of December 31, 2010 and 2009, respectively. (b)Included under “Other current assets” account in the consolidated balance sheets. (c)Included under “Other noncurrent assets” account in the consolidated balance sheets. (d)Includes advances to and investment in preferred shares of Beacon Electric (see Note 12).

Metro Pacific Investments Corporation 209

=6,370,480 =4,797,886 =25,506,181 =20,138,831

P 6,138 843,590 526,080 1,261,227 9,070,102 48,602 6,985 34,615 – 81,500 – 39,212 – 2,433,418 – 71,734 – 4,000 – – – – – – – – – – 282,787 – – 554,400 566,649 – 796,302 – 400,600

=– P = y P P

=511,299 P =487,917 P Individuall

Individually – 69,917 69,917

=6,370,480 =4,797,886 =24,994,882 P =19,650,914 P

P 6,138 1,114,002 180,000 91,385 1,294,002 37,366 843,590 12,012 526,080 9,070,102 5,110 103,397 48,602 42,476 6,985 34,615 – – 39,212 – 2,433,418 – 4,000 – 71,734 – – – – – – – – – – – – 282,787 – 554,400 – 796,302 – 400,600 = =– P P P 273 273 217,673 3,484 221,157 =325,409 P =12,744,957 P

– – – – – – – – – – – – – – – – – – – – – = =– P P =877,938 P =221,409 P

– 6,561 6,561 28,997 9,894 38,891 – – 523,480 11,728,480 11,728,480 150,000 11,878,480 – – – – – – – – – – – – – – – – – – 37,996 40,622 566,649 – – = =– P P 273 273 310 310 2,145 18,714 81,500 (In Thousands) (In Thousands) (In Thousands) Thousands) (In =11,935 P 120 Days Days 120 Days >120 Total Total Impaired Total =116,355 P –

– – – – – – – – – – – – – – – – – – – – – – – = =– P P 300 300 259 259 90 Days Days 90 90 =15,051 P – =158,615 P Past Due but not Impaired Impaired not but Due Past Past Due but not Impaired Impaired not but Due Past

– – – – – – – – – – – – – – – – – – – – – – – = =– P P 310 310

60 Days Days 60 60 =54,837 P – =227,012 P

4,233 5,485 3,120 2,573 15,411 26,025 6,405 32,430 – – – – – – – – – – – – – – – – – – – – – – – 60 60 2,020 2,026 999 198,247 203,352 1,261,227 = =– P P 404 404 1,963 =22,177 P =11,365,037 P

– – 11,205,000 6,985 6,985 4,000 4,000 6,138 6,138 22,436 22,436 62,786 62,786 15,649 39,212 39,212 10,614 10,614 91,385 91,385 71,734 71,734 48,602 48,602 37,366 37,366 34,615 34,615 Due nor Due nor Due nor nor Due Impaired Impaired Days <30 Days 30–60 Days 60–90 Days 90–120 Days >120 Total Total Impaired Total 217,400 217,400 468,343 468,343 143,984 224,739 158,056 115,772 307,756 950,307 1,418,650 278,004 1,696,654 282,787 282,787 347,174 347,174 3,032 331 191 2,639 1,665 7,858 355,032 3,484 358,516 526,080 526,080 554,400 843,590 843,590 796,302 526,027 526,027 400,600 Impaired Impaired Days <30 30 1,114,002 1,114,002 2,433,418 2,433,418 9,070,102 9,070,102 1,057,875 1,057,875 1,333,091 1,333,091 19,085 48,253 7,349 5,177 18,924 98,788 1,431,879 280,906 1,712,785 =4,797,886 =6,370,480 P P Neither Past Past Neither =12,249,925 P =19,325,505 =19,325,505 P Neither Past Past Neither P P

(b)

)

c ( (b) (b) (b)

) c (

) ) a a ( (

) ) a a ( (

Included under “Other current assets” account in the consolidated balance sheets. sheets. balance consolidated the account in assets” current “Other under Included sheets. balance consolidated the account in assets” current “Other under Included Included under “Other noncurrent assets” account in the consolidated balance sheets. sheets. balance the consolidated in account assets” noncurrent “Other under Included sheets. balance the consolidated in account assets” noncurrent “Other under Included Includes advances to and investment in preferred shares of Beacon Electric (see Note 12) 12) Note (see Electric Beacon of shares preferred in investment toand advances Includes (a) (a) Sinking fund Sinking Others employees and to officers Advances affiliates to other Advances

receivable Notes receivables Trade receivable interests Accrued Receivables: Receivables: Derivative assets assets Derivative receivable Notes Short-term deposits deposits Short-term

AFS financial assets assets financial AFS receivables Trade receivable interests Accrued employees and to officers Advances fund Sinking Others

Short-term deposits deposits Short-term Receivables: deposits Cash parties related from Due assets financial AFS deposits Miscellaneous deposit cash Long-term assets Derivative As at December 31, 2010, the aging analysis of past due but not impaired financial assets is as follows: follows: assets financial is as impaired not but analysis aging of past due the 2010, 31, As at December equivalents cash and Cash * (b) (c) follows: assets financial is as impaired not but analysis aging of past due the 2009, 31, As at December equivalents cash and Cash * (b)

affiliates to other Advances Miscellaneous deposits Miscellaneous Due from related parties parties related from Due bonds in Investment Cash deposits Cash Investment in treasury bills treasury in Investment

210 2010 Annual Report The Company also assesses each financial assets based on its credit quality.

Cash and cash equivalents and sinking fund are classified as high grade since these are placed with reputable local and international banks which meet the credit rating criteria set under the loan agreements. Qualified banks in the Philippines are those with a bank deposit rating of at least equal to the sovereign rating, or if there is no bank deposit rating, bank financial strength rating of at least “B” by Moody's, or whose credit rating given by Moody's, Standard & Poor’s (S&P), or Fitch is equal to the Philippine government, or whose issuer or issue credit rating by Philratings is at least “Aa.” Qualified banks outside the Philippines are those whose senior unsecured obligations are rated at least “BBB” by S&P. In addition to this, the Company has investment in bonds issued by the Philippine government, rated as “Aa” by Philratings.

For the Company’s other financial assets, high-grade relate to those financial assets which are consistently collected before the maturity date. In addition, these are financial assets from counterparties that also have corresponding collectibles from the Company for certain contracted services. The first layer of security comes from the Company’s ability to offset amounts receivable from those counterparties against payments due to them. Standard grade include financial assets that are collected on their due dates even without an effort from the Company to follow them up. Substandard grade relate to financial assets which are collected on their due dates provided that the Company made a persistent effort to collect them. Past due receivables and advances include those that are past due but are still collectible.

The table below shows the credit quality per class of financial assets of the Company that were neither past due nor impaired.

2010 Standard Sub-standard High Grade Grade Grade Total (In Thousands) Financial Assets at FVPL - Derivative assets P=34,615 P=– P=– P=34,615 Loans and Receivables: Cash and cash equivalents 4,797,886 – – 4,797,886 Short-term deposits 6,138 – – 6,138 Receivables: Notes receivable 457,015 – 656,987 1,114,002 Trade receivables 1,333,091 – – 1,333,091 Accrued interests receivable 6,092 – 4,522 10,614 Advances to officers and employees 37,366 – – 37,366 Advances to other affiliates 91,385 – – 91,385 Others 347,174 – – 347,174 Sinking fund(a) 843,590 – – 843,590 Cash deposits(a) 526,080 – – 526,080 Long-term cash deposits(b) 6,985 6,985 Due from related parties(c) 1,057,875 – – 1,057,875 Miscellaneous deposits(b) 48,602 – – 48,602 AFS financial assets(c) 8,858,277 – 211,825 9,070,102 P=18,452,171 P=– P=873,334 P=19,325,505 *(a)Included under “Other current assets” account in the consolidated balance sheets. (b)Included under “Other noncurrent assets” account in the consolidated balance sheets. (c)Includes advances to and investment in preferred shares of Beacon Electric (see Note 12).

2009 Standard Sub-standard High Grade Grade Grade Total (In Thousands) Financial Assets at FVPL - Derivative assets P=31,911 P=– P=– P=31,911 Derivative assets designated as accounting hedges 7,301 – – 7,301 Loans and Receivables: Cash and cash equivalents 6,370,480 – – 6,370,480 Short-term deposits 2,433,418 – – 2,433,418 Receivables: Notes receivable – – – – Trade receivables 468,343 – – 468,343 Accrued interests receivable 4,170 58,616 – 62,786 Advances to officers and employees 21,740 696 – 22,436 Others 115,337 55,350 46,713 217,400

(Forward)

Metro Pacific Investments Corporation 211 2009 Standard Sub-standard High Grade Grade Grade Total (In Thousands) Sinking fund(a) P=796,302 P=– P=– P=796,302 Cash deposits(a) 554,400 – – 554,400 Due from related parties 526,027 – – 526,027 Miscellaneous deposits(b) 71,734 – – 71,734 AFS financial assets 282,787 – – 282,787 HTM Investments: Investment in bonds 400,600 – – 400,600 Investments in treasury bills(a) 4,000 – – 4,000 P=12,088,550 P=114,662 P=46,713 P=12,249,925 (a)Included under “Other current assets” account in the consolidated balance sheets. (b)Included under “Other noncurrent assets” account in the consolidated balance sheets.

Capital Management The primary objective of the Company’s capital management policies is to ensure that the Company maintains a strong balance sheet and healthy capital ratios in order to support its business and maximize shareholder value. The Company ensures that it is compliant with all debt covenants not only at the consolidated level but also at the Parent Company and each of its subsidiary.

The following debt covenants are being complied with by the Company as part of maintaining a strong credit rating with its creditors:

MPIC. MPIC Omnibus Agreement provides that MPIC shall ensure during the terms of the Notes that its Debt-to-equity ratio does not exceed 70:30, and its debt service coverage ratio (DSCR) is at a minimum of 1.3x. To be able to declare dividends, MPIC shall achieve a DSCR of 1.5x. As of December 31, 2010, MPIC is in compliance with the required financial ratios and other loan covenants.

MNTC. Under the loan agreement, there is a limit to the amount of additional senior debt that it can incur, US$50 million (or its Peso equivalent, as escalated) for Phase II expansion and US$10 million (or its Peso equivalent, as escalated) for general corporate purposes within three years after November 8, 2006. After this three-year period, incurrence of additional senior debt is governed by certain cash flow tests such as forward debt-service coverage ratios (minimum of 1.3x) and Debt:EBITDA ratio (maximum of 3:1).

MNTC also ensures that its debt to equity ratio is in line with the requirements of the Bangko Sentral ng Pilipinas (BSP) and the BOI. BSP requires MNTC to maintain a long-term debt to equity ratio of at most 75:25 during the term of the foreign loans while BOI requires MNTC to comply with a 75:25 debt-equity ratio as proof of capital build-up. MNTC’s long-term debt to equity ratio stood 59:41 and 55:45 as of December 31, 2010 and 2009, respectively, indicating that MNTC has the capacity to incur additional long-term debt to build up its capital.

MNTC continuously evaluates whether its capital structure can support its business strategy.

In 2010, MNTC launched its capital restructuring plan which aims to maximize its flexibility to pursue expansion opportunities within and outside the NLE concession and, at the same time, maintain a steady flow of dividends to shareholders. In order to do this, MNTC had to take certain steps to complete its transition away from its project-finance origins. First of these steps is the prepayment of the US Dollar and ADB Direct loans. While the prepayment entailed costs related to the cancellation of several hedge transactions, the low interest environment and strong liquidity of the local market ensured the Company that the loan prepayment and swap termination can be done efficiently. To effect the prepayment, MNTC obtained a short-term Peso bridge loan facility that will eventually be refinanced with a long- term Peso loan facility. Post prepayment, the weighted average interest rate on MNTC’s long term loan facilities went down from 9.6% per annum to 6.6% per annum.

Maynilad. Maynilad closely manages its capital structure vis-a-vis a certain target gearing ratio, which is net debt divided by total capital plus net debt. Its target gearing ratio is 75%. This target is to be achieved over the next 5 years by managing Maynilad’s level of borrowings and dividend payments to shareholders.

For purposes of computing its net debt, Maynilad includes the outstanding balance of its long-term interest-bearing loans, service concession obligation payable to MWSS and trade and other payables, less the outstanding cash and cash equivalents, short-term investments, deposits and sinking fund. To compute its capital, Maynilad uses net equity.

RMCI. RMCI considers the carrying amount of its equity in managing its capital structure.

MPIC Group. The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, the Company may obtain additional advances from shareholders, return capital to shareholders, issue new shares or issue new debt or redemption of existing debt. No changes were made in the objectives, policies or processes during the years ended December 31, 2010 and 2009.

212 2010 Annual Report The Company monitors capital on the basis of debt-to-equity ratio. Debt-to-equity ratio is calculated as long-term debts over equity.

During 2010, the Company’s strategy, which was unchanged from 2009, was to maintain a sustainable debt-to-equity ratio. The debt-to- equity ratio on December 31, 2010 and 2009 are as follows:

2010 2009 (In Thousands) Long-term debts P=32,523,000 P=42,786,400 Equity 65,279,362 60,275,638 Debt-to-equity ratio 1:2 1:1.4

38. Financial Assets and Financial Liabilities

Carrying Values The carrying values of the Company’s financial assets and financial liabilities and reconciliations with the amounts in the consolidated balance sheets as of December 31, 2010 and 2009 are as follows:

2010 Financial Assets Financial Liabilities Other Non-financial Loans and AFS Financial Financial Assets/ FVPL Receivables HTM Assets FVPL Liabilities Total Liabilities Total (In Thousands)

ASSETS Cash and cash equivalents P=– P=4,797,886 P=– P=– P=– P=– P=4,797,886 P=143,807 P=4,941,693 Short-term deposits – 6,138 – – – – 6,138 – 6,138 Receivables - net – 3,055,689 – – – – 3,055,689 – 3,055,689 Advances to contractors and consultants – – – – – – – 288,285 288,285 Inventories - at cost – – – – – – – 158,817 158,817 Real estate for sale – – – – – – – 187,010 187,010 Due from related parties - net – 504,840 – – – – 504,840 – 504,840 Derivative assets 34,615 – – – – – 34,615 – 34,615 AFS financial assets – – – 1,059,658 – – 1,059,658 – 1,059,658 Other current assets - net – 1,369,670 – – – – 1,369,670 951,234 2,320,904 Investments in associates and interest in joint ventures (a) – 756,387 – 8,010,444 – – 8,766,831 26,104,826 34,871,657 Goodwill – – – – – – – 12,751,001 12,751,001 Service concession assets - net – – – – – – – 69,348,123 69,348,123 Property and equipment - net – – – – – – – 1,423,235 1,423,235 Deferred tax assets – net – – – – – – – 275,288 275,288 Other noncurrent assets – 55,587 – – – – 55,587 93,583 149,170 P=34,615 P=10,546,197 P=– P=9,070,102 P=– P=– P=19,650,914 P=111,725,209 P=131,376,123

LIABILITIES Accounts payable and other current liabilities P=– P=– P=– P=– P=– P=7,214,937 P=7,214,937 P=489,892 P=7,704,829 Unearned toll revenues – – – – – – – 30,986 30,986 Unearned tuition and other school fees – – – – – – – 29,306 29,306 Income tax payable – – – – – – – 30,940 30,940 Due to related parties – – – – – 6,783,636 6,783,636 – 6,783,636 Derivative liabilities – – – – 211,912 – 211,912 – 211,912 Accrued retirement costs – – – – – – – 55,653 55,653 Provisions – – – – – – – 2,496,499 2,496,499 Service concession fees payable – – – – – 9,130,225 9,130,225 – 9,130,225 Long-term debt – – – – – 32,523,000 32,523,000 – 32,523,000 Deferred credits and other long-term liabilities – – – – – 721,007 721,007 3,441,150 4,162,157 Deferred tax liabilities - net – – – – – – – 2,937,618 2,937,618 P=– P=– P=– P=– P=211,912 P=56,372,805 P=56,584,717 P=9,512,044 P=66,096,761 (a) Includes advances to Beacon Electric classified as loans and receivables and investment in preferred shares of Beacon Electric classified as AFS financial assets.

2009 Financial Assets Financial Liabilities Other Non-financial Loans and AFS Financial Financial Assets/ FVPL Receivables HTM Assets FVPL Liabilities Total Liabilities Total (In Thousands)

ASSETS Cash and cash equivalents P=– P=6,370,480 P=– P=– P=– P=– P=6,370,480 P=9,251 P=6,379,731 Short-term deposits – 2,433,418 – – – – 2,433,418 – 2,433,418 Receivables - net – 13,475,300 – – – – 13,475,300 – 13,475,300 Advances to contractors and consultants – – – – – – – 527,571 527,571 Inventories - at cost – – – – – – – 96,012 96,012 Real estate for sale – – – – – – – 187,010 187,010 Due from related parties - net – 566,649 – – – – 566,649 – 566,649 Derivative assets 39,212 – – – – – 39,212 – 39,212 AFS financial assets – – – 282,787 – – 282,787 – 282,787 Noncurrent asset held for sale – – – – – – – 329,570 329,570 Other current assets - net – 1,350,702 4,000 – – – 1,354,702 239,130 1,593,832

(Forward)

Metro Pacific Investments Corporation 213 2009 Financial Assets Financial Liabilities Other Non-financial Loans and AFS Financial Financial Assets/ FVPL Receivables HTM Assets FVPL Liabilities Total Liabilities Total (In Thousands)

Investments in associates and interest in joint ventures P=– P=– P=– P=– P=– P=– P=– P=27,370,023 P=27,370,023 Investment in bonds – – 400,600 – – – 400,600 – 400,600 Goodwill – – – – – – – 12,551,750 12,551,750 Service concession assets - net – – – – – – – 62,185,407 62,185,407 Property and equipment - net – – – – – – – 634,405 634,405 Deferred tax assets - net – – – – – – – 214,992 214,992 Other noncurrent assets – 71,734 – – – – 71,734 59,832 131,566 P=39,212 P=24,268,283 P=404,600 P=282,787 P=– P=– P=24,994,882 P=104,404,953 P=129,399,835

LIABILITIES Accounts payable and other current liabilities P=– P=– P=– P=– P=– P=5,773,024 P=5,773,024 P=444,943 P=6,217,967 Unearned toll revenues – – – – – – – 21,135 21,135 Income tax payable – – – – – – – 10,818 10,818 Due to related parties – – – – – 429,718 429,718 – 429,718 Derivative liabilities – – – – 44,467 – 44,467 – 44,467 Provisions – – – – – – – 2,285,938 2,285,938 Service concession fees payable – – – – – 10,280,140 10,280,140 – 10,280,140 Long-term debt – – – – – 42,786,400 42,786,400 – 42,786,400 Deferred credits and other long-term liabilities – – – – – 560,022 560,022 3,814,900 4,374,922 Deferred tax liabilities - net – – – – – – – 2,672,692 2,672,692 P=– P=– P=– P=– P=44,467 P=59,829,304 P=59,873,771 P=9,250,426 P=69,124,197

Fair Values The classification and comparison by category of the carrying values and fair values of all of the Company’s financial instruments as of December 31, 2010 and 2009 are as follows:

2010 2009 Carrying Value Fair Value Carrying Value Fair Value (In Thousands)

Financial Assets Financial Assets at FVPL - Derivative assets P=34,615 P=34,615 P=31,911 P=31,911 Designated as accounting hedges - Derivative assets – – 7,301 7,301 34,615 34,615 39,212 39,212 Loans and Receivables: Cash and cash equivalents 4,797,886 4,797,886 6,370,480 6,370,480 Short-term deposits 6,138 6,138 2,433,418 2,433,418 Receivables (current and noncurrent): Notes receivable 1,114,002 1,195,590 11,728,480 11,728,480 Trade receivables 1,443,781 1,431,879 1,418,650 1,418,650 Accrued interests receivable 26,025 26,025 81,500 81,500 Advances to officers and employees 32,790 37,366 28,997 28,997 Dividend receivable 28,494 28,494 7,841 7,841 Others 410,597 417,923 209,832 209,832 Total Receivables 3,055,689 3,137,277 13,475,300 13,475,300 Due from related parties 504,840 561,524 566,649 609,242 Advances to a joint venture(a) 756,387 756,387 – – Sinking fund(b) 843,590 843,590 796,302 796,302 Cash deposits(b) 526,080 526,080 554,400 554,400 Long-term cash deposits(c) 6,985 6,985 – – Miscellaneous deposits(c) 48,602 48,602 71,734 74,843 Total loans and receivables 10,546,197 10,684,469 24,268,283 24,313,985 AFS Financial assets: NEPSCC 236,262 236,262 236,262 236,262 Landco 211,825 211,825 – – CMMTC 140,953 140,953 – – BLC 46,525 46,525 46,525 46,525 Investment in bonds 424,093 424,093 – – Investments in preferred shares(a) 8,010,444 8,010,444 Total AFS financial assets 9,070,102 9,070,102 282,787 282,787 HTM Investments - Investment in bonds – – 400,600 405,948 Investment in treasury bills(c) – – 4,000 3,929 Total AFS financial assets – – 404,600 409,877 Total financial assets P=19,650,914 P=19,789,186 P=24,994,882 P=25,045,861

214 2010 Annual Report 2010 2009 Carrying Value Fair Value Carrying Value Fair Value

Financial Liabilities Designated as accounting hedges - Derivative liabilities P=211,912 P=211,912 P=44,467 P=44,467 Other Financial Liabilities: Accounts payable and other current liabilities: Accrued expenses 1,054,003 1,054,003 1,277,519 1,277,519 Accrued construction costs 3,109,514 3,109,514 1,726,337 1,726,337 Trade payables 1,755,673 1,755,673 1,432,453 1,432,453 Interest and other financing charges 848,296 848,296 1,035,659 1,035,659 Dividends payable 208,365 208,365 170,477 170,477 Retention payable 25,864 25,864 16,901 16,901 Accounts payable 26,611 26,611 7,350 7,350 Others 186,611 186,611 106,328 106,328 Total accounts payable and other current liabilities 7,214,937 7,214,937 5,773,024 5,773,024 Due to related parties 6,783,636 7,456,085 429,718 429,718 Service concession fees payable (current and noncurrent) 9,130,225 9,490,978 10,280,140 10,692,524 Long-term debts (current and noncurrent) 32,523,000 34,328,446 42,786,400 44,698,741 Customers’ guaranty deposits(d) 522,585 463,276 494,453 408,110 LTIP payable(d) 133,009 133,009 – – Financial guarantee obligation(d) 65,413 122,098 65,569 108,162 Total financial liabilities P=56,584,717 P=59,420,741 P=59,873,771 P=62,154,746 (a)Included in “Investments in associates and interest in joint ventures” account in the consolidated balance sheet. (b)Included in “Other current assets” account in the consolidated balance sheets. (c)Included in “Other noncurrent assets” account in the consolidated balance sheets. (d)Included in “Other long-term liabilities” account in the consolidated balance sheets.

The fair value of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate such value:

Cash and Cash Equivalents. Due to the short-term nature of transactions, the fair value of cash and cash equivalents approximate the carrying amounts at end of reporting period.

Receivables, Sinking fund, Cash Deposits, and Accounts Payable and Other Current Liabilities. Carrying values approximate the fair values at balance sheet date due to the short-term nature of the transactions.

Due to/from Related Parties. Estimated fair value is based on the present value of all future cash flows discounted using the prevailing PDST-F rate of interest of a similar instrument.

Service Concession Fees Payable and Customers’ Guaranty Deposits. Estimated fair value is based on the discounted value of future cash flows using using the applicable rates for similar types of financial instruments.

Financial Guarantee Obligation. Estimated fair value is based on the discounted value of future cash flows using the prevailing peso interest rates that are specific to the tenor of the instruments’ cash flows ranging from 1.2% to 10.9% in 2010 and 4.1% to 11.3% in 2009.

AFS Financial Assets. Unquoted shares classified as AFS financial assets are carried at cost as there are no other reasonable basis for fair value. Investments in ROP bonds classified as AFS financial assets is carried at fair value based on its quoted market price (see Note 10).

Investment in Bonds. These pertain to quoted ROP treasury bonds which bear fixed interest rates ranging from 5.3% to 9.0%, payable quarterly, and with the following maturities:

Maturity Date 2009 July 31, 2011 P=50,000 September 24, 2012 300,000 July 31, 2013 50,600 P=400,600

Metro Pacific Investments Corporation 215 Investment in treasury bills amounting to P=4.0 million pertain to quoted zero-coupon ROP short-term securities with a yield of 4.13% per annum maturing on June 2, 2010.

The fair values are based on the quoted market prices of the financial instruments as of December 31, 2009.

Miscellaneous Deposits and Other Financial Assets. Estimated fair value is based on the discounted value of future cash flows using the prevailing peso interest rates that are specific to the tenor of the instruments’ cash flows at end of each reporting period.

Long-term Debt. For both fixed rate and floating rate (repriceable every six months) U.S. Dollar-denominated debts and peso- denominated fixed rate corporate notes, estimated fair value is based on the discounted value of future cash flows using the prevailing credit adjusted US risk-free rates and prevailing Philippine risk free rates ranging from 1.3% to 6.1% and 0.61% to 6.1% in 2010 and 2009, respectively.

Derivative Assets and Liabilities. The fair values of interest rate swaps and cross currency swaps are estimated based on the net present value of estimated future cash flows using US and Philippine risk free rates ranging from 0.2% to 4.0% in 2010 and 1.7% to 2.2% in 2009. The derivative asset from the conversion option bifurcated from the preferred shares of Landco are carried at cost since the underlying common shares are unquoted and there is no reliable basis for its fair value.

Fair Value Hierarchy The Company 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: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and

Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

Below are the set of financial instruments carried at fair value and their classification in the fair value hierarchy as of December 31, 2010 and 2009:

December 31, 2010 Level 1 Level 2 Level 3 (In Thousands) Financial Assets Financial Assets at FVPL - Derivative assets P=34,615 P=– P=34,615 P=– AFS financial assets - Investment in bonds 424,093 424,093 – – 458,708 424,093 34,615 –

Financial Liabilities Derivative liabilities accounted as accounting hedges P=211,912 P=– P=211,912 P=–

December 31, 2009 Level 1 Level 2 Level 3 Financial Assets Financial Assets at FVPL - Derivative assets P=31,911 P=– P=31,911 P=– Derivative assets designated as accounting hedges 7,301 – 7,301 – 39,212 – 39,212 –

Financial Liabilities Derivative liabilities accounted as accounting hedges P=44,467 P=– P=44,467 P=–

During the year ended December 31, 2010 and 2009, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements.

216 2010 Annual Report Derivative Financial Instruments As of December 31, 2010 and 2009, the Company has freestanding derivatives used to hedge foreign exchange and interest rate risks on its long-term loans. In 2010, the Company bifurcated an embedded derivative from its investment in preferred shares of another entity.

Embedded Derivative. As discussed in Note 6, the Company bifurcated the conversion option in its investment in Landco’s preferred shares which are classified as liability instrument. The embedded derivative gives the Company the option to convert the preferred shares into common shares of Landco at a conversion price of P=156.27 subject to the occurrence of certain contingent events.

At initial recognition, the Company assigned a value amounting to P=31.7 million to the conversion option. This amount is the residual after deducting from the value of the hybrid instrument the fair value of the host instrument (preferred shares without any embedded derivative) calculated as the present value of all future cash flows from the preferred shares discounted using credit adjusted interest rates ranging from 8.5% to 11.8%.

The conversion option is carried at cost in the consolidated balance sheet since the underlying common shares of Landco are unquoted and there is no reliable basis for its fair value.

Freestanding Derivatives. In 2010 and 2009, MNTC entered into cross currency swap and interest rate swap transactions to hedge its foreign exchange and interest rate exposures on the following loans:

Outstanding Balance as of December 31, December 31, Loan Facility Interest Rate 2010 2009 (In Thousands) ADB-CFS A LIBOR + 2.75% $7,438 $9,563 ADB-CFS B LIBOR + 2.75% 1,312 1,687 USD Bank Facility LIBOR + 3.00% 14,022 18,028 COFACE 6.13% 6,541 8,409 EFIC 8.03% 6,562 8,438 $35,875 $46,125

ADB Direct PHIREF + 4.66% P=380,520 P=489,240

The following table provides information about MNTC’s outstanding derivative financial instruments as of December 31, 2010 and 2009 and their related fair values:

2010 2009 Asset Liability Asset Liability (In Thousands) Cross Currency Swaps to Hedge ADB-CFS A P=– (P=41,094) P=– (P=3,493) ADB-CFS B – (9,030) – (2,968) COFACE 2,902 – 27,223 – EFIC – (34,976) – (7,109) USD Bank Facility – (96,612) – (30,897) 2,902 (181,712) 27,223 (44,467) Interest Rate Swaps to Hedge ADB Direct – (17,200) 7,301 – COFACE – (13,000) 4,688 – – (30,200) 11,989 – P=2,902 (P=211,912) P=39,212 (P=44,467)

On December 7, 2010, an irrevocable prepayment notice was issued by MNTC to prepay in full the hedged loans on Janury 14, 2011. Subsequently, on December 13, 2010, MNTC issued a notice of prepayment to the hedging counterparty indicating its intent to preterminate the cross currency swap and interest rate swap transactions with the counterparty on January 14, 2011, the same date as the prepayment of the loans. The cancellation proceeded in accordance with the notice.

Derivatives Accounted for as Non-hedge Transactions. On July 1, 2008, MNTC entered into a cross currency swap to hedge its fair value exposure on the COFACE covered loan due to movements in foreign exchange and interest rates. Under the cross currency swap, MNTC will receive US$11.2 million in installments of US$0.9 million every six months starting December 15, 2008 until June 16, 2014 plus semi- annual interest at a fixed rate of 6.13% per annum on the outstanding U.S. dollar balance, and pay P=504.6 million, payable in equal semi- annual installments of P=42.0 million every six months starting December 15, 2008 until June 16, 2014, and semi-annual interest at six- months Philippine Reference Rates (PHIREF) plus 2.75% per annum on the outstanding peso balance. As of December 31, 2010 and 2009, the outstanding notional amount of the swap amounted to US$6.5 million and US$8.4 million, respectively.

Metro Pacific Investments Corporation 217 On February 26, 2009, MNTC entered into an interest rate swap where MNTC receives semi-annual interest based on six-months PHIREF plus 2.75% per annum spread and pays semi-annual fixed interest at 7.6% per annum, calculated based on an amortizing peso notional amount, starting June 15, 2009 until June 16, 2014. The outstanding notional amount of the swap as of December 31, 2010 and 2009 amounted to P=294.3 million and P=378.4 million, respectively.

The interest rate swap, together with the existing cross currency swap entered in 2008 for the COFACE loan, effectively transformed the dollar denominated floating rate loan into a fixed rate peso loan.

For the periods ended December 31, 2010 and 2009, the fair value changes of the interest rate swap and cross currency swap (both hedging the COFACE loan) amounted to P=42.0 million loss and P=19.2 million loss, respectively. The loss and gain amounts were recognized as part of “Other expense” account and “Other income” account, respectively, in the consolidated statements of income (see Note 29).

Derivatives Accounted for Under Cash Flow Hedge Accounting. On September 23, 2008 and October 3, 2008, MNTC entered into cross currency swap transactions with Mizuho to hedge the cash flow variability on the ADB loans and USD Bank facility due to movements in foreign exchange and interest rates. In 2009, additional derivative transactions were entered to hedge the cash flow variability on the EFIC due to movements in foreign exchange rates and ADB Direct Loans due to movement in interest rates.

ADB-CFS A Under the cross currency swap, MNTC will receive US$12.8 million in installments of US$1.1 million every six months starting December 15, 2008 until June 16, 2014 plus semi-annual interest at a rate of 6-month LIBOR plus 2.75% per annum spread on the outstanding U.S. Dollar balance, and pay P=590.7 million, payable in equal semi-annual installments of P=49.2 million every six months starting December 15, 2008 until June 16, 2014, and semi-annual interest at fixed rate of 8.3% per annum on the outstanding peso balance. As of December 31, 2010 and 2009, the outstanding notional amount of the swap amounted to $7.4 million and $9.6 million, respectively.

ADB-CFS B Under the cross currency swap, MNTC will receive US$2.2 million in installments of US$0.2 million every six months starting December 15, 2008 until June 16, 2014 plus semi-annual interest at a rate of 6-month LIBOR plus 2.75% per annum spread on the outstanding U.S. Dollar balance, and pay P=105.9 million, payable in equal semi-annual installments of P=8.8 million every six months starting December 15, 2008 until June 16, 2014, and semi-annual interest at fixed rate of 8.9% per annum on the outstanding peso balance. As of December 31, 2010 and 2009, the outstanding notional amount of the swap amounted to $1.3 million and $1.7 million, respectively.

USD Bank Facility Under the cross currency swap, MNTC will receive US$24.0 million in installments of US$2.0 million every six months starting December 15, 2008 until June 16, 2014 plus semi-annual interest at a rate of 6-months LIBOR plus 3.0% per annum spread on the outstanding U.S. Dollar balance, and pay P=1,131.0 million, payable in equal semi-annual installments of P=94.2 million every six months starting December 15, 2008 until June 16, 2014, and semi-annual interest at fixed rate of 9.1% per annum on the outstanding peso balance. As of December 31, 2010 and 2009, the outstanding notional amount of the swap amounted to $14.0 million and $18.0 million, respectively.

EFIC MNTC entered into a cross currency swap to hedge its cash flow variability on the EFIC loan due to movements in foreign exchange rates effective January 5, 2009. Under the cross currency swap, MNTC will receive US$10.3 million in installments of US$0.9 million every six months starting June 15, 2009 until June 16, 2014, plus semi-annual fixed interest of 8.03% per annum based on the amortizing US dollar notional amount, and pay P=498.0 million, payable in equal semi-annual installments of P=44.5 million every six months starting June 15, 2009 until June 16, 2014, plus semi-annual fixed interest at 11.5% per annum on the amortizing peso notional amount. The cross currency swap effectively transformed the fixed rate US dollar loan into a fixed rate peso denominated loan. As of December 31, 2010 and 2009, the outstanding notional amount of the swap amounted to US$6.6 million and US$8.4 million, respectively.

ADB Direct On April 1, 2009, MNTC entered into a pay-fixed, receive-floating interest rate swap contract to hedge the variability of cash flows pertaining to the floating rate ADB Direct Loan. Under the swap, MNTC will receive semi-annual interest equal to 6-month PHIREF plus 4.66% per annum spread and pay semi-annual fixed interest of 9.4% per annum, based on the amortizing principal balance of the ADB Direct Loan, starting from June 15, 2009 until June 16, 2014. The interest rate swap effectively fixed the floating rate of the said loan over the duration of the agreement at 9.4% per annum. As of December 31, 2010 and 2009 the outstanding notional amount of the interest rate swap amounted to P=380.5 million and P=489.2 million, respectively.

Under the cash flow hedge, the effective portion of the change in fair values of the designated hedges are recognized directly in equity and recycled in earnings in the same periods during which the hedged transaction affects earnings.

As a result of MNTC issuing a notice to preterminate the cross currency swaps and interest rate swaps, it discontinued applying hedge accounting on those derivatives accounted for under cash flow hedge accounting as the hedges no longer meet prospective effectiveness. Hence, fair value changes of the derivatives for the last quarter of 2010 were taken to the consolidated statement of income.

218 2010 Annual Report Hedge Effectiveness of Cash Flow Hedges. Movements of the Company’s cumulative translation adjustments on cash flow hedges for the years ended December 31, 2010 and 2009 are as follows:

2010 2009 (In Thousands) Balance at beginning of year (P=22,676) (P=52,069) Changes in fair value of cash flow hedges (162,431) (92,696) Transferred to consolidated statement of income(a) 181,630 122,089 (3,477) (22,676) Tax effects of items taken directly to equity 1,043 6,803 (2,434) (15,873) Less share of non-controlling interests 801 5,223 Balance at end of year (P=1,633) (P=10,650) (a)In 2010,(P=45.8) million,(P=206.2) million and P=70.4 million are included in “Interest expense”, ”Mark-to-market gain/(loss)” and“Foreign exchange gain (loss)” account, respectively. In 2009, (P=39.7)million and (P=82.4) million are included in “Foreign exchange gain (loss)” and “Interest expense” account, respectively.

In 2010 and 2009, the ineffective portion of the changes in fair value of the cash flow hedges is not material.

Fair Value Changes on Derivatives. The net changes in the fair values of all derivative instruments for the years ended December 31, 2010 and 2009 follow:

2010 2009 (In Thousands) Balance at beginning of year (P=5,255) P=23,181 Embedded derivative bifurcated during the year 31,713 – Net changes in fair values of derivatives: Designated as accounting hedges (162,431) (92,696) Not designated as accounting hedges(a) (142,987) (19,219) (278,960) (88,734) Fair value of settled instruments 101,663 83,479 Balance at end of year (P=177,297) (P=5,255) (a)In 2010, (P=86.8) million and (P=56.2) million are included under “Mark-to-market gain (loss)” and “Interest expense” account, respectively. In 2009, the amount is included under “Mark-to-market gain (loss)” account.

2010 2009 (In Thousands) Presented as: Derivative Assets - current P=2,902 P=– Derivative Assets - noncurrent 31,713 39,212 Derivative Liabilities - current 211,912 – Derivative Liabilities - noncurrent – 44,467 (P=177,297) (P=5,255)

39. Events after the Reporting Period

Cash Dividends On March 3, 2011, the BOD approved the declaration of cash dividends of P=0.015 per common share in favor of the Parent Company’s stockholders of record as of the record date of March 17, 2011, with payment date of April 12, 2011.

On the same date, the BOD also approved the declaration of cash dividends of 10.0% based on the par value of Class A Preferred Shares or the amount of P=3.0 million in favor of MPHI, the sole holder of Class A Preferred Shares.

Metro Pacific Investments Corporation 219 40. Supplemental Cash Flow Information

2010 2009 2008 (In Thousands) Noncash investing and financing activities: Transfer of investment in Meralco to Beacon Electric (see Note 12) P=24,540,310 P=– P=– Subscription of Beacon Electric shares (see Note 12) (24,540,310) – – Additions to property and equipment through recognition of a contingent liability (see Note 4) 179,488 – – Acquision of Meralco shares through issuance of MPIC shares (see Notes 12, 21 and 22) – 14,285,449 – Additions to service concession assets and concession fees payable resulting from extension of the concession term for Maynilad (see Notes 13 and 18) – 3,772,109 – Conversion of advances from MPHI to equity (see Notes 21 and 22) – 2,066,389 – Increase in AFS financial asset from an exchange of note receivable (see Notes 6 and 10) – 236,262 – Acquisition of additional interest in DMWC through conversion of a convertible Note (see Note 4) – – 7,575,700 Conversion of MPHI loan to equity (see Notes 19 and 22) – – 2,029,853 Acquisition of additional interest in Maynilad through issuance of shares (see Notes 4 and 22) – – 2,029,200

220 2010 Annual Report Corporate Information

HEADQUARTERS: 10th floor, Makati General Office Building Legazpi corner Dela Rosa Streets Legazpi Village, 0721 Makati City Philippines Telephone (632) 888-0888 Facsimile (632) 888-0813 Email [email protected] Website http://www.mpic.com.ph

SHARE LISTING INFORMATION: Metro Pacific Investments Corporation is traded in the Philippine Stock Exchange under the ticker symbol “MPI” Listing date: 15 December 2006

AUDITORS: SyCip Gorres Velayo & Co. 6769 Ayala Avenue 1226 Makati City Philippines

PRINCIPAL BANKERS: Banco de Oro Universal Bank Metropolitan Bank and Trust Company Philippine National Bank Union Bank of the Philippines

LEGAL ADVISERS: Picazo, Buyco, Tan, Fider & Santos 19th floor, Liberty Center 104 H.V. De la Costa Street, Legazpi Village Makati City Telephone (632) 888-0999 Facsimile (632) 888-1011

Sycip Salazar Hernandez & Gatmaitan SSHG Law Center 105 Paseo de Roxas Makati City, 1226 Metro Manila Telephone (632) 817-9811 Facsimile (632) 818-7562

STOCK TRANSFER AGENT: Stock Transfer Services, Inc. 8th floor, Phinma Plaza Building 39 Plaza Drive, Rockwell Center Makati City Telephone (632) 898-7555 Facsimile (632) 898-7590