Sustaining Energy 2019 Meralco Annual Report 2019 Reports Meralco Annual Report Meralco Sustainability Report One Meralco Foundation Annual Report Our Cover With the backdrop of a sky at dusk, mother and child admire the view of tree-lined residential houses Meralco is the largest private sector electric distribution utility in the set against a cityscape. Amid this urban growth, Meralco in 2019 embeds sustainability in its business Philippines. It covers 36 cities and 75 municipalities, with a franchise area strategy – with a promise of prosperity and of a planet worth admiring for generations to come. of 9,685 square kilometers. This coverage is just 3% of the land area of the Philippines, but accounts for 55% of the country’s electricity output. Celebrating 117 years of service in 2020, the Company is committed to its record of providing reliable and affordable energy. Our Reports Beginning 2019, Manila Electric Company (Meralco) is providing three annual reports: the first covers the distribution utility and its subsidiaries; the second is its sustainability report; and the third is that of its social development arm, One Meralco Foundation. Sustaining Energy 2019 Meralco Annual Report Sustaining Energy: Sustaining Energy shows Meralco’s transition to renewable energy to better support future generations, and executes a digital transformation to upgrade its systems and operations for greater efficiency and a better customer experience. Sustaining the Future 2019 Meralco Sustainability Report Sustaining the Future: Sustaining the Future maps out Meralco’s sustainability agenda, in the context of the United Nations Sustainable Development Goals. It details the focus on Power, Planet, People, and Prosperity in alignment with Meralco’s business strategy. Sustaining Communities 2019 One Meralco Foundation Annual Report Sustaining Communities: Sustaining Communities presents the accomplishments of One Meralco Foundation on its various community and social development programs on household and school electrification, energy education, environmental sustainability, and responsible citizenship. About this Report This Annual Report presents the accomplishments of the Manila Electric Company (Meralco) and its subsidiaries for 2019 with special emphasis on sustainability. The sustainability agenda has been incorporated into the Company’s core values, operations, workforce, and outreach programs. Focusing on the strategic areas of Power, Planet, People, and Prosperity, the report illustrates Meralco’s commitment to achieve corporate 2019 CONTENTS objectives while transforming operations, improving customer service, protecting the Annual Report environment, and empowering people and communities. 1 Who We Are 2 Contents 4 Financial and Operational Highlights 6 Message from the Chairman, the President and CEO 14 Performance Highlights 16 Business Review 36 Sustainability 42 Corporate Social Responsibility 48 Corporate Governance 72 Board of Directors 78 Corporate Officers 82 Subsidiaries 86 Report of The Audit Committee 88 Statement of Management’s Responsibility for Consolidated Financial Statements 89 Independent Auditor’s Report 93 Consolidated Statements of Financial Position 94 Consolidated Statements of Income 95 Consolidated Statements of Comprehensive Income 96 Consolidated Statements of Changes in Equity 97 Consolidated Statements of Cash Flows 98 Notes to Consolidated Financial Statements 192 Glossary of Terms 194 ISO Certifications 195 Investor Information FINANCIAL AND OPERATIONAL HIGHLIGHTS Financial and Operational Highlights FINANCIAL INFORMATION 2015 2016 2017 2018 2019 (in Million PhP, Except Per Share Data) Revenues Sale of electricity 249,773 249,206 275,172 295,389 310,098 Sale of other services 8,626 7,975 7,384 9,065 8,217 PhP 318.3 B TOTAL 258,399 257,181 282,556 304,454 318,315 Total Revenues Purchased power 192,117 189,853 214,558 232,102 241,032 Operating expenses 24,336 24,935 25,567 25,885 27,195 Depreciation and amortization 6,910 7,312 7,520 7,827 8,730 Interest income, net of interest, and (322) (737) (658) (798) (1,662) financial charges 46,871 GWh 6.9 M Core net income 18,887 19,583 20,213 22,408 23,832 Energy Sales Customer Accounts Reported net income 19,098 19,176 20,384 23,017 23,285 EBITDA 31,124 34,049 34,474 37,165 40,977 Core earnings per share 16.76 17.37 17.93 19.88 21.15 Reported earnings per share 16.94 17.01 18.09 20.42 20.66 PhP 23.8 B Cash dividends declared per common share 15.25 25.08 18.23 13.38 16.06 Market price per share at end of year 320.00 265.00 328.60 380.00 317.00 Core Net Income Utility plant and others 124,913 128,814 133,874 139,846 151,441 Interest-bearing financial liabilities 30,308 40,347 40,256 40,016 41,253 PhP 41.0 B PhP 16.06 Cash Dividends OPERATING INFORMATION 2015 2016 2017 2018 EBITDA 2019 Per Common Share Customer Accounts (in Thousands) Residential 5,296 5,537 5,812 6,086 6,339 Commercial 474 486 500 514 528 Industrial 10 10 10 10 11 Streetlights 4 5 5 5 5 5.54% PhP 23.3 B TOTAL 5,784 6,038 6,327 6,615 6,883 System Loss Reported Net Income Energy Sales (in GWh) Residential 11,121 12,444 13,060 13,555 14,589 Commercial 14,654 15,867 16,597 17,463 18,483 Industrial 11,216 11,697 12,309 13,156 13,659 Streetlights 133 134 136 139 140 TOTAL 37,124 40,142 42,102 44,313 46,871 System Loss (in %) Meralco 6.47 6.35 5.91 5.67 5.54 Clark Electric 4.01 3.59 2.14 2.77 2.15 4 Sustaining Energy 2019 Annual Report 5 MESSAGE FROM THE CHAIRMAN, THE PRESIDENT AND CEO Sustaining Our Commitment To our fellow to Excellence shareholders Meralco’s leadership took a bold new path Sustainability to us means concrete page 30, 2019 Meralco in 2019, advancing the goal of sustainability, actions to: Sustainability and taking the enlightened view of presenting Report the full picture of doing business. This means • Ensure business resiliency Meralco will now report how it contributes to amid the new normal the community and impacts the environment, • Reduce emissions in the same frame as its financial performance. • Promote resource efficiency • Lead world-class waste This is why our 2019 annual report is management practices “Sustaining Energy.” The One Meralco • Power and sustain communities Foundation annual report is “Sustaining Communities,” and our very first sustainability For the distribution utility, 2019 “Sustaining report is “Sustaining the Future.” Energy” means transitioning to renewables, an imperative of our time. We are weaning Our strategic ambitions are now cast wider ourselves out of fossil fuels to renewable with the four (4) focus areas – Power, Planet, energy sources for a future for the People, Prosperity. generations to come. “Sustaining Energy” also means transforming our network into a smart grid, which is more reliable and effective in reducing the POWER frequency and duration of outages. A smart Providing energy for all, grid is at the center of Meralco’s digital always transformation, providing a better customer experience: consumption information is presented online, customers can get budget PLANET alerts, the progress of an outage report may Integrating environmental be tracked, and there are notifications on stewardship to protect and estimated time of restoration. preserve Mother Earth A smart grid also allows the two-way flow needed to accommodate renewable energy, PEOPLE and facilitates both the Energy Efficiency and Cultivating a culture of Conservation Act and the Retail Competition excellence, sustainability, and and Open Access (RCOA). inclusivity Many countries are well on their way in their smart grid journeys, and in cooperation with PROSPERITY our regulator and policy maker, we hope to Creating better lives for all get going faster. “Sustaining Energy” will take Meralco to new paths and we approach with optimism and determination. 6 Sustaining Energy 2019 Annual Report 7 MESSAGE FROM THE CHAIRMAN, THE PRESIDENT AND CEO Our CCNI reached PhP23.8 billion, Achieving a system loss rate 6% higher than the PhP22.4 billion significantly lower than the current 6% ↑ in 2018. Consolidated Reported Net regulatory cap translated to Income stood at PhP23.3 billion, cumulative savings to customers of marginally higher than 2018. Core PhP44.8 billion or an average savings Consolidated Core Net Income Earnings Per Share was PhP21.15 in of PhP0.11 per kWh since 2008. It 2019 while Reported Earnings Per has also enabled Meralco to return PhP 23.8 B Share was PhP20.66. PhP9.0 billion worth of pilferage 2019 recoveries to customers. EBITDA in 2019 rose to 10% to 2018 PhP41.0 billion from PhP37.2 billion Our 8.37 Customer Satisfaction 22.4 B in 2018. EBITDA margin was at 13% Index or CSI matches our all-time on consolidated revenues. high in 2017. Our customers are our reason for being, and we measure Capital Expenditures (CAPEX) customer satisfaction by segment 10% ↑ in 2019 reached PhP20.2 billion, from residential, small and medium Financial and 48% higher than 2018. Aimed enterprises, corporate customers, Operational Results at continuously providing the national government, and local EBITDA 6% ↑ best service, we aggressively government units. We use the implemented projects that enable feedback to refine our operations PhP 41.0 B 2019 was an excellent year, with Consolidated energy sales a more resilient distribution grid to deliver simple, fast, convenient 2019 sales volume and revenues, volume, inclusive of Clark Electric Energy Sales capable of meeting increasing service, and to develop programs consolidated core net income Distribution Corporation (Clark consumer demand, and ensuring and solutions that address our 2018 (CCNI), and operational results Electric), rose to its highest level 46,871 GWh safety and reliability in the customers’ evolving needs. 37.2 B reaching new highs.