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Unformatted text preview: 2018 ANNUAL REPORT MY ENERGY PARTNER. MY MERALCO. MERALCO 2018 ANNUAL REPORT A CONTENTS 01 Who We Are 02 Financial and Operating Highlights 04 Message from the Chairman, the President and CEO 12 Business Review 24 Corporate Social Responsibility 30 Corporate Governance 56 Board of Directors 60 Corporate Officers and Advisors 64 Subsidiaries 66 Report of the Audit Committee 68 Statement of Management’s Responsibility for Consolidated Financial Statements WHO WE ARE 69 Independent Auditor’s Report 73 Consolidated Statements of Financial Position 74 Consolidated Statements of Income 75 Consolidated Statements of Comprehensive Income 76 Consolidated Statements of Changes in Equity 77 Consolidated Statements of Cash Flows 78 Notes to Consolidated Financial Statements 166 Glossary of Terms 172 Awards and Recognitions 173 ISO Certifications 174 Investor Information The largest private sector electric distribution utility company in the Philippines covering 36 cities and 75 municipalities Franchise area of over 9,685 km2 which includes the country’s industrial, commercial, and population centers Market capitalization of PhP428.3 billion (US$8.1 billion) at end-2018. Celebrates 116 years in service in 2019 Determined to serve, today and for the future OUR COVER Excellence in the work that we do and in the services that we offer remains our commitment as your energy partner. We shall continue to reach for excellence with a long-held corporate value of Malasakit, which has guided generations of the Meralco workforce to mold the Company into what it has become today. B MY ENERGY PARTNER. MY MERALCO. MERALCO 2018 ANNUAL REPORT 1 FINANCIAL AND OPERATING HIGHLIGHTS 6.6M 2014 2015 2016 2017 2018 FINANCIAL INFORMATION (in Million Pesos, Except Per Share Data) Revenues Sale of electricity 261,740 249,773 249,206 275,172 295,389 Sale of other services 4,596 8,626 7,975 7,384 9,065 266,336 258,399 257,181 282,556 304,454 Costs and Expenses Purchased power 203,242 192,117 189,853 214,558 Operating expenses 20,187 24,336 24,935 25,567 Depreciation and amortization 6,093 6,910 7,312 7,520 Interest and other financial charges (income) - net 669 (322) (737) (658) Others 9,677 10,482 9,125 7,707 239,868 233,523 230,488 254,694 EBITDA Reported net income Core net income Core earnings per share Cash dividends declared per common share Market price per share at end of year Market capitalization Utility plant and others Interest-bearing long-term financial liabilities Notes payable Equity attributable to equity holders of parent Capital expenditures 32,927 18,053 18,128 16.08 12.36 256.00 288,537 120,830 29,642 400 79,154 12,582 31,124 19,098 18,887 16.76 15.25 320.00 360,672 124,913 29,265 1,043 80,276 11,303 34,049 19,176 19,583 17.37 25.08 265.00 298,681 128,814 28,872 11,475 74,417 11,584 34,474 20,384 20,213 17.93 18.23 328.60 370,365 133,874 26,670 13,586 73,610 12,127 232,102 25,885 7,827 (798) 8,893 273,909 37,165 23,017 22,408 19.88 13.38 380.00 428,298 139,846 26,588 13,428 82,042 13,669 CUSTOMER ACCOUNTS PhP37.2B EBITDA PhP22.4B CORE NET INCOME 5.67% MERALCO SYSTEM LOSS PhP23.0B REPORTED NET INCOME PhP13.38 CASH DIVIDENDS DECLARED PER COMMON SHARE 2.77% CEDC SYSTEM LOSS OPERATING INFORMATION Customer Accounts (in Thousands) Residential 5,097 5,296 5,537 5,812 6,086 Commercial 464 474 486 500 514 Industrial 10 10 10 10 10 Streetlights 4 4 5 5 5 5,575 5,784 6,038 6,327 6,615 Energy Sales (in GWh) Residential 10,364 11,121 12,444 13,060 13,555 Commercial 13,814 14,654 15,867 16,597 17,463 Industrial 10,850 11,216 11,697 12,309 13,156 Streetlights 132 133 134 136 139 35,160 37,124 40,142 42,102 44,313 System Loss (in %) Meralco 6.49 6.47 6.35 5.91 5.67 CEDC 4.37 4.01 3.59 2.14 2.77 2 MY ENERGY PARTNER. MY MERALCO. PhP13.7B CAPEX 44,313GWh ENERGY SALES PhP304.5B TOTAL REVENUES MERALCO 2018 ANNUAL REPORT 3 MESSAGE MESSAGE FROM THE CHAIRMAN, THE PRESIDENT AND CEO Fulfilling Our Commitment to Excellence To our fellow shareholders, We are pleased to report that 2018 once again proved Meralco’s steadfast commitment to excellence. Our sales, operating, and financial results showed another year of record performance, under business conditions which saw slightly lower growth in Gross Domestic Product (GDP) at 6.2%, higher inflation and interest rates, high coal, gas, and fuel prices, and a weaker peso towards the latter part of 2018, and cooler temperature felt during the first four (4) months of the year. C hallenges notwithstanding, we pursued continuous improvement and outperformed previous years’ results, buoyed by a Philippine economy still on a good growth trajectory and a mired yet resilient global economy amid socio-political uncertainties. Consolidated energy sales volume rose to its highest level at 44,313 GWh or 5% more than the 42,102 GWh recorded in 2017. The fast-growing north and south areas of the franchise helped our strong energy sales, where rapidly-expanding Philippine Offshore Gaming Operators (POGO) and Business Process Outsourcing (BPO) services are based. Meralco’s customer base grew by 5% over 2017 to 6,614,814 customer accounts. Peak demand in the Meralco franchise area went up by 6% over 2017 to 7,399 MW. Our Consolidated Core Net Income (CCNI) was at PhP22.4 billion, 11% higher than the PhP20.2 billion in 2017. Consolidated Reported Net Income stood at PhP23.0 billion or 13% better than the PhP20.4 billion in 2017. Core Earnings Per Share reached PhP19.88 in 2018, while Reported Earnings Per Share was at PhP20.42. Consolidated Core EBITDA in 2018 rose 8% to PhP37.4 billion from PhP34.6 billion in 2017. Core EBITDA margin was stable at 12% on consolidated revenues. 4 MY ENERGY PARTNER. MY MERALCO. With a growing customer base and load growth, the persistent demand for adequate, reliable, and least-cost power supply, and the requirement for network hardening and resiliency, public safety, enhanced customer experience and related technology and innovation, we continue to reinvest heavily in capital expenditures (CAPEX). Consolidated CAPEX amounted to PhP13.7 billion in 2018 which was 13% higher over 2017. The amount included the partial approval by the Energy Regulatory Commission (ERC) of PhP24.2 billion out of an almost PhP73.0 billion that Meralco had filed for the entire 4th Regulatory Period (RP), which covers July 1, 2015 to June 30, 2019. While awaiting the ERC approval, we also manifested CAPEX aggregating almost PhP10.0 billion for projects needing immediate implementation. Our CAPEX also included facilities and lines to support embedded renewable energy (RE) plants, with total capacity at 180.3 MW that is 6% higher compared with 2017. Meralco’s system loss rate extended its record-breaking performance for the eighth consecutive year at a 116-year all-time low of 5.67%. The relentless drive to invest the necessary capital expenditures to help reduce technical loss, and to work with law enforcement agencies and local barangays to minimize pilferage of electricity enabled the Company to continuously lower system loss to a level outperforming “We pursued continuous improvement and outperformed previous years’ results.” MERALCO 2018 ANNUAL REPORT 5 the much tighter regulatory cap of 7.5% (6.5% distribution feeder cap for private Distribution Utilities plus 1% substation and subtransmission loss) that took effect in June 2018. Achieving a level lower than the regulatory cap has benefited our customers, who have realized cumulative savings of PhP39.6 billion or an average savings of PhP0.11 per kWh since 2008. Improvements in our system loss rate and other operating performance metrics were also made possible by continuous sizeable investment in various major CAPEX projects to upgrade and expand our electric system infrastructure, such as sub transmission lines and substations. The projects effectively increased power transformer capacity by 385 MVA and circuit length by 136.7 km. Reflecting the positive outcomes in operating and financial performance is our strong balance sheet. Cash and Cash equivalents as at year-end was PhP36.5 billion, excluding investment in debt securities at amortized cost and fair value through other comprehensive income financial assets and other cash placements, that are classified under other noncurrent assets and other current assets according to their maturities. The total interest-bearing debt is slightly lower at PhP40.1 billion at end-2018, of which PhP15.5 billion is due to mature within 2019. Two (2) of our non-electric subsidiaries, CIS Bayad Center, Inc. (Bayad Center) and Radius Telecoms, Inc. (Radius), provided meaningful additions to Meralco’s CCNI. “The positive outcomes for 2018 enabled excellent returns to about 43,000 Meralco shareholders.” 6 MY ENERGY PARTNER. MY MERALCO. CIS Bayad Center, 95%-owned by Meralco’s wholly-owned subsidiary Corporate Information Solutions, Inc. (CIS), strengthened its biller base to 290 from 269. With a wide range of strategic biller-partners including utilities, government agencies, credit companies, and lending institutions, among others, Bayad Center’s bills payment facility has now adopted a digital platform. It ended 2018 with 33,280 customer payment touchpoints consisting of more than 600 co-owned and branded stores, 678 automated payment machines (APM), over 2,000 retail machines deployed in neighborhood establishments, and over 29,000 corporate partners. Bayad Center’s consolidated revenues stood at PhP1.7 billion in 2018, or an 8% increase over 2017. LETTER FROM THE PRESIDENT AND CEO To our Shareholders, Kindly allow me, as I relinquish my post at the end of Meralco’s AGM, to express my sincerest gratitude to our most respected Chairman, Mr. Manuel V. Pangilinan, our Board of Directors, my colleagues in Meralco and Subsidiaries, and to you, our Shareholders, for the immense privilege and pleasure of leading this truly vital and strategic institution. Our Company has surmounted formidable challenges for over 116 years, and has emerged stronger than ever, creating great value for our customers, our Shareholders, and our own people. This success, we owe to all of you for your trust and confidence. With your continued support, I have absolute confidence that your Company, your Meralco will scale even greater heights. Maraming Salamat po. Radius, our operating telecommunications arm, recorded revenues of PhP1.3 billion, which is 20% higher than in 2017. The increase was attributed mainly to an expanded customer base with the completed installation and bandwidth upgrade of additional fiber circuits. The positive outcomes for 2018 enabled excellent returns to about 43,000 Meralco shareholders. Total cash dividends paid from 2018 CCNI amounted to PhP15.905 per share, or an 80% payout. Meralco share price went up 16%, closing 2018 at PhP380.00 per share over 2017’s year-closing price of PhP328.60 per share. For 2018, cash dividend yield reckoned on the 2018 yearend share price was at 4%. Meralco ended the year with a market capitalization of PhP428.3 billion. MERALCO 2018 ANNUAL REPORT 7 THE 2018 PHILIPPINE ECONOMY GROSS DOMESTIC PRODUCT (GDP) Economic growth was supported by: GDP GROWTH 6.2% There are more details concerning our operating performance in the Business Review section of this Annual Report. Sector growth fueled by sustained strong performance of: Stable domestic demand Agriculture Rising public and private sector investments Manufacturing Our digital journey further gained speed in 2018 with the Meralco Online and the Meralco Mobile app which significantly enhanced online payments, facilitated customer applications, accelerated energization, and provided convenience for paperless bill information and settlements. Trade GROWTH RATES BY EXPENDITURE Household Consumption Government Consumption Capital Formation 5.6% 13.0% 13.2% Exports Imports 13.4% 16.0% GROWTH RATES BY SECTOR Industrial Services Agriculture, Forestry and Fishing 6.7% 6.8% 0.9% 58% Services SECTOR SHARE IN 2018 34% Industrial FOREIGN EXCHANGE* INFLATION Average USD to PhP rates Inflation rates (2012 = 100) 2018 8 8 2.9% 2017 2017 MY ENERGY PARTNER. MY MERALCO. MY ENERGY PARTNER. MY MERALCO. Forestry and Fishing 2018 50.40 *Data from Bangko Sentral ng Pilipinas 8% Agriculture, 5.2% 52.66 Embracing Change and Disruptions We recognize the continuous, evolving needs and aspirations of our customers, especially amidst rapidly-advancing technology and a very competitive industry. Retail Competition and Open Access (RCOA) for contestable customers remains very challenging and intensely price-competitive. At year-end 2018, there remained 30 licensed Retail Electricity Supply (RES) and 25 authorized Local RES providing electricity to voluntary contestable customers with demand of at least 750 KW in Luzon and Visayas. The number of qualified contestable customers in Luzon and Visayas stood at 1,876 at end-2018, of which 1,203 had sealed retail supply contracts. Energy security by way of available, reliable, and least-cost power supply remains a compelling concern. Our whollyowned subsidiary, MERALCO PowerGen Corporation (MGen), has engaged in joint ventures to develop new power plants and ensure a highly-reliable and cost-efficient power supply to customers in the Meralco franchise area and in the Luzon Grid. San Buenaventura Power Limited (SBPL) is a joint venture between MGen and New Growth B.V., a subsidiary of Electricity Generating Company Limited of Thailand (EGCO). The 455 MW (net) supercritical coal-fired power plant is currently under construction. The Engineering, Procurement and Construction (EPC) contract is 98.15% completed to date, which augurs well for the target commercial operations by the third quarter of 2019. This will mark the re-entry of Meralco into power generation, enabling the Company to best serve the interest of its customers through better assurance and security of adequate, reliable, least-cost power by not being an otherwise pure price and supply taker. This re-entry follows an absence of well over 40 years following the transfer of all of Meralco’s power generating plants in the mid-1970s to the National Power Corporation during the period of martial law. Up to such transfer, Meralco had been the largest power generator in the Luzon Grid. The other priority power plant, Atimonan One Energy, Inc. (A1E) located in Atimonan, Quezon, will be the country’s first ultrasupercritical coal-fired power plant with a gross capacity of 2x600 MW. A1E was granted a Certificate of Energy Project of National Significance by the DoE and is a registered Pioneer Project by the Board of Investments. As with all PSAs, including SBPL’s, it will need to comply with and secure the requisite regulatory approval. Cognizant of the heightened focus on renewable energy, MGen is in discussion with potential partners to develop a portfolio of utility-scale solar generation projects for the Luzon Grid and Meralco customers, with competitive tariffs. MGen is also looking at co-developing large scale hybrid solar and storage projects outside the Meralco franchise area. With competitive tariffs from wind-based generation in Luzon, MGen is working with a strategic partner on developing a 150 MW wind generation project within the Meralco franchise area. Another Meralco subsidiary, MSpectrum, Inc., carries out largely own-use solar initiatives for ”roofing” industrial, commercial, and large residential customers. Total installation stands at over 10 MW in a market that is teeming with opportunities. Expanding Renewable, Sustainable Options We have taken bigger steps in developing a more sustainable energy future for Filipinos. Rapid technological developments in Solar Photovoltaic (PV) and Battery Energy Storage Systems (BESS) have given us an off-grid alternative to provide sustainable access to electricity to households in remote areas. This alternative is the microgrid, or small-scale power grids, that can be operated independently from the country’s interconnected network of power transmission and distribution facilities. We actively pursue solar microgrid projects in remote islands in our franchise area. We have set up hybrid renewable energy (RE) generation and distribution systems in two (2) remote islands – Isla Verde in Batangas MERALCO 2018 ANNUAL REPORT 9 distribution system to meet the electricity demand requirements of new industrial, commercial, and residential locators, and alternate government center, as customers of NCC in Tarlac. The Meralco Marubeni Consortium and the Bases Conversion and Development Authority (BCDA) signed the Joint Venture Agreement (JVA) for the Development of the Electric Power Distribution System in New Clark City (NCC). With their combined experience in the energy sector, Meralco and its Japanese partners, Marubeni Corporation, the Kansai Electric Power Co., Inc., and Chubu Electric Power Co., aim to provide world-class electric service through a modern distribution system that will support the electricity requirements of the NCC. NCC is envisioned to be the country’s first smart, disasterresilient, and sustainable city. City, and Cagbalete Island in Mauban, Quezon. Through these projects, we support the government’s thrust to provide basic electricity access to more Filipinos, lifting their quality of life and opening up opportunities for livelihood and business. In 2018, Meralco was selected as the service provider to operate, maintain, and manage a hybrid RE generating plant in Isla Verde, following a Competitive Challenge Process (CCP) held in accordance with the Batangas City Public-Private Partnership (PPP) Code. In February 2019, we inaugurated the first 32 KW solar PV-plus-battery microgrid in our franchise in partnership with the Local Government Unit (LGU) of Batangas City and the United States Agency for International Development (USAID). While the microgrid currently provides electricity to around 40 households in the island, we expect to expand service to substantially more households and enterprises in 2019 and beyond. We also completed the construction of a microgrid pilot project in Cagbalete Island. It is a hybrid generating plant composed of 60 kWp solar PV, 150 kWh battery energy storage, and two (2) units of 30 kW diesel generators. The microgrid will initially serve around 200 households, once all the requisite permits have been released, and eventually to the resorts and other businesses, as well as other communities in Cagbalete. RE projects are part of our efforts to help reduce carbon emissions as well as push for missionary electrification in areas where electricity is not yet available round-the-clock. Amidst the clamor for renewable and sustainable options is the call for “green mobility”. A subsidiary, MServ, started 10 MY ENERGY PARTNER. MY MERALCO. operating electric vehicles (EVs) in 2013 in our main headquarters in Pasig City and soon after, within two (2) university campuses in our franchise area. Beyond EV operations, we have also constructed and currently operate charging stations for, among others, the Department of Environment and Natural Resources (DENR). Our newly-established subsidiary, eSakay, Inc., builds on the momentum of these deployments. Recently, eSakay launched a breakthrough electric jeep operation plying a developmental route from the Buendia MRT Station in Makati to the Mandaluyong City Hall. eSakay aims to identify and enable more routes by working closely with the Department of Transportation (DOTr), local government units (LGUs), and transport sector stakeholders. This is in support of the DOTr’s Public Utility Vehicle Modernization Program (PUVMP) which aims to fast-track the adoption of modern public utility vehicles for a cleaner and greener environment, while helping modernize and professionalize the Philippine transport sector. Expanding Services We are pleased to share with you that our efforts to expand service and value to new customers in new areas as an electric distribution ...
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