Contents Business Mission and Credo 2 Corporate Governance 3 Corporate Directory 4 Financial Highlights 5 PART I - BUSINESSAND GENERAL INFORMATION Item 1 Business 6 Item 2 Properties 27 Item 3 Legal Proceedings 30 Item 4 Submission of Matters to a Vote of Security Holders 34 PART II -OPERATIONAL AND FINANCIAL INFORMATION Item 5 Market for Issuer's Common Equity and Related Stockholders Matters 35 Item 6 Management's Discussion and Analysis or Plan of Operation :38 Item 7 Financial Statements 52 Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 62 PART III - CONTROL AND COMPENSATION INFORMATION Item 9 Directors and Executive Officers of the Registrant 63 Item 10 Compensation of Directors and Executive officers 72 Item 11 Security Ownership of Certain Beneficial Owners and Management 73 Item 12 Certain Relationships and Related Transactions '74, PART IV - CORPORATE GOVERNANCE 74 PARTV - EXHIBITS AND SCHEDULES Item 13 a. Exhibits 76 b. Reports on SEC Form 17-C (Current Report) 76 SIGNATURES 79 STATEMENT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS 80 REPORT OF INDEPENDENT AUDITORS 81 CONSOLIDATED BALANCE SHEETS 83 CONSOLIDATED STATEMENTS OF INCOME 85 CONSOLIDATED STATEMENTS OF CASH FLOWS 87 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 89 INDEX TO FINANCIAL STATEMENTSAND SUPPLEMENTARY SCHEDULES 186 ANNEX A SUMMARY OF OWNERSHIP OF SHARES 192 Business Mission and Credo BUSINESS MISSION Our basic purpose is to create new wealth for our stakeholders. Our business will focus on vital needs for national development in the areas of energy, infrastructure, manufacturing, and supporting industries. In pursuing our objective, we will be guided by the following fundamental and imperishable values and principles: nationalism, entrepreneurship and innovation, teamwork, a strong work ethic, and corporate social responsibility. CREDO We believeintheFilipino'sabilitytoinnovate,toseizedevelopmental opportunitiesbornefromtherealneedsofdomesticand overseasmarkets. We affirm our partnership with the Filipino in their endeavor of ever pushing the social development frontiers beyond currently known limits. We share the Filipino's vision of spreading gainful employment to all who are willing to put their talents in the total betterment of the Filipino. ,_ 2 Corporate Governance First Philippine Holdings Corporation other directors themselves, have been made by the company to the (First Holdings) has instituted corporate Securitiesand Exchange Commission (SEC) governance as a working philosophy. The audit committee is itself chaired by and to the Philippine Stock Exchange for It has adopted a Manual on Corporate an independent director. Its duty, among the benefit of the investing public. Governance, then a Manual on Anti- others, isto ensure transparency and Money Laundering, and finally a Code of integrity in financial management. External The law requires a company to have only Corporate Conduct intended to serve as a and internal auditors assist in this work. two independent directors. First Holdings guide in dealing with stakeholders, has three. Their presence provides the First Holdings has an Internal Audit Group board with broad and impartial viewpoints, Indeed, First Holdings finds the philosophy (IAG) headed by a vice-president, with a thus allowing for deliberations. of corporate governance dovetailing with the manpower complement of eight senior commitment, articulated by the company's and junior audit personnel, all certified For corporate governance, a compliance founders and pursued to this day, of public accountants and mostly certified officer and assistant have been designated. "sound strategic business management internal auditors. The lAG reports to the These are concurrently corporate secretary to improve the economic and commercial board through the audit committee, and assistant corporate secretary. First prosperity of the corporation and enhance Holdings is ISO certified, and regulatory shareholder value." The lAG provides assurance and consulting compliance is one of the processes that are functions for First Holdings and its subject to periodic audit under this system. This philosophy finds serious practical subsidiaries in internal control, corporate adherence in the very composition of First governance, and risk management. It Among the current governance compliance Holdings' board, which sits persons of observes faithfully the International steps taken by the company are: (1) the proven competence and integrity. Standards for Professional Practice of annual certification to the SEC regarding Internal Auditing (ISPPIA). compliance by the corporation, its The nomination committee itself initially directors, officers, and employees with the passes upon prospects for new board Since the company focuses on finding leading practices and principles on good members, demanding among other appropriate financing and business governance as embodied in the company's qualifications the capability to "bring prospects, First Holdings has also manual, and (2) the secretary's certification prudent judgment to bear on the decision- constituted a finance and investment as to attendance and sworn declarations making process," committee, whose job, among others, by all independent directors as to their is to review investment objectives and qualifications as required under the SEC The philosophy is passed on down the strategies, fund raising, major capital Notice dated October 20, 2006. line. For instance, a compensation and expenditures, investment opportunities, remuneration committee oversees a and divestments. First Holdings keeps an abiding rewards system, closely observing a commitment to a type of governance that policy intended to promote a culture that For further transparency, the company is sound, transparent, responsive, and supports enterprise and innovation, has allowed one board observer at board equipped with a system of checks and meetings. Previously, there were two balances. The chairman's own remuneration observing as creditors' representatives. is subject to review by a committee In any event, complete, prompt and composed of the vice-chairman and the timely disclosuresof material information Corporate Directory iNVESTOR RELATIONS 4th Floor Benpres Building Exchange Road corner Meralco Avenue Ortigas Center, Pasig City, Philippines 1605 T (632) 631-2435, 910-3086 F (632) 631-4089 Email [email protected] LEGAL COUNSEL STOCKHOLDER SERVICESAND ASSISTANCE Quiason, Makalintal, Barot, Tortes & Ibarra Law Firm Mr. Antonio R. Galvez 21st Floor Robinsons Equitable-PCI Tower Head of Operations ADB Avenue corner Poveda Road SecuritiesTransfer Services, Inc. Ortigas Center, Pasig City, Philippines 4th Floor Benpres Building T (632) 631-0981 to 85 Exchange Road corner Meralco Avenue F (632) 631-3847 Ortigas Center, Pasig City, Philippines 1605 PO. Box No. 13951 Puno & Puno Law Offices T (632) 449-6149 to 69 12th Floor East Tower F (632) 631-7148 Philippine Stock Exchange Centre Email [email protected] Exchange Road, Pasig City, Philippines T (632) 631-1261 to 64 CORPORATE OFFICE F (632) 631-2517 First Philippine Holdings Corporation 4th Floor Benpres Building EXTERNAL AUDITOR Exchange Road corner Meralco Avenue Sycip, Gorres, Velayo & Co Ortigas Center, Pasig City, Philippines 1600 SGV Building T (632) 631-8024 6760 Ayala Avenue F (632) 631-4089 1226 Makati City, Philippines Website www.fphc.com T (632) 891-0307 Email [email protected] F (632) 819-0872 Schedule of Annual Stockholders' Meeting Every 3raMonday of May _::,_ zl First Philippine Holdings Corporation And Subsidiaries Financial Highlights December 31 2006 2005 OPERATING RESULTS(In million Php) Revenues Sale of electricity 51,176 45,485 Toll operations 5,705 5,104 Contracts and services 1,326 1,402 Sale of merchandise 1,184 861 Sale of real estate 181 407 Equity in net earnings of associates 4,208 963 Gain on sale of investment in shares of stock 535 594 Finance costs (7,338) (5,455) Finance income 3,281 1,086 Net income for the year 15,468 9,705 Net income attributable to equity holders of the parent 8,699 4,912 FINANCIAL POSITION (In million Php) Total Assets 135,476 125,635 Investments and deposits 17 758 14,158 Long-term debt (including current portion) 42 201 52,261 Total Liabilities 71 378 76,173 Total equity attributable to equity holders of the parent 35 879 29,334 Minority Interest 28 219 20,128 Total Equity 64 098 49,462 FINANCIAL RATIOS Return on equity 3 24% 17% Dividend payout ratio (%)4 23% 31% Current Ratio (times) _ 2.35 2.09 Long-term debt to equity (times)6 1.18 1.78 PERSHARE DATA (In Php) Earnings per share7 Basic 15.147 8.798 Diluted 14.984 8.651 Book value per shares 61.80 51.39 Priceearnings ratio _ 4.159 5.569 Market price 63.00 49.00 Cash dividend paid per share 2.00 2,00 Number of shares issued and subscribed 580,565,599 570,855,717 Weighted average number of shares Basic 574,293,127 558,293,115 Diluted 580,543,212 567,769,724 Number of stockholders 13,473 13,789 1 Theresultsfor the yearsended December31,2006 and 2005 are set out on the consolidatedfinancial statements. 2 Thebalancesheetsas of December31,2006 and 2005 areset outon the consolidatedfinancialstatements. 3 Returnonequity= netincomefor theyearattributabletoequityholdersof the parent/totalequityattributableto equityholdersofthe parent. 4 Dividendpayout ratio= dividendspaid/prioryear'snet incomeattributableto equity holdersof the parent. Currentratio= current assets/currentliabilities 6 Long-termdebt to equity = long-term debt (includingcurrentportion)/total