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MWSS Compound, Katipunan Ave.,Balara, Quezon City, Philippines

www.mayniladwater.com.phTel.No: 981 3333

Maynilad Water Services, Inc. 2015 Annual Report-3

Company ProfileYear in BriefKey FiguresHighlights of the YearLetter from the ChairmanPresident’s ReportOperational Highlights

SustainabilityCorporate Social ResponsibilityAwards Received in 2015Financial Review and AnalysisBoard of DirectorsTop Management TeamConsolidated Financial Statements

135791317

41455557616775

Table ofContents

On the Cover

The past few years have been marked by dramatic transformation as our massive infrastructure investments resulted in enhanced service levels for over 9 million people. Even as we pursue operational enhancements, we embrace our multi-faceted role as social enabler, educator, environmental activist, and first responder in crises and disasters. In 2015, we take stock of what we have accomplished and celebrate our evolution from basic utility to total water solutions provider.



From Basic Utility to Water Solutions Company-1

Company Profile

Who we areAn agent and contractor of the Metropolitan

Waterworks and Sewerage System (MWSS), we are the

water and wastewater services provider for the 17 cities

and municipalities that comprise the West Zone of the

Greater Manila area.

What we doWe provide our customers with piped-in water supply

that meets the Philippine National Standards for

Drinking Water (PNSDW).

Aside from delivering potable water, we also provide

sewerage services to customers in Manila, Malabon,

Navotas, Caloocan, Quezon City, Magallanes Village in

Makati, and parts of Muntinlupa. We make sanitation

services available to customers outside these sewered

areas.

After developing valuable expertise in Non-Revenue

Water (NRW) management, we have also started

extending NRW management and leak detection

services to other companies on a consultancy basis.

Our VisionWe are the leading water solutions company in the

Philippines with a strong presence across Asia.

Our MissionWe provide safe, affordable and sustainable water

solutions that enable those we serve to lead healthier,

more comfortable lives.


Our HistoryMaynilad was formed in 1997, after the consortium of

Benpres Holdings Corporation and Suez Lyonnaise de

Seaux won the exclusive right to provide water and

wastewater services in the West Zone of Metropolitan

Manila. Before then, the MWSS was in charge of

providing these services.

Towards the end of 1997, Maynilad struggled to meet

its service and financial obligations, leading to a string

of disputes with the MWSS.

In 2005, Benpres and Suez ceded management and

control of Maynilad to MWSS. After the competitive

bidding in 2005, DMCI-MPIC Water Company—a joint

venture between Metro Pacific Investments Corporation

(MPIC) and DMCI Holdings, Inc. (DMCI)—acquired

83.96% of M aynilad’s shares.

The new owners took over Maynilad in 2007, and

launched an aggressive five-year investment program

to rehabilitate the company and its operations. In 2013,

Marubeni Corporation of Japan acquired a 20% stake

and became a strategic partner of the consortium.

Since its re-privatization, Maynilad has spent over

P56 billion to improve and expand its water and

wastewater services. As a result, over 9 million people in the

West Zone are now enjoying safe, reliable water supply.

Our ValuesHonesty and Integrity

We deal with our stakeholders with honesty and

integrity. We will always do what is right and fair

for the sake of our customers, shareholders and the

environment.

Customer Service

We consider our customers as our growth partners.

Only by providing them with affordable, high-quality

water solutions can we continue generating value for

our company and shareholders.

Entrepreneurship

We encourage creative thinking and deliberate execution.

We expect our people to manage our company’s

resources with a strong sense of initiative, ownership,

and accountability in order to balance the needs of our

customers with those of our other stakeholders.

Commitment to Excellence

We view excellence as a means and not an end. To

maintain our operational efficiency and industry

leadership, we push our people to excel by being

diligent and innovative in their work.

Teamwork

We value our people and consider their success as our

own. This is why we provide them with the support,

responsibilities, and opportunities that will allow them

to develop individually and with the company.

Love for Country

We actively partner with the public sector so that we can

provide even more Filipinos with water solutions that will

spur national development and secure the environment.


Year in Brief

Maynilad adopted new company slogan, “Higit sa Tubig ang Aming Serbisyo”.

Despite water reductions due to El Nino, billed volume and resulting revenues increased, along with all other key performance indicators.

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Upward tariff adjustment was implemented at a net average of P1.35 per cubic meter.

Ramoncito S. Fernandez was appointed as Maynilad’s new

President and CEO come 2016.

Maynilad received company-wide ISO certification in 9001, 14001 and 18001.

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4

5


Billed Volume(MCM)

2014

2013

2015

463.24

481.53

443.85

Billed Services

2014

2013

2015

1,190,062

1,265,625

1,129,497

Non-Revenue Water(Avg %)

2014

2013

2015

33.92

31.01

38.71

24-Hour Water Supply(%)

2014

2013

2015

99.89

99.81

97.75

Key Figures

481.5331.011,265,62599.81


Over 7 PSI Pressure(%)

2014

2013

2015

99.97

100.00

99.90

Consolidated Net Income(PhP Billion)

2014

2013

2015

8.26

9.55

6.94

Consolidated Revenue(PhP Billion)

2014

2013

2015

18.36

19.10

16.90

Consolidated Core Net Income(PhP Billion)

2014

2013

2015

8.78

9.68

7.55

9.689.5519.10100.00


Highlights ofJanuary

Papal visit. Maynilad joined the country in welcoming Pope Francis. To support the Catholic faithful who gathered at Rizal Park for Holy Mass, the company deployed 11 water tankers with a combined capacity of 94,000 liters around main thoroughfares leading to the venue. Fifteen water stations were also set up at the Luneta grounds, and some 90,000 units of Maynilad bottled water were sent to other Holy Mass venues at Tacloban and Palo in Leyte, and at the University of Santo Tomas in Manila.

Mangrove reforestation. Five sites in the Cavite Province with a total area of 6.6 hectares were adopted for mangrove reforestation as part of Maynilad’s “Plant for Life” program, a multi-site reforestation and afforestation program.

April

More local and international awards. Maynilad’s “Decentralized Wastewater Treatment Facilities in Quezon City” project won in the ASEAN Corporate Sustainability Awards. The company also won a Gold Award for Environmental Excellence at the 2015 Global CSR Summit and Awards. Meanwhile, the “Mission Ginhawa” program also won a Gold Anvil Award for its innovative approach to disaster response.

MarchPhilippine Quill Awards 2014. Two advocacy programs (“Daloy Dunong Water Education Program” and “Mission Ginhawa: Water Solution for Yolanda-Hit Communities,”) and two communications tools (“Maynilad Website Relaunch” and “Ripples: The Official Newsletter of Maynilad”) won awards.

World Water Day (WWD) 2015. Maynilad launched the Philippines’ first “WWD Water and Sustainable Development Awards”. As a culminating activity for the week-long WWD celebration, Maynilad also organized the “WWD 2015: Let’s Run for Water and Sustainable Development” event.

Water Safety Plan. Maynilad was recognized by DOH and WHO for pioneering Water Safety Plan development and implementation during the National Conference on Climate Change and Water Safety for Health.

Gold Environmental Excellence Award. Maynilad was given noteworthy distinction for its carbon reduction efforts during the 2015 Global CSR Awards, Asia’s most prestigious recognition program for Corporate Social Responsibility.

June

Military camp reservoirs. Two new water reservoirs at the Cavite Naval Base were completed. Designed to boost water supply and pressure inside the camp, these reservoirs have a combined holding capacity of 1,500 cubic meters.

Asia-Pacific Stevie Awards. Maynilad received noteworthy distinction in the Best Newsletter or House Organ/Publication category for “Ripples – The Maynilad Official Newsletter” and in the Corporate Social Responsibility Program of the Year category for “Mission Ginhawa”.

Winning innovations. Two teams from Maynilad were declared winners in the 2015 IdeaSpace Startup Competition. Only 10 winning ideas were chosen out of the more than 1,000 entries submitted from all over the Philippines and 15 other countries. Each winning team received P1 million in seed funding and grants.

Sanitation Safety Plan (SSP). Maynilad finalized the SSP for implementation in its wastewater treatment plants. This is part of a project by WHO and ADB where Maynilad was selected as one of two pilot cases for the Philippines, the other one being the Baliwag Water District.

February

100% water quality compliance rating. The DOH certified Maynilad as having maintained 100% satisfactory compliance with the PNSDW for the entire year of 2014.

Talayan Sewage Treatment Plant (STP). The P249-million STP in Talayan, Quezon City was inaugurated. The facility provides wastewater services for over 27,000 households in the area.

Help for fire victims. Maynilad extended assistance to families who lost their homes in a fire that razed 300 houses in Pasay City.

ISO certification. The Information Technology Services (ITS) Division received its ISO certification, making Maynilad the first water company in the Philippines to be certified for ISO/IEC 20000-1:2011.

May

Grand winner. Maynilad was declared the grand winner of the 2015 Kapatiran sa Industriya (KAPATID) Awards of the Employers Confederation of the Philippines.

“Brigada Eskwela.” Employee-volunteers refurbished classrooms and fixed water and sanitation facilities in 19 public schools in Manila, Muntinlupa, Navotas, Quezon City, Caloocan City and Valenzuela City, in support of the back-to-school program of the Department of Education.


July

Tree planting. The yearly tree-planting activity at the Ipo Dam Watershed in Norzagaray, Bulacan, kicked off. Part of Maynilad’s “Plant for Life” program, the activity aims to help prevent the effects of calamities such as land erosion, flooding and drought due to El Niño.

Partnership with Bangladesh. Through the Asian Development Bank (ADB), Maynilad and the People’s Republic of Bangladesh entered into a Septage Management Twinning Partnership, under which Maynilad would mentor three municipal corporations in Bangladesh.

October

Global Handwashing Day. Maynilad celebrated the 8th Global Handwashing Day by visiting seven schools in Quezon City, Manila, Pasay and Parañaque to teach schoolchildren the proper way of washing their hands using soap and water.

WaterLinks Awards. Recognition was given to the company’s twinning program, aimed to build the NRW management and water quality monitoring capacities of Nepal’s Department of Water Supply and Sewerage.

Typhoon Lando relief. Maynilad brought donations of drinking water to some areas of Isabela, Aurora, Nueva Ecija, Benguet, Pangasinan, Pampanga and Quezon Province to help affected families.

Energy Management Systems (EnMS). Maynilad was recommended for EnMS certification of its top energy-consuming facilities.

September

El Niño water reduction. Rotating service interruptions had to be implemented to help manage water level in Angat Dam during the strong El Niño season that was expected to last until mid-2016. The adjustments resulted in shortened supply schedules in about 900 barangays or 56% of the West concession area.

Coastal cleanup. Maynilad joined the 30th International Coastal Cleanup Drive, which was simultaneously held in different areas in Metro Manila and several provinces. Aside from providing water stations and tankers, Maynilad also sent 50 employee-volunteers to help in the cleanup of coastal areas.

August

Multi-channel customer service. Maynilad added a new SMS (short message service) Hotline, as well as official Facebook and Twitter accounts, among its existing customer service platforms.

International water seminar. Maynilad, UNESCO and the University of the Philippines (UP) spearheaded an international water seminar for educators and community workers from different countries.

KAAGAPAY Awards. LANDBANK’s Gawad KAAGAPAY declared Maynilad as first runner-up in the Large Corporation/Non-Agriculture-based Category. The award honors large corporations that support the bank’s priority sectors such as farmers and fishers, micro and small and medium enterprises.

the Year

November

Parañaque STP. A groundbreaking ceremony marked the start of construction of Maynilad’s P1.43-billion STP in San Dionisio, Parañaque City. The new facility will be able to treat up to 76,000 cubic meters of wastewater per day, and serve approximately 110,000 households in the area.

Las Piñas Pumping Station. The P198-million Alabang-Zapote Pumping Station in Las Piñas City was energized, making it possible to maintain strong water pressure for more than 38,000 households in Las Piñas and Muntinlupa.

Water seminar. A two-day seminar for water industry professionals was conducted. Titled “Making Every Drop Count: Improving Water Supply Efficiency through Collaboration and Creativity,” the seminar provided a venue for water industry practitioners in the country to benchmark on best practices in water supply operations.

Launch of Sustainability Report. The Maynilad Sustainability Reporting for the combined CY 2013 & 2014 was launched.

December

Company-wide ISO certification. TUV Rheinland Philippines conferred a company-wide ISO certification to Maynilad.

Las Piñas SpTP. The P363-million South Septage Treatment Plant began operations. The facility can treat 250 cubic meters per day of septage and is expected to support the company’s sanitation drive in the south.

Industrial Safety Awards. The Safety Organization of the Philippines, Inc. gave Maynilad an Award of Excellence for its exemplary record of over 16 million safe man-hours of exposure without lost time accident in a span of four years (November 2011 to October 2015).


Letter from the Chairman

The challenges and successes that we experienced

in 2015 have strengthened our sense of purpose:

beyond providing water, it is serving our customers,

communities and the country.

“Higit sa tubig ang aming serbisyo,” we now say.

In 2015, we rose to the occasion and showed everyone

that, more than anything, it is our desire to serve our

stakeholders that motivates our entire organization.

Business performance

Despite an adverse regulatory environment, our

business performance remained robust. Consolidated

revenues from our water and sewer services grew by

4.3% to P18.7 billion from P17.94 billion in 2014. Our

reported consolidated net income also improved to

P9.55 billion—a growth of 15.7% from the previous

year’s P8.26 billion.

These gains were a result of our financial stewardship.

Concerted efforts to conserve resources, coupled with

lower personnel cost from the Special Opportunity

Package for early retirees, lessened our operating

expenses and pulled up our net income.

Notwithstanding the water supply reductions due

to El Niño, we were able to raise billed volume in our

Concession Area by 3.9% from 463.24 million cubic

To our valued Stakeholders,

Maynilad Water Services, Inc. 2015 Annual Report-

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meters (MCM) to 481.53 MCM after connecting over

75,500 new customers, mostly from the south district.

By end of 2015, a total of 1,265,625 customers are now

counting on us to supply potable water 24 hours a day

at an average pressure of 7 psi (pounds per square inch).

Redefining customer service

Looking beyond our business of supplying water also

meant discovering and pursuing ways to engage our

stakeholders more meaningfully.

In 2015, we launched our official social media accounts

on Facebook, Twitter, YouTube and LinkedIn. These

social media platforms have redefined the way we

do customer service by directly connecting us with

thousands of customers, allowing us to receive and

respond to queries real time, or reach them with urgent

advisories. Beyond this, social media has also enabled

us to communicate rich content, start and sustain

discussions, and bring the Maynilad brand closer to

customers and communities.

We shall continue to explore innovative ways to reach

our stakeholders through relevant channels.

Focus on advocacy

Since 2010, we have spent considerable resources in

building a redundant water supply system, which now

includes 25 reservoirs with a total capacity of almost 600

million liters. Unfortunately, even with our preparations,

the strong El Niño that gained full strength by the third

quarter of 2015 greatly affected our operations.

We focused our efforts on managing the impact to

our customers. We implemented system adjustments

to make sure that they would not have to go through

a day without water supply, even as we employed

conservation measures to preserve water level in Angat

dam given PAGASA’s projection that El Niño will persist

until mid-2016.

This occurrence reinforces our belief in the importance of

our water sustainability and environmental advocacy—a

responsibility that we prioritize as we do our bottom line.

In 2015, we reached close to 20,000 children from 52

schools with our Daloy Dunong water education program.

We constructed drink-wash areas in 54 public schools

to promote proper sanitation and hygiene. In Cavite,

we adopted 6.6 hectares for mangrove rehabilitation,

bringing the total number of mangrove propagules

planted under our Plant for Life program to 35,000.

Water is a finite resource. As we have done in the past,

we will continue to reach out to schools, communities,

and partners in the government and private sector

to stress the urgency of using water responsibly and

caring for the environment.


Arbitration update

We are entering the fourth year of our rate rebasing

dispute with a partial victory and a long way to go

before full resolution. As you will remember, in 2012, we

underwent a rate rebasing exercise pursuant to the terms

of our Concession Agreement. Unfortunately, our proposed

upward adjustment was not only disapproved but reversed

by our regulators, prompting us to file an arbitration case

before the international arbitration panel in October 2013.

Here, we revised our proposed adjustment and limited our

position to asking for reimbursement of our corporate

income tax as a recoverable expenditure.

Even with a favorable ruling in December 2014, we have

been unable to implement the Arbitral Award until May

2015, when the MWSS granted an upward adjustment

of P2.35 per cu.m. as partial implementation. With the

discontinuance of the CERA, the net adjustment in the

average tariff is 4.32% or P1.35 per cu.m.

While this tariff adjustment gives us vindication and

hope, the delay in the implementation of the Arbitral

Award has cost Maynilad over P5.6 billion in revenue

losses as of December 2015, and these continue to

increase at an average of approximately P157 million per

month of delay. This is the subject of a second arbitration

case that we initiated in March 2015, and which remains

pending to date.

We remain confident that our position will be upheld in

the end.

Making our mark

Finally, we also take pride in the various awards that we

received this year. These recognitions are a testament

to our organizational excellence, both in our business of

providing potable water and beyond it.

Last year was a celebration of our culture of

innovation. Two homegrown teams were declared

among the ten winners of the IdeaSpace Startup

Competition, the country’s first private-led

comprehensive inception program.

“Mission Ginhawa,” our response to the call for

assistance from Yolanda-hit communities, was also

conferred multiple citations for its innovativeness.

Under this program, we provided easy-to-install,

portable and shareable microfiltration systems that

can purify water from freshwater sources without need

for electricity or chemicals. The system is benefitting

42,000 survivors who no longer have to rely on relief

missions for safe drinking water.

In addition, the ASEAN Corporate Sustainability Awards

recognized the compact wastewater treatment

technology that we applied in constructing 15

sewage treatment plants for the densely populated

San Juan River Basin area. This innovation saved us

47% of otherwise required lot area while providing a

combined treatment capacity of 72,000 cubic meters

of wastewater—enough to serve some 150,000

households per day.


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Movements and outlook

Several changes in the senior management of the MVP

Group of Companies will be implemented by 2016. Our

President and CEO, Victorico P. Vargas, will move to his

new assignment with PLDT. He has been instrumental

in shaping the Maynilad organization to become the

results-oriented marketing company that it is now; to

Ricky, we send our most humble thanks.

On behalf of the Board members, we wish him well in his

new role in the MVP Group.

Ramoncito S. Fernandez, formerly the President and

CEO of our Tollways Group, will succeed Ricky as our new

President and CEO come 2016. Mon’s accomplishment

in growing our tollways venture will stand Maynilad in

good stead as it boosts expansion amidst a challenging

business environment.

As we approach the tail end of our first decade since

Maynilad’s re-privatization, I want to take this opportunity

to thank our employees for their hard work, and all our

partners for their continued support. I ask that you stay

committed to our business and to the bigger causes that

we espouse, as we make the full transition from basic

utility to a water solutions company.

Manuel V. Pangilinan

Chairman

“I ask that you stay committed to our business and to the bigger causes that we espouse, as we make the full transition from basic utility to a water solutions company.”


President’s Report

Year 2015 was another growth year in terms of billed

volume and water service coverage expansion, despite

continuing challenges we face on rate rebasing.

Despite the very tough situation of the past few years,

we were able to focus on doing our jobs the best way

we could. We saw our hard work pay off last year, as our

company regained stability and our sights refocused on

creating value for all our stakeholders.

Meeting service commitments

Our customer base grew by 40% in the last five years,

reaching 1,265,625 water service connections by 2015.

We now have 7,575 kilometers of water pipes, and this

infrastructure now conveys water supply to some

9.2 million Filipinos in the West Zone. Almost 100%

of our customers in the West concession already have

access to potable water 24 hours a day at an average

pressure of 7 psi.

Because of the effects of El Niño, service level dipped

during the last quarter of the year. We worked hard to

cushion the impact of the dry spell on our customers,

and the success of these efforts became apparent in the

continued attainment of our targets. Billed volume for

the year increased to a record-breaking 481.53 MCM—

up from 463.24 MCM in 2014—notwithstanding the

reduced water production.

To our Stakeholders,


14

This was backed by the sustained downtrend in Non-

Revenue Water (NRW), which reached an all-time low

average of 31% in 2015. The reduction from last year’s

average NRW of 34% represents a water recovery of

about 58 MLD, which flowed through the distribution

system to customer taps instead of going to waste.

Historically, our wastewater service has lagged behind

in terms of achieving our target service coverage,

mainly due to difficulties in acquiring appropriate-sized

lots for new treatment facilities. This year, I am happy

to report that we are now at 44.2% sanitation coverage

and 14.1% sewerage coverage—up by 15.5 and 2.0

percentage points, respectively—after we employed

innovative approaches in treatment technologies that

can be built on small lots. We will take advantage of this

momentum to further expand this part of our business.

Investing in expansion

At the beginning of 2015, we committed to build

infrastructure to improve our service levels as well as

make service delivery more efficient. We targeted a

capital expenditure disbursement of over P9 billion

toward the attainment of this objective.

In our bid to improve services in the south, we

invested a total of P1.59 billion for various projects in

Muntinlupa. Among other projects, our Putatan Water

Treatment Plant underwent upgrades to ensure that

the water pumped out of this plant continues to meet

government standards, and provides the required

production volume for its influence area.

We also focused on connecting more customers from

our expansion areas in Muntinlupa and in Bacoor and

Imus, Cavite. We completed a P972-million pipe-laying

project consisting of 39 kilometers of primary pipes

with parallel secondary pipes. This constitutes a bigger

bulk of the 117 kilometers of new pipelines that we laid

in 2015 as part of our expansion plans.

Our South Septage Treatment Plant—a P363-million

project—now stands in Las Piñas City. Partly funded by

a World Bank loan, the facility will help expedite the

provision of sanitation services in the southern part of

the West Zone. It will serve the areas of Parañaque, Las

Piñas, Muntinlupa and Cavite, and has the capacity of

treating up to 250 cubic meters of septage per day.

Setting industry standards

Since Maynilad’s re-privatization almost 10 years

ago, we have prioritized the improvement of process

efficiencies as part of our business strategy. Several

years ago, we took on the challenging task of getting

the company-wide ISO certification.

Following a strict audit process, we have now been

conferred a company-wide ISO certification by TUV

Rheinland Philippines. The certification covers 55

offices and facilities, including several corporate offices,

Business Areas, warehouses, pumping stations, sewage

treatment plants and water treatment plants.

At 150 ISO certificates that include Quality Management

Systems (ISO 9001:2008), Environmental Management

Systems (ISO 14001:2004) and Occupational Safety and

Health Management Systems (BS OHSAS 18001:2007),

the company now has the most number of ISO

certificates for multiple sites in the Philippines.

We are proud to be setting industry standards in

efficiency and excellence.


Employee-led innovation

In 2014, we sought to rationalize our workforce by

offering a Special Opportunity Package for qualified

employees who wanted to avail of early retirement.

The impact of this move was considerable in terms

reducing our operating cost and increasing our net

income in 2015.

Having rolled out this program, we were able to focus

our human resources efforts on building a culture

of innovation, sustaining workforce engagement,

developing leadership and technical competencies,

promoting workforce efficiency, and transforming the

way we communicate to better deliver business results.

In the area of innovation, our Human Resources

Division launched a series of roadshows to encourage

employees to submit entries to our annual Think

Maynilad Innofest. Over 100 employees participated

and entered a total of 53 entries, of which nine

finalists and two grand winners were chosen. These

ideas from our employees are now in various stages

of further development, for possible adoption in the

enhancement of company operations.

We are also delighted to report that two of our previous

Innofest winners made it to the top 10 of the 2015

IdeaSpace competition. Our Innofest program was also

recognized at the 51st Anvil Awards.

There is, indeed, wisdom in investing in innovation. We

are always excited to fund and implement crowdsourced

ideas through programs such as our Innofest.

More than a water company

To my mind, the most important milestone of 2015 is

the introspection that we did as an organization, and

the resulting redefinition of our company identity. Now

we are proud to say that we are so much more than a

water utility company.

Our people have always gone above and beyond the

call of duty, especially in times of calamity when we

need to assist our fellow Filipinos. We are all aware—

as members of the Maynilad family with individual

responsibilities—that we serve the public through the

roles that we play in providing safe and clean water.

Higit sa tubig ang aming serbisyo. This both validates our commitment to Maynilad’s mission, and further inspires us to work harder in the service of our fellowmen, our country, and the environment.


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Higit sa tubig ang aming serbisyo. This both validates our

commitment to Maynilad’s mission, and further inspires

us to work harder in the service of our fellowmen, our

country, and the environment.

Management change

I wish to thank the shareholders, especially Maynilad

employees for the privilege of being able to lead them

and likewise for their trust and support during the last

five years.

I will leave you with my successor, Ramoncito S.

Fernandez, who will bring you to greater success to

the next level of performance. Mon brings with him

extensive experience in international carrier business,

administration and materials management, industrial

marketing and sales. He has a track record of ensuring

business growth despite challenging situations, and

I have high regard for his dedication and leadership.

As I accept my new assignment in the MVP Group of

Companies, I am confident in the knowledge that

Maynilad will sustain its remarkable performance under

the guidance of Mon Fernandez.

Victorico P. Vargas

President and CEO

Ramoncito S. Fernandez

He has been with the MVP Group of Companies for over 20 years, heading several business groups with the Philippine Long Distance Telephone Co. and serving as President and CEO of Metro Pacific Tollways Corp., Tollways Management Corp., and MPCALA Holdings, Inc. He successfully led the tollways group in its expansion efforts and increased profitability threefold during his term.


Operational Highlights

The operating and regulatory environment was less than ideal in 2015. Supply shortage due to the strong El Niño affected service levels to 56% of the West concession during the last quarter. Meanwhile, the continued non-implementation of the arbitral award granting Maynilad a tariff increase for the fourth rebasing period threatened the sustainability of our business.

Despite these challenges, performance in 2015 was at an all-time high with all Key Performance Indicators met. This is proof of our unwavering commitment to sustain the investments that will ensure we meet our service obligations, no matter the circumstances.


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As the process of arbitration progresses, the men and women of our ranks remain focused on achieving our business and organizational goals, living up to our new slogan, “Higit sa tubig ang aming serbisyo”.


Business Environment

Regulatory Setbacks

While we spent 2014 fighting to win the arbitration

case against our regulator, the better part of 2015 saw

us working to have the Arbitral Award implemented.

On January 5, 2015, Maynilad officially received the

award of the Appeals Panel granting our alternative

rebasing adjustment of P4.06 per cubic meter (cu.m.),

which was effectively reduced to P3.06/cu.m., following

the integration of the P1.00 Currency Exchange

Rate Adjustment (CERA) into the basic water charge.

Unfortunately, despite being final and binding under

the Concession Agreement, our regulator refused to

implement the Arbitral Award as it was inconsistent

with the award in the separate arbitration case filed by

Manila Water.

The unfortunate delay in the implementation of the

Award caused us revenue losses amounting to

P3.44 billion from January 2013, when the rebased

rate should have been implemented, until February

2015. To recover this and curtail any additional losses,

we wrote to the Philippine Government, through the

Department of Finance (DOF). The demand letter called

on the Undertaking of the Republic of the Philippines

to indemnify Maynilad for revenue losses caused by

the regulator’s refusal to implement its rightful award.

In March, we reiterated our demand through a second

letter. Both demand letters were not acted upon.

Because of this, we were constrained

to take the matter up in a second

arbitration. On March 27, 2015, we

served the Notice of Arbitration and

Statement of Claim upon the Republic,

through the DOF, with a demand

for compensation for the revenue


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losses incurred. In the Statement, we stressed that the

continued refusal to implement the Appeals Panel’s award

was causing us additional losses of an average of

P208 million per month.

On April 21, 2015, the MWSS Board of Trustees

approved a partial implementation of the arbitral award

for a tariff adjustment of P0.64/cu.m. However, net of

the P1.00 CERA, this translated to a tariff adjustment

of negative P0.36/cu.m., which was significantly

different from the arbitral award of P3.06/cu.m. tariff

adjustment, net of CERA. Hence, we did not implement

the adjustment.

On May 14, 2015, the MWSS Board of Trustees approved

a 7.52% increase in the prevailing average basic charge

of P31.25/cu.m. or an upward adjustment of P2.35/cu.m.

as partial implementation of the Arbitral Award. With

the discontinuance of CERA, this brought us to a net

adjustment in average water charge of P1.35/cu.m.

The Arbitration Tribunal for our second arbitration case

was constituted before the year ended. The hearings

have yet to start. Although the future of the arbitration

process remains unclear, we remain positive that our

due diligence will once again bring us victory.

Project Management Challenges

Despite our project management teams’ singular

focus on meeting our 2015 CAPEX goals, project

implementation was marked by delays and challenges.

We committed to implement over P17 billion in CAPEX

projects for 2015, most of which were earmarked for

building sewage treatment plants, conveyance systems,

pumping stations and reservoirs. By the end of the year,

we managed to disburse only P8 billion. Shortfalls were

due to difficulty in acquiring lots for planned STPs, long

and tedious process of permit acquisition, and delayed

implementation of other projects affected by port

congestion and right-of-way issues.

Under the concession agreement, Maynilad is obligated

to achieve 100% sewerage coverage by the end of the

concession in 2037, which necessarily requires building

STPs with enough capacity to service the entire West

Zone. But acquiring lots on which to build these plants

has been challenging because of urban congestion. As

a workaround, we have had to make do with building

several small STPs instead of one large STP with a more

optimal capacity. This we have done successfully in the

San Juan River Basin area, where we decentralized the

wastewater treatment system and built 15 compact

STPs spread out in different locations.

Despite limitations, we were able to complete in 2015

the construction of the STP in Talayan, Quezon City, and

one Septage Treatment Plant (SpTP) in Las Piñas City.

We aim to catch up on our CAPEX commitments by

implementing P13.6 billion worth of projects in 2016 in

the West Zone, a considerable portion of which will be

allotted to our sewerage programs.


22

Temporary Service Level Reduction

Some areas of the West Zone experienced reduced

service levels this year owing to two developments—

our realignment of a primary line in Tondo, Manila, and

our self-imposed reduction in raw water drawdown to

preserve water elevation in Angat Dam.

The Department of Public Works and Highways (DPWH)

implemented a flood control project that involved the

construction of an interceptor drainage box culvert

along Blumentritt St. in Manila. Maynilad had an

existing primary line along Juan Luna St. corner Hermosa

St. in Tondo that blocked the path of the DPWH’s

drainage line. For the government project to proceed,

Maynilad realigned its 2,200mm-diameter pipeline.

Our methodology involved removing a segment of the

primary line and replacing it with a cross-under pipe

segment so that the drainage line could pass over it

unimpeded to direct floodwaters from the northern

parts of Metro Manila out to Manila Bay.

The activity would greatly impact service levels for

customers, so Maynilad sought to mitigate its effect

by laying a 1,500mm-diameter bypass line through

which water supply would continue to flow while the

cross-under pipe segment was installed. Despite this,

over 450,000 accounts experienced rotating service

interruptions, particularly portions of Caloocan, Manila,

Pasay, Makati, Parañaque, Muntinlupa, Las Piñas, Cavite

City, Imus City, and the towns of Kawit, Rosario and

Noveleta in Cavite Province.

Maynilad issued advisories way ahead of the August

implementation so that affected customers may store

water for the duration of the activity. In addition, it

deployed 35 water tankers to deliver water to severely

affected areas. Though the company estimated the

pipe realignment to take 107 hours, it was able to

complete the project ahead of schedule; hence,

affected customers saw service levels return to normal

earlier than expected.

A mere month after this activity, however, service

levels would take another hit. The El Niño phenomenon

began to intensify in the last quarter of 2015,

causing a significant reduction in rainfall at the Angat

watershed. The Philippine Atmospheric Geophysical and

Astronomical Services Administration (PAGASA) forecast

was that El Niño will persist until the second half of

2016. Given this dire projection, the National Water

Resources Board (NWRB) began reducing raw water

allocations for Metro Manila to manage water level in

Angat Dam.

Maynilad helped in this conservation effort by

implementing daily off-peak water service interruptions

in September, affecting 56% of its customers.

These service interruptions were temporarily

suspended in October after rains brought by Typhoon

Lando over the Angat watershed increased the dam’s

water level by almost four meters. However, as water

level in Angat Dam continued to decline, the company

resumed the scheme until November 16, when it

implemented pressure management in lieu of service

interruptions following NWRB’s approval of an increase

in raw water allocation.

We anticipate the effects of El Niño to become a

recurring challenge in the years to come. To combat

these and secure our ability to provide water services

efficiently, we will continue to invest in building new

reservoirs for enhanced water storage capacity.


Expansion

Capital Investments

Though external factors prevented us from meeting our

CAPEX target for 2015, we were able to complete key

projects that are expected to have a major impact on

our operational efficiency and expansion plans in the

coming years.

Our Alabang-Zapote Booster, a P198-million facility, is

the 25th pumping station to be built in our concession

area. The new structure will enable us to consistently

deliver strong water pressure to over 38,000

households in Las Piñas and Muntinlupa.

Also in the south, our Putatan Water Treatment Plant

(WTP) underwent a P457-million upstream process

improvement to ensure that it meets the required

level of production. Moreover, we invested another

P566 million to sustain the facility’s compliance to

PNSDW. In Northern Metro Manila, we spent

P206 million rehabilitating the chlorine scrubber and

dosing systems at La Mesa Treatments Plants 1 and 2

in Quezon City to maintain compliance with standards

for environmental safety for chemicals.

In recent years, we started exploring opportunities to offer our ser-vices outside the West Zone through subsidiaries and bulk water supply schemes. While we continued on this track, growth this year took on many forms—from increases in key performance indicators, to the forging of strategic partnerships for water solutions services or capacity building.


24

Aside from building new facilities and upgrading

existing ones, we also made major investments in our

network of pipelines to reach more customers and

improve service levels.

More households in Cavite and Muntinlupa are now

being served by Maynilad, thanks to 36 kilometers

worth of new primary pipelines laid in Bacoor, Imus and

Muntinlupa. Similar investments were also made to

connect more households in Caloocan and Quezon City.

In Malabon City, we spent almost P30 million to

replace deteriorated pipelines located alongside the

Lambingan Bridge, and this brought uninterrupted

water supply for some 36,000 households.

This year alone, we were able to add 117 kilometers

of primary pipelines, bringing the total West Zone

distribution system to 7,575 kilometers or a 66%

increase from only 4,576 kilometers before re-

privatization in 2006.


We are now serving about 9.2 million Filipinos, all of whom are counting on us to provide them with potable water every day.


26


Service Coverage

We are now serving about 9.2 million Filipinos, all of

whom are counting on us to provide them with potable

water every day. This translates to a total of 1,265,625

water service connections—a 6.3% increase from last

year’s 1,190,062 accounts. Our penetration rate is now

at 93.7% of the West concession area.

Some 99.81% of our customers now have 24-hour water

availability, compared to only 32% in 2006. Meanwhile,

100% of the West Zone now receives water supply at

the average pressure of 7 psi. With full coverage of this

service level attained, we are moving to increase water

pressure to 16 psi for all our customers.

As previously reported, despite reductions in water

production this year, we managed to increase billed

volume from 463.24 million cubic meters (MCM) in

2014 to 481.53 MCM in 2015. This is attributed to

the increase in our water service connections and the

steady decline in NRW.

Expansion

Other Growth Prospects

In 2015, Maynilad pursued innovative growth strategies

for both the organization and its employees.

Through twinning partnerships with water operators

here and abroad, our in-house pool of experts raised

the organization’s profile and upgraded their own

skills through exposure to different challenges and

situations. We proactively explored more of these

opportunities in 2015.

We entered into a twinning partnership with the

Metro Iloilo Water District (MIWD) in April. Under this

partnership, Maynilad shared its technical expertise on

managing water losses and operating water treatment

plants to improve and support the development of Iloilo

City.

Through the Asian Development Bank (ADB), Maynilad

also entered into a Septage Management Twinning

Partnership with the People’s Republic of Bangladesh.

Under this arrangement, Maynilad mentored three

municipal corporations in Bangladesh, with the goal of

developing septage management plans for these areas.

Our experts conducted an assessment to identify gaps

and opportunities for each of these areas, and delivered

technical and managerial capacity-building trainings for

their personnel.

Another ADB-funded endeavor was our twinning

partnership with the Central Human Resource

Development Unit of Nepal’s Department of Water

Supply and Sewerage (DWSS) to capacitate the

Lekhnath Small Town Water Supply and Sanitation

Users Committee (LSTWSSUC)—water service

provider for Nepal’s Leknath Municipality. Following

our intervention, the LSTWSSUC was able to reduce


28

its NRW by 6%, increase its customer base by 23%,

enhance water availability within its service area, and

raise its revenue by some 43%. Through the mentorship

of Maynilad and the World Health Organization,

LSTWSSUC was also able to develop a local water

quality testing protocol and use this to monitor water

quality.

In recent years, we have also proven how the expertise

that we developed internally can be leveraged to help

counterparts provide better water services, generating

additional income for the company in the process.

For example, our Central Non-Revenue Water (CNRW)

Division opened up the possibility of consulting

arrangements early on, with third parties seeking us out

for assistance, given our unparalleled success story in

dramatically reducing water losses since 2007.

In 2015, our new Business Solutions and Sales unit

began offering our in-house expertise to more clients

from different industries, showcasing in many ways

that Maynilad is indeed more than just a water utility.

By the end of the year, we generated almost P4 million

in consultancy contracts involving multiple lines of

expertise.

This only proves that for 2016 and beyond, the

possibilities for expansion are limitless.


Enhanced Efficiencies

Water Loss Reduction

We continue to replace old pipelines and repair pipe

leaks to contain physical losses.

Given our proactive leak detection and intensive

rehabilitation of the distribution system, the past three

years have shown a steady decline in pipe repairs made.

Besides the repair of leaks, we also do pipe

replacements in areas with high NRW level. Year

2015 saw the replacement of 235 kilometers of

pipelines, particularly in Cavite City, Tondo in Manila,

and South Caloocan.

Meanwhile, to address commercial losses, Maynilad

also replaces old water meters. In 2015 alone, a total

of 137,220 meters that are over five years old have

been recalled and replaced under this initiative, thus

ensuring accurate registration of water consumption.

These efforts helped to bring down average NRW in

the West Zone to 31% from last year’s 34%. This NRW

reduction translates to some 58 MLD of water recovered

and piped to households rather than lost to leaks.

To sustain this downward trend and enable the

company to breach the 30% NRW mark by 2016, around

230 kilometers of pipes in Quezon City, Parañaque and

Cavite have been lined up for replacement, along with

over 137,000 old meters.

Number of Pipe Leaks Repaired

2012

2014

2013

2015

36,967

36,967

41,171

45,988

In 2015, we focused on two major thrusts in our drive toward increased operational efficiencies. First, we continued addressing the problem of non-revenue water to recover more water for reallocation to expansion and under-served areas. Second, we followed through on previous years’ efforts of enabling our processes with technology.


30

IT and Automation

In 2015, technology continued to work for us in

enhancing business processes, operational efficiency,

security, and customer service.

The adoption of a state-of-the-art firewall system now

keeps our network secure, and seamlessly connects

remote locations and mobile employees to our network.

We also initiated the second phase of our business

intelligence project, a system that generates in-depth

analyses and reports involving logistics requirements

in planning, procurement, inventory management and

warehousing, among others.

Moves to automate our facilities continue as we install

instrumentations and software to broaden the coverage of

our industrial control network. By next year, we expect to

have our Central Control Room (CCR) functioning, where

our operators can monitor operational parameters and

provide set points for all water and wastewater facilities in

our concession. The CCR, once fully operational, will make

our operations units more nimble when responding to

issues such as sudden drops in pressure.

Technology has likewise been useful in allowing us to

innovate the way we connect with our customers. In

2015, we initiated paperless billing, which automatically

sends electronic Statements of Account via email, as

well as reminders on current balance via SMS. Aside

from allowing customers to view current and previous

billing information, this facility also redirects them to

online payment systems at their option.

By yearend, Maynilad has likewise managed to

successfully implement same-day payment posting and

increase the frequency of payment files processing to

about three times a day. As a result, we are now able to

process last-minute bill payments, giving rise to fewer

disconnections that need to be reversed.

Information and automation technology have become

an integral part of our operations. Our investments in

technology have allowed people within our organization

to collaborate toward shared goals, and connected

Maynilad better to our valued customers.


32

Given our proactive leak detection and intensive rehabilitation of the distribution system, the past three years have shown a steady decline in pipe repairs made.


Sewerage and Sanitation

As we approach full water service coverage of the West concession, we have begun channeling more resources toward our sewerage and sanitation program. Our investments in the construction of wastewater facilities enabled us to push sewerage coverage expansion and consequently help to reduce pollution loading in nearby creeks and rivers.


34

In 2015, we increased our wastewater service coverage to

14% from only 12% in 2014 by expanding our sewerage

system. We were able to add 4,113 sewer service

connections to our existing sewer network and built three

new STPs, bringing the total number of STPs to 19. Over

57 million cubic meters of wastewater was treated by our

treatment facilities, for a capture rate of 94%.

Maynilad also provided desludging services to

customers. Only 32% of the over 200,000 accounts we

approached availed of the service. Nevertheless, this

translated to 63,134 septic tanks cleaned by yearend

versus last year’s 41,873, or over 98,446 cubic meters

of septage treated versus last year’s 85,036 cubic

meters. In the coming years, we aim to boost customer

acceptance of our desludging services by tapping local

government support and intensifying our information

campaign on the benefits of having septic tanks

cleaned regularly.

Meanwhile, sustained investments in wastewater

infrastructure gave rise to the completion this year of

the third Septage Treatment Plant (SpTP) for the West

Zone. This new SpTP was built in Las Piñas so it can service

customers in the south, as our two other SpTPs are located

in the north—i.e., in Caloocan and Quezon City.

With the new Alabang-Zapote (ALAZAP) SpTP in Las

Piñas, which was partly funded by a World Bank loan,

the turnaround time for vacuum trucks that collect

septage from septic tanks in the south have been

greatly reduced, enabling us to do more with less

resources. The P363-million facility can treat up to

500 cubic meters of septage per day, and now serves

Parañaque, Las Piñas, Muntinlupa, Bacoor, Imus, and the

municipalities of Kawit, Rosario and Noveleta in Cavite.

Early this year, we began construction of a P1.044-

billion STP in Cupang, Muntinlupa City. This plant

will likewise be funded by the $137.5-million World

Bank loan that funded the ALAZAP SpTP. Designed to

accommodate up to 46,000 cubic meters of wastewater

coming from over 57,000 households in the south,

the Cupang STP is expected to have a major impact in

helping keep the Laguna Lake clean.

Another STP currently under construction in San

Dionisio, Parañaque City, will add an additional 76,000

cubic meters of wastewater per day to our treatment

capacity and help to ease pollution loading in Manila Bay.


36


Human Resource Management

Internal Trainers

Maynilad sustained its investment in human resources

training this year, with specific focus on cascading the

values central to the theme that we are more than a

water utility company.

We launched a parallel Human Resources (HR) program

called “Higit sa Tubig: Isip, Puso at Gawa,” which sought

to enhance self-worth and employee attitude toward

work and relationships, as well as teach participants

the value of gratitude and appreciation. The successful

launch was attended by over 600 employees, including

all key officers and board of directors of Maynilad’s two

union groups.

In terms of competency development, we endeavored

to make capacity building more responsive to

employees’ specific needs last year by partnering with

line managers to identify training gaps and priorities for

their people. Our joint efforts resulted in the conduct of

a total of 52,162 training hours for 68.9% of employees

by yearend.

More importantly, we started cultivating a pool of

internal trainers last year, both as a professional

development motivation for our people and as a means

to deliver more prudent and efficient training programs.

After a successful train-the-trainers program, eight

courses are now being taught by our pool of 28 active

internal trainers. This initiative has effectively saved the

company P12 million in training expenditure and, at the

same time, provided employees with a greater sense of

involvement in the Maynilad community.

We plan on further expanding our training initiatives to

cover more employees and develop more courses in the

coming years.

Our new slogan, “Higit sa tubig ang aming serbisyo,” is informed and inspired by the men and women of Maynilad who are dedicated to their work and who espouse the organization’s ideals of innovation and public service.

We continue to hone our people’s potential by providing them with opportunities for personal and professional advancement through programs aimed at reinforcing their sense of self-fulfillment.


38

Employee Engagement

In 2015, our HR Division took on the task of being a

strategic partner in building and sustaining a healthy,

highly entrepreneurial and sustainably engaged

workforce.

Initiatives towards this end built on the results of

the Employee Engagement Survey (EES) conducted

by Towers Watson in November 2014, which

assessed the level of engagement of employees,

identify strengths and areas of opportunity in the

organization, and benchmark results with industry

standards and best practices.

Results of the 2014 EES showed that 93% of

Maynilad employees were sustainably engaged. This

is 7% higher than the Philippine National Norm.

As a follow-through, HR Division intensively worked

with line managers to develop action plans that

will sufficiently sustain the gains, as well as address

the challenges identified in the survey, specific to

their respective divisions. Once completed, both the

engagement survey results and plans of action were

communicated to all executives, department heads

and managers. The action plans were implemented

via team-building sessions for targeted divisions.


Customer Service

Last year marked Maynilad’s entry into social media as

part of our effort to connect with our customers using

multiple platforms. We started to engage the public

on Twitter and Facebook in August, using these digital

platforms to disseminate information and notifications

on a massive scale, as well as to receive and address

complaints. The take-up rate was exceptional. By De-

cember, our response management team was answer-

ing a monthly average of 3,014 posts and messages.

We also started to implement our text hotline at

around the same time. The facility enables Maynilad to

respond to a customer’s inquiry, request or complaint

through short message system (SMS) or text messag-

ing. From August, when the platform was launched,

through December, Maynilad was able to respond to a

monthly average of 3,042 customer texts.

These initiatives serve to complement other existing

Maynilad platforms for receiving customer complaints.

Meanwhile, we sought to proactively provide customers

feedback on complaints made via the Maynilad Hotline

1626. Maynilad customers who called our hotline were

given updates on their complaints via voice call or

text messaging. From July to December, we were able

to provide a monthly average of 5,932 feedbacks to

customers.

Maynilad consistently explores creative ways to serve

its customers. In 2015, we began laying the groundwork

for an innovative customer service program called “My

Water Bill.” The program will enable Maynilad customers

to receive their Statement of Account (SOA) via elec-

tronic means, either through SMS, email or a specified

web portal. More importantly, the program allows cus-

tomers to post payments in accredited payment cen-

ters by presenting the electronic SOA from their mobile

phones, or even pay their water bills online through

the web portal that provides links to online payment

facilities. “My Water Bill” is scheduled to become fully

operational by 2016.


40


Sustainability


42

There are two major themes in our sustainability strategy: operational, which involves keeping processes compliant with international standards; and environmental, which focuses on securing our water sources. In 2015, we achieved major milestones in both areas.


Integrated Management System

Maynilad began pursuing ISO certification in 2007, as

part of the organization’s efforts to professionalize

processes so that these meet international standards.

We have successfully earned multiple ISO certifications

since our first one for the Dagat-Dagatan Sewage and

Septage Treatment Plant, which holds the record of

being the first wastewater facility of its kind in the

Asia-Pacific Region to receive triple ISO certifications.

We are happy to report that our commitment to

operational excellence has paid off in 2015 with the

conferment of a company-wide ISO certification. We

now hold the distinction of being the largest water

utility company in the Philippines with a company-wide

ISO certification in three basic standards: ISO 9001, ISO

14001 and BS OHSAS 18001.

Maynilad’s total number of ISO certificates is 150 by

end of 2015. Our company-wide ISO certificates cover

55 offices and facilities, including several corporate

offices, Business Areas, materials depots (warehouses),

pump stations, sewage treatment plants, and water

treatment plants.

Additionally, Maynilad is the first water company in the

Philippines to receive ISO certification of IEC 20000-

1:2011 for its Information Technology Services Division.

Meanwhile, in the last quarter of 2015, TUV Rheinland

recommended for certification the Energy Manage-

ment Systems of Maynilad’s top energy-consuming

facilities.

Sustainability


44

Watershed Management

Maynilad pursues a “Plant for Life” reforestation and

afforestation program to help address the threats of El

Niño, as well as combat soil erosion, flooding and envi-

ronment degradation. The program taps volunteers and

partner agencies to help reforest the Ipo Watershed,

as well as to plant mangrove propagules in the coastal

areas of Manila Bay.

The 2015 run gathered 1,046 volunteers who planted

65,100 trees on the 40-hectare area around the Ipo

Watershed. This brought the number of trees planted

under the “Plant for Life” program to a total of 177,500

trees for the past three years.

In the coastal areas of Cavite, we also brought in volun-

teers to plant some 30,000 mangrove propagules that

will help protect the wetland ecosystem—a sanctuary

for birds and fish—in the years to come. This brings the

total number of mangrove propagules planted in the

coastline to 75,000 since 2013.

To further emphasize the importance of watershed

management, Maynilad partnered with organizers of

the 30th International Coastal Clean-Up Day on Sep-

tember 19, 2015. Aside from providing water stations

and water tankers onsite, Maynilad also deployed 50

employee-volunteers to help in the cleanup of coastal

areas at Baywalk in Manila, SM Mall of Asia in Pasay, Las

Piñas-Parañaque Critical Habitat and Ecotourism Area

(LPPCHEA) in Las Piñas, Marine Tree Park in Navotas,

and Hamilo Hotel in Nasugbu, Batangas.


Corporate Social Responsibility

At the heart of Maynilad’s operations are its advocacy programs. Beyond providing potable water, we serve and sustain communities. We help mold the next generation of responsible water consumers. We respond in times of crisis. We protect the environment.


46


Welfare and Livelihood

Maynilad empowers families through sustainable

programs that provide livelihood opportunities to

marginalized communities. In 2015, we sought to uplift

the living conditions of our adopted communities with

innovative and sustainable projects.

We strengthened our partnership with the Dumagat

tribe of the Ipo Watershed through our Sining Ipo

program. Through the program, we brought Dumagat

sculptors under the mentorship of artist Tata Raul

Funilas. The mentorship produced the Sining Ipo

Sungka series—a collection of

wood sculptures in the form of

the traditional game, which also

symbolized the joint campaign

to protect the Ipo watershed and

manage a finite yet vital resource

such as water.

Aside from the sculptors’

individual earnings from the sale

of their artwork, the program

also contributed to the Sining

Ipo scholarship fund, giving 27

Dumagat schoolchildren and one

college scholar a chance to continue

their education. The sculptors also

showcased their best works in the

Landas exhibit, which featured

a collection of sculptures from

different livelihood programs of the

MVP Group at SM Megamall.

In southern Metro Manila, we gave

volunteers from the Laguna de Bay

community surrounding the Putatan

Water Treatment Plant the task of

clearing water lilies that clogged the

plant’s intake area. Called “Habing

Buhay,” the program opened up for

them the opportunity to make a

living out of the harvested water lilies. We partnered

with the Villar Foundation to teach the volunteers

how to weave baskets and mats out of water lilies. The


In 2015, we sought to uplift the living conditions of our adopted communities with innovative and sustainable projects.


48

results of their handiwork are now being purchased by

Maynilad for use as corporate giveaways.

We also sustained our partnership with the

Mamamayan Para sa Lambat at Dagat Cooperative

of Bacoor, Cavite, with a third donation of P400,000

as incentive for their achievements in promoting the

shellfish industry and the livelihood of thousands of

fishermen in the area.

Also in collaboration with the Bacoor local government

and the water service provider Tubig Pag-Asa, we

brought the "Pag-asa sa Patubig

Partnership" program—a bulk

water scheme—to around 250

poor informal settler families in

MAGTALHAI and DINAMITA, Bacoor

City. Through this arrangement,

households in these areas no longer

have to rely on water rationing,

allowing them to save up to P300

per month.

Finally, we also endeavored to

create an impact in food security

by partnering with the local

government of Parañaque City

for its Food Always in the Home

(FAITH) Gardens program. This

program promotes backyard

farming as a means to help

families provide proper nutrition

for their members while instilling

environmental consciousness and

cooperation among community

members.

We supported the program by

helping to set up four urban

gardens in low-income communities

in Barangays San Dionisio, San

Isidro, BF and Don Galo. Aside from

providing technical resources on sustaining the garden,

Maynilad donated and installed four overhead water

tanks with drip irrigation systems.


50


Infrastructure

Our Lingkod Eskwela program provided more students

access to clean drinking water through the drink-wash

facilities that we installed in 54 of the most densely

populated and resource-deficient public schools in the

West Zone.

In addition, we supported DepEd’s Brigada Eskwela

program by sending employee-volunteers to refurbish

classrooms and fix the water and sanitation facilities

of 19 public schools in Manila, Muntinlupa, Navotas,

Quezon City, Caloocan City and Valenzuela City.

Maynilad also donated 10 desktop computer terminals

to Gen. Gregorio del Pilar Elementary School in Tondo,

Manila, which lost learning equipment in a fire in 2014.

The company likewise pledged to convert one of its

dilapidated rooms to a computer laboratory.

Under its GinhaWASH (water, sanitation and hygiene)

program, Maynilad installed 777 bidets in 24 health

centers, five hospitals, 20 public schools and 14

barangay halls—establishments engaged in public

service where health and sanitation are of particular

concern. In addition, ten drinking fountains were

installed at Barangay Commonwealth in Quezon City,

and at five health centers in Quezon City and Manila.



52

Education and Training

Maynilad also sustained its advocacy of educating

the public about health, sanitation, and the role of

proper water use and consumption in preserving the

environment.

This year, our water education program “Daloy

Dunong” reached out to over 18,750 elementary and

high school students from more than 52 schools to

teach them about the importance of water, good

hygiene and environmental responsibility. Since its

inception in 2012, we have taken “Daloy Dunong”

to more than 200 schools and over 40 other venues

outside campuses, converting close to 55,000 kids

into champions for water, health and the environment

touted as “Water Warriors”.

As part of our 8th Global Handwashing Day 2015

celebration, Maynilad visited seven schools in Quezon

City, Manila, Pasay and Parañaque from October 12 to

15 to teach 2,700 schoolchildren the proper way of

handwashing using soap and water.

Volunteer teachers, including the

cast members of the TV shows Hi-5

Philippines and Batibot, encouraged

children to always keep their hands

clean to prevent the spread of

diseases such as pneumonia and

diarrhea. Handwashing kits were also

given to students to encourage them

to make it a habit.

Maynilad promotes sports among the youth. In line with

this, it tapped employees to serve as coaches for some

500 youth from poor families who are eager to learn

Ultimate Frisbee. The company also organized the 2015

Ultimate Inter-Barangay League, which was participated

in by 10 teams from all over the West Zone.

Year 2015 also saw Maynilad expanding its education

advocacy to industry professionals through the conduct

of specialized trainings and seminars.

Maynilad partnered with UNESCO and the University of

the Philippines (UP) to conduct the “International Seminar

on Water: Nature’s Precious Gift,” where educators

and community workers discussed education as key to

addressing water-related development challenges. The

seminar was participated in by representatives from

Indonesia, Thailand, Vietnam, Sweden, Japan, United

States, Sri Lanka and the Philippines.

Through our Maynilad Water Academy, we likewise

successfully held a two-day water solutions conference

and exhibition for water industry professionals. The

seminar, titled “Making Every Drop Count: Improving

Water Supply Efficiency through Collaboration

and Creativity,” was participated in by about 250

participants from local water districts and private water

companies from all over the Philippines. The latest

research and innovations in water treatment, pressure

management, leak management, meter management,

and other areas of specialization were shared by

industry experts during the conference.


Disaster Relief

Maynilad sustains its role as first responder during

times of calamity, regardless if the affected areas are

within the West concession or beyond.

After Typhoon Lando made its landfall, Maynilad was

quick to assist in government relief efforts by providing

potable water for some 3,400 affected families in

Isabela, Aurora, Nueva Ecija, Benguet, Pangasinan,

Pampanga and Quezon. Besides drinking water,

Maynilad also donated 2,000 pieces of galvanized iron

sheets to typhoon-stricken families in General Nakar,

Quezon, to help them start rebuilding their houses and

their lives.

These relief activities were done in partnership with

the TV5 Alagang Kapatid Foundation, Inc. (AKFI),


DSWD-National Resource and Operation Center, Philex

Group Foundation, Inc., Philippine Disaster Recovery

Foundation, and International Citizen Service.

When Typhoon Nona came, we were also present to

assist in relief operations and bring precious bottled

water to around 1,000 families in Samar and Leyte,

again in collaboration with the TV5 AKFI.

Maynilad also had the opportunity to help in various

areas hit by fire, including in Manila, Pasay, Parañaque,

Caloocan, Valenzuela and Quezon City. By the end of

2015, we were able to give assistance to as many as 2,200

families through our fire relief programs conducted

in collaboration with government agencies, local

government units and private groups, including AKFI.


54

Recognition

Our corporate social responsibility programs have given

us both a sense of fulfillment and pride.

During the 2014 Philippine Quill Awards held last

March 9, 2015, Maynilad’s advocacy projects brought

home a total of four awards. Our “Daloy Dunong”

Water Education Program and “Mission Ginhawa:

Water Solution for Yolanda-Hit Communities” disaster

response program were recognized under the Corporate

Social Responsibility category of the Communication

Management Division, and conferred an Award of

Excellence and a Merit Award, respectively.

In addition, for its innovative approach to disaster

response, “Mission Ginhawa” also won a Gold Anvil

Award in the PR Programs-Disaster Programs Category

at the 50th Anvil Awards. The same program was

awarded the 2015 Asia-Pacific Stevie Silver Award for

its innovative approach in disaster response out of 400

nominations from organizations in 22 countries across

the Asia-Pacific region.

It is encouraging that our efforts to become a positive

force in communities and the country are appreciated

and recognized. But beyond these accolades, it is the

desire to be of service to our fellow Filipinos that will

continue to motivate us to make a difference in the

lives of others.


AwardsAward-Giving Body Organizer Recognition Entry

Kapatiran sa Industriya (KAPATID) Awards

Employers Confederation of the Philippines

2015 KAPATID Awards Grand Winner N.A.

Philippine Quill Awards 2014 International Association of Business Communicators – Philippines

Award of Excellence Daloy Dunong

Merit Award Mission Ginhawa

Ripples newsletter

Maynilad Website

50th Anvil Awards Public Relations Societyof the Philippines

Gold Anvil Mission Ginhawa

Award of Excellence Safety Organization of the Philippines

Exemplary Record of 16 Million Man-Hours without Lost Time Accident

N.A.

Safety and Health Excellence (SHE) Award

Workplace Advocates on Safety in the Philippines, Inc. (WASPI)

Recognition for implementation of workplace safety and health standards

N.A.

Gawad KAAGAPAY (Korporasyon na Kaagapay sa Ating Ganap na Tagumpay) Awards

LANDBANK of the Philippines First Runner-up, Large Corporation/Non-Agriculture-based Category

N.A.

Local Awards

Award-Giving Body Organizer Recognition Entry

ASEAN Corporate Sustainability Awards

Apex Global First Runner-up, Product/Service Innovation Category

Maynilad Decentralized Wastewater Treatment Facilities in Quezon City

2015 Global CSR Summit and Awards

Pinnacle Group International Gold Award for Environmental Excellence

Maynilad’s environmental initiatives

Asia-Pacific Stevie Awards The Stevie Awards Silver Award Mission Ginhawa

Ripples newsletter

WaterLinks Awards 2015 WaterLinks Winner, along with Nepal’s Department of Water Supply and Sewerage (DWSS) and Lekhnath Small Town Water Supply and Sanitation Users Committee (LSTWSSUC)

Twinning Partnership with DWSS and LSTWSSUC

International Awards


56

It is encouraging that our efforts to become a positive force in communities and the country are appreciated and recognized. But beyond these accolades, it is the desire to be of service to our fellow Filipinos that will continue to motivate us to make a difference in the lives of others.


Financial Review and Analysis

Revenues

Consolidated revenues from water and sewer services

for the full year 2015 grew 4.3% to P18.7 billion from

P17.94 billion last year. The increase in revenues was

primarily driven by the 4.3% increase in billed volume,

coupled with 0.1% increase in average effective tariff.

Effective June 1, 2015, Maynilad was able to implement

a standard inflationary or CPI increase of approximately

7.52% exclusive of the discontinuation of the P1.00

CERA. The delayed CPI adjustment was a stand-still

of sort with neither the new rebased rates won by

Maynilad in arbitration nor the rate reduction sought

by MWSS being implemented. The impact of the CPI

adjustment was diluted by the late implementation

and the lower CMD which tends to bring down average

tariff as a result of Maynilad’s socialized rates structure

where high consuming consumers subsidize low

consumers within the same customer classification.

Other fees and services which primarily consists of

installation charges and reconnection fees reflected a

decline of 6.8% to P395 million as the regulatory office

approved lower rates during the year. Consolidated

revenues from operations amounted to P19.1 billion, a

4% increase from P18.36 billion last year.

Cash Operating Expenses

Consolidated cash operating expenses decreased 3.0%

to P5.18 billion versus P5.34 billion last year primarily

due to lower personnel costs driven by the one-time

Special Opportunity Package (SOP) implemented last

year to improve employee productivity, as well as

savings on major expense items such as light and power

and repairs and maintenance costs.

Personnel costs, the company’s single largest cost

element declined 8.9% to P1.85 billion from

P2.03 billion last year, which included P283 million for

the SOP. Total number of employees as of December

2015 was 2,147 compared to 2,071 at the end of

the same period last year. This reflected a slight

improvement in the employee productivity ratio to 1.70

employees per 1,000 connections at the end of the year

compared to 1.74 in the prior year. Excluding the one-

time charge, personnel cost would have grown by 6%.


58

Light and power declined 1.9% to P780 million as the

company benefited from lower average power rates

obtained from retail electricity contracts which brought

down average costs per kilowatt-hour by around 16%,

offsetting a 17% growth in kilowatt-hour consumption

due to higher production in the Putatan treatment

plant, pumping activities in the South, and more

sewage treatment plants in operation.

Outside services increased 4.8% to P570 million as the

company increased sanitation services in the South

using a specialized service contractor. Repairs and

maintenance dropped 21.6% to P389 million in line with

lower leak repairs. These four items are the company’s

largest cost elements, accounting for 69% of total cash

expenses, and as a group declined 7.2%.

In contrast, all other expense items accounting for

31% of the total, increased 7.8%, as a result of higher

local taxes due to the increase in operating facilities,

and additional professional fees in relation to the

company preparation for the new arbitration against

the government to enforce its guarantee on the

unimplemented rebased rates. (See Other Matters: Rate

Rebasing Update.)

Non-Cash Operating Expenses

Under IFRIC 12, all property plant and equipment

(PP&E) defined as parts of the network are considered

intangible assets. These are no longer depreciated but

are instead amortized over the life of the concession

similar to concession fees. Concession assets

(composed of concession fees and network PP&E) are

considered intangible assets and are amortized over the

life of the concession. Beginning 2013, the company

decided that given the large initial expenditures and

the economic benefit of the concession asset being

more closely aligned with the growth in billed volume,

it would apply the unit-of-production (UOP) method,

instead of the straight-line method, of amortizing its

concession asset.

Amortization of intangible assets increased 12.9% to

P2.04 billion from P1.8 billion in the prior year, in line

with the company’s continuing capital expenditure

program. Offsetting this increase is the reversal of

P232 million of provisions for doubtful accounts due

to the company’s improved collection performance.

Despite the reversal, average days sales outstanding at

the end of the period was maintained at 46 days, same

as the level at the end of 2014.

Due to the offsetting movement, consolidated non-cash

operating expenses remained flat.

Net Income

With total operating expenses declining, consolidated

income from operations grew faster than revenues

improving by 8.3% to P11.85 billion from P10.95 billion last

year. Reported consolidated net income grew at an even

higher pace of 15.7% to P9.55 billion from

P8.26 billion in the prior year, due to lower interest

expense.

Consolidated core net income for the period, which

excludes one-time charges such as last year’s SOP and

foreign exchange gains or losses, amounted to

P9.68 billion, a growth of 10.3% from last year’s

consolidated core net income of P8.78 billion.

EBITDA

Consolidated core Earnings before Interest, Taxes, and

Depreciation (EBITDA) grew by 7.9% to P13.9 billion

versus P12.9 billion last year, resulting in an improved

margin of 72.8% versus 70% last year, driven primarily

by the reversal of the provision for doubtful accounts.

Balance Sheet

In 2015, Maynilad’s consolidated assets grew 12.1% to

P81.35 billion compared to P72.54 billion at the end of

2014 due primarily to the addition of concession assets.

Concession assets continued to form bulk of total

assets growing 9.8% net of amortization to

P62.49 billion or 77% of total assets of the company.

Debt-to equity ratio improved to 56:44, despite the

payment of P2 billion in cash dividends in March, and

a net increase in borrowings, despite the substantial

cash balance, due to drawdowns on concessionary

debt facilities that had been specifically set up to fund

sewerage projects.


Financial Review and Analysis

Investments

Acquired in August 2012 and owned 100% by Maynilad,

PhilHydro owns and operates three plants that supply

treated bulk water to the Legazpi City Water District in

Albay, Norzagaray Water District and Santa Maria Water

District in Bulacan, and municipal waterworks of Bambang,

Nueva Vizcaya. The company also owns and operates the

treated water supply and distribution system of Rizal,

Nueva Ecija. The company has a total plant capacity of

53 MLD and is currently operating at around 33 MLD.

In 2015, PhilHydro’s billed volumes significantly

improved compared to the same period last year,

growing 18.2% to 32.7 MLD. Bulacan billed volume

grew a substantial 32.7% as new pipe capacity allowed

for expansion in the water districts of Norzagaray and

Santa Maria in Bulacan, as well as supply water to the

INC-led Ciudad de Victoria complex, which houses the

Philippine Arena. Billed volume in Legazpi also grew

6.1% as water supply issues that affected billed volume

in 2014 had been addressed. The company generated

revenues of P174 million and income from operations of

P50.7 million. Net income contribution to Maynilad was

P20.6 million and EBITDA amounted to P71 million.

On 28 January 2013, Maynilad won the bid to acquire

10% of Subic Water and Sewerage Company Inc. (Subic

Water) from the city of Olongapo for P210 million.

After the expiry of the right of first refusal of Subic

Water’s existing shareholders to acquire the shares,

Maynilad signed the deed of sale for the acquisition on

15 March 2013.

Subic Water operates the water supply and sewerage

system in the Subic Bay Freeport and the water system

in Olongapo City, under a franchise agreement expiring

in 2027. Billed connections for 2015 reached 40,137

accounts while average NRW stood at 27%. Unaudited

gross revenues amounted to P617.3 million while

net income was at P177.7 million. Maynilad’s 10%

investment in Subic Water is carried at cost less any

impairment losses.

Other Matters: Rate Rebasing Update

Maynilad is a concessionaire of the Metropolitan

Waterworks and Sewerage System (MWSS) given the

exclusive right to manage water and wastewater

operations in the West Zone of the Greater Manila Area

as defined in the Concession Agreement (CA) entered

into by both parties on February 21, 1997. Under the

CA, a Rate Rebasing process is conducted every five

years to determine the adjustment to be made to the

tariff charged by Maynilad for the services it renders

that will allow it to recover and earn a return on its

expenditures.

On March 30, 2012, Maynilad submitted a business plan

for the determination of the adjustment to be applied

to its standard rates for the period 2013 to 2017. After

almost one and half years of review and discussion, in

a resolution dated September 12, 2013, MWSS denied

Maynilad’s petition for an upward adjustment of

28.35% of its average basic charge (or P8.58 per cubic

meter), and instead approved a negative adjustment

of 4.82% (or P1.46 per cubic meter), which Maynilad

subsequently contested.

Under the CA, any disagreement or dispute which

cannot be resolved through consultation or negotiation

between the parties must be resolved through an

arbitration process. In this regard, on October 4, 2013,

Maynilad filed a notice of dispute with the Secretariat

of the International Chamber of Commerce (ICC)

International Court of Arbitration to resolve its rebasing

dispute with MWSS. Maynilad reviewed and took into

consideration the MWSS determination as outlined in

its September resolution and submitted an alternative

proposal with a positive adjustment of 13.41% (or

P4.06 per cubic meter). The most significant element

driving this alternative proposal is Maynilad’s position

that corporate income tax should be a recoverable

expenditure in tariff determination.

A three-member panel called the Appeals Panel

conducted the arbitration proceedings in accordance

with the arbitration rules of the United Nations

Commission on International Trade Law (UNCITRAL).

The Appeals Panel consists of a Chairman appointed by

the International Chamber of Commerce and a nominee

each of Maynilad and the MWSS.


60

On April 21, 2014, the Appeals Panel was deemed

constituted and the formal arbitration process began,

culminating in formal hearings that occurred from

August 24 to September 1, 2014. The closing memorials

were submitted on October 6, 2014 and the reply

memorials on October 31, 2014. On January 5, 2015,

Maynilad officially received the Appeals Panel’s award

dated December 29, 2014 (the “Award”) upholding

Maynilad’s alternative Rebasing Adjustment for the

4th Rate Rebasing Period of 13.41% or its equivalent

of P4.06/cu.m. This increase has effectively been

reduced to P3.06, following the integration of the P1.00

Currency Exchange Rate Adjustment into the basic

water charge.

The Award being final and binding on the parties,

Maynilad asked the MWSS to cause its Board of Trustees

to approve the 2015 Tariffs Table so that the same

can be published and implemented 15 days after its

publication.

However, the MWSS and the Regulatory Office have

chosen, over Maynilad’s repeated objections, to defer

the implementation of the Award despite the Award

being final and binding on the parties. In its letter dated

February 9, 2015, the MWSS and Regulatory Office

(RO), who received their copy of the Award on January

7, 2015, informed Maynilad that they have decided to

await the final outcome of their arbitration with the

other concessionaire, Manila Water, before making any

official pronouncements on the applicable resulting

water rates for the two concessionaires.

On February 20, 2015, Maynilad wrote the Philippine

Government, through the Department of Finance

(DOF), to call on the undertaking which the Republic

of the Philippines (the “Republic”) issued in favor of

Maynilad on July 31, 1997 and March 17, 2010 (the

“Undertaking”). The Undertaking provides, among other

things, that the Republic shall indemnify Maynilad in

respect of any loss that is occasioned by a delay caused

by the Republic or any government-owned agency

in implementing any increase in the Standard Rates

beyond the date for its implementation in accordance

with the Concession Agreement.

On March 9, 2015, Maynilad again wrote the Philippine

Government, through the DOF, to reiterate its demand

against the Undertaking. Maynilad demanded that

the Republic pay it, immediately and without further

delay, the P3.44 Billion in revenue losses that it has

thus far sustained as a direct result of the MWSS’ and

the RO’s refusal to implement its correct Rebasing

Adjustment from January 1, 2013 (the commencement

of the 4th Rate Rebasing Period) to February 28, 2015.

Maynilad reserved its right to update the demand for

as long as it remains unpaid, and the MWSS and the RO

continue to refuse to honor and implement the Appeals

Panel’s final and binding Award upholding its Rebasing

Adjustment.

On March 27, 2015, Maynilad served a Notice of

Arbitration and Statement of Claim upon the Republic,

through the DOF, pursuant to the terms of the

Undertaking and the 1976 UNCITRAL Arbitration Rules

and in respect of its demands for payment made on

the Republic under its letters dated February 20 and

March 9, 2015 (collectively, the “Demand Letters”).

Maynilad demands arbitration to resolve the issue on

the Republic’s liability for compensation that Maynilad

has claimed in the Demand Letters, the Notice of

Arbitration and the Statement of Claim.

On April 21, 2015, the MWSS Board of Trustees in its

Resolution No. 2015-004-CA dated March 25, 2015

approved to partially implement the Arbitral Award

of a tariff adjustment of P0.64 per cu.m., net of the

P1.00 CERA, which translates to a tariff adjustment of

negative P0.36 per cu.m. as opposed to the Arbitral

Award of P3.06 per cu.m. tariff adjustment, net of

CERA. For being contrary to the Final Award as well as

the provisions of the Concession Agreement, Maynilad

did not implement this tariff adjustment.

On May 14, 2015, the MWSS Board of Trustees in its

Resolution No. 2015-060-RO approved a 7.52% increase

in the prevailing average basic charge of P31.25 per

cu.m. or an upward adjustment of P2.35 per cu.m. as

partial implementation of the Arbitral Award. With the

discontinuance of CERA, the net adjustment in average

water charge is P1.35 per cu.m.


Board of Directors

Mr. Pangilinan assumed chairmanship of Maynilad in January 2007 and remain as such up to the present. He was appointed as Chairman of the Philippine Long Distance Telephone Company (PLDT) after serving as its President and Chief Executive Officer from Nov. 1998 to Feb. 2004 and became Chairman of PLDT Communications and Energy Ventures Inc. (formerly Piltel) on Nov. 3, 2004. He also holds chairmanship in Beacon Electric Asset Holdings, Inc., Metro Pacific Investments Corp., Smart Communications, Inc., Landco Pacific Corp., Philex Mining Corp., Manila North Tollways Corp., Medical Doctors, Inc. (Makati Medical Center), Colinas Verdes, Inc. (Cardinal Santos Medical Center), Davao Doctors, Inc., Riverside Medical Center, Inc. in Bacolod City, Our Lady of Lourdes Hospital, Asian Hospital, Inc., Mediaquest Inc., Associated Broadcasting Corp. (TV5), and Manila Electric Company (Meralco).

Mr. Pangilinan founded First Pacific in 1981 and served as its Managing Director until 1999. He was appointed Executive Chairman until June 2003, when he was named CEO and Managing Director. He also holds the position of President Commissioner of P.T. Indofood Sukses Makmur Tbk, the largest food company in Indonesia.

Manuel V. PangilinanChairman, 2007 to present

Outside the First Pacific Group, Mr. Pangilinan was a member of the Board of Overseers of The Wharton School, University of Pennsylvania. He is currently Chairman of the Board of Trustees of San Beda College. He also serves as Chairman of Hong Kong Bayanihan Trust, a non-stock, non-profit foundation which provides vocational, social and cultural activities for Hong Kong’s foreign domestic helpers. In Feb. 2007, he was named President of the Samahang Basketball ng Pilipinas, and effective Jan. 2009, he assumed chairmanship of the Amateur Boxing Association of the Philippines. In 2009, he was appointed Chairman of the Philippine Disaster Recovery Foundation, Inc. He is also chairman of the Philippine Business for Social Progress, Vice Chairman of the Foundation for Crime Prevention, a member of the Board of Trustees of Caritas Manila and Radio Veritas Global Broadcasting Systems, Inc., a former Commissioner of the Pasig River Rehabilitation Commission, and a former Governor of the Philippine Stock Exchange. In 2012, he was appointed Co-Chairman of the newly organized US-Philippines Business Society.


62

Mr. Consunji has been Vice Chairman of Maynilad since January 2007. He is a Member of the Board of Directors of DMCI Holdings, Inc. (DMCI), Semirara Mining and Power Corp., Crown Equities, Inc., Atlas Consolidated Mining and Development Corp., D.M. Consunji, Inc., DMCI Project Developers Inc., DMCI Mining Corp., DMCI Power Corp., DMCI Masbate Corp., Maynilad Water Holding Co. Inc. (formerly DMCI-MPIC Water Company), Sem-Calaca Power Corp., Southwest Luzon Power Generation Corp., Sem-Calaca Res Corp., Sem-Cal Industrial Park Developers, Inc., Dacon Corp., DFC Holdings, Inc., and Beta Electric Corp.

Mr. Consunji graduated from the University of the Philippines where he earned a degree in Bachelor of Science in Engineering. He also took up Master of Business Economics from the Center for Research & Communication, and Master of Business Management from the Asian Institute of Management. He took up Advanced Management Program at IESE School in Barcelona, Spain.

Isidro A. ConsunjiVice Chairman, 2007 to present

He became President of the Philippine Constructors Association from 1999 to 2000, and the Philippine Chamber of Coal Mines, Inc. from May 1999 to January 2002. At present, he is Chairman of the Philippine Overseas Construction Board (POCB), and a Board Member of the Construction Industry Authority of the Philippines.

Mr. Consunji is an active member of the U.P. Beta Epsilon Fraternity, Asian Institute of Management Alumni Association, U. P. Alumni Engineers, and U.P. Aces Alumni Association.


Mr. Lim has been a Director of Maynilad since January 2007. He is President & CEO of Metro Pacific Investments Corp., and is also currently a Director in the following MPIC subsidiary and/or affiliate companies: Beacon Electric Asset Holdings Inc., Manila Electric Company, Metro Pacific Tollways Corp., Manila North Tollways Corp., Tollways Management Corp., Indra Philippines Inc., Medical Doctors, Inc. (owner and operator of Makati Medical Center), Cardinal Santos Medical Center (Colinas Verdes Hospital Managers Corp.), and Our Lady of Lourdes Hospital. He serves as Chairman of Asian Hospital, Davao Doctors Hospital (Clinica Hilario) Inc., and Riverside Medical Center in Bacolod. Mr. Lim is also President of the Metro Strategic Infrastructure Holdings, Inc. (MSIHI) which holds a minority ownership in Citra Metro Manila Tollways Corp. (Skyway). He is active in the Management Association of the Philippines and has served as Vice-Chair of the Good Governance Committee from 2007 to 2009. He is a founding member and Treasurer of the Shareholders Association of the Philippines.

Mr. Consunji has been a Director of Maynilad since January 2007. He is also presently the President and Chief Operating Officer of D.M. Consunji, Inc. He also serves as a member of the Board of Directors of DMCI Holdings Inc., Semirara Mining and Power Corp., D.M. Consunji, Inc., DMCI Project Developers, Inc., DMCI Mining Corp., DMCI Power Corp., DMCI Masbate Corp., Sem-Calaca Power Corp., Southwest Luzon Power Generation Corp., Maynilad Water Holding Co. Inc. (formerly DMCI-MPIC Water Company), Dacon Corp., DFC Holdings, Inc., Beta Electric Corp., Wire Rope Corp., Private Infra Dev Corp., Manila Herbal Corp., Sirawai Plywood & Lumber Co., and M&S Company, Inc.

Jose Ma. K. LimDirector, 2007 to present

Jorge A. ConsunjiDirector 2007 to present

Board of Directors


64

Mr. Vargas is concurrently the President and CEO of Maynilad. He formally took over the position last August 2010. He is also a Director for Metro Pacific Investments Corp., Metro Pacific Water Investments Corp.; Director and Chairman of Philippine Hydro, Inc.; member of the Executive Committee of the First Pacific Leadership Academy, and trustee of the MVP Sports Foundation, Inc. and the IdeaSpace Foundation, Inc.

In the field of sports, he currently holds the position of President for the Amateur Boxing Association of the Philippines (ABAP). He has recently been elected as a member of the Executive Committee of the Asian Boxing Confederation (ASBC). He also holds the position of Vice Chairman for the Samahang Basketbol ng Pilipinas, Inc., the national sports association for Philippine Basketball, and he is an Alternate Governor and former Chairman of the Philippine Basketball Association, the nation’s professional basketball league. The Philippine Sportswriters Association (PSA) conferred Mr. Vargas with the title “Executive of the Year” for 2011.

Mr. Estrellado has been a Director of Maynilad since January 2007 and is concurrently the Company’s Chief Finance Officer. He was Director and Chief Finance Officer of Metro Pacific Investments Corp. Prior to joining Metro Pacific, Mr. Estrellado was Vice President and Chief Finance Officer for ABS-CBN Broadcasting Corporation. While at ABS-CBN, he managed all aspects of the network’s financial operations, including financial planning, controllership, treasury, budget, and investor relations. Mr. Estrellado had served in various positions of senior responsibility with the Lopez Group of Companies since 1996. He had formerly also served in financial positions at Phinma and P.T. Dwi Satrya Utama in Indonesia.

Victorico P. VargasDirector, 2007 to present

Randolph T. EstrelladoDirector 2007 to present


Atty. Aquino joined the Maynilad Board on December 21, 2012. She is also Assistant Director at First Pacific Company Limited (FPC). She joined FPC on July 1, 2012 following her 31-year practice at SyCipLaw. She graduated cum laude (class salutatorian) from the University of the Philippines, College of Law in 1980 and placed second in the Philippine Bar Examination in the same year. Atty. Aquino is also a Director of Philex Mining Corporation, Philex Petroleum Corporation, and Silangan Mindanao Mining Co., Inc.

Mr. Tatsukawa joined the Maynilad Board of Directors last April 2013, and is the Unit Director for the Environment Infrastructure Department of the Marubeni Corporation. He was also assigned by Marubeni to help facilitate international projects in Doha, Qatar as Project Director for the Doha Sewage Project Office (2008-2010), and in Jakarta, Indonesia as Project Coordinator (1994-2001).

Atty. Marilyn A. Victorio-AquinoDirector, December 21, 2012 to present

Kensuke TatsukawaDirector, April 22, 2013 to present

Board of Directors


66

Mr. Sugawara joined the Maynilad Board of Directors last August 2014. He has been engaged in the development of various international infrastructure projects in Marubeni Corporation for over 20 years, including the overseas assignments in Manila, Philippines (2000-2002), and in Lima, Peru (2009-2011). Mr. Sugawara held a director position in Marubeni’s water business subsidiary and/or affiliate companies, such as Consorcio Agua Azul S.A. (Lima, Peru), Chengdu Generale Des Eaux-Marubeni Waterworks Company Limited (Sichuan Province, P.R.China). He is also presently Vice President of Marubeni Philippines Corp.

Manabu Sugawara Director, August 1, 2014 to present


Top Management Team


68

Victorico P. VargasPresident and Chief Executive Officer


Antonio F. GarciaHead, Wastewater Management

Randolph T. EstrelladoChief Finance Officer

John Patrick C. GregorioHead, Commercial & Marketing

Top Management Team


70

Arturo Celso D. BarandaHead, Corporate Logistics

Lourdes Marivic P. EspirituHead, Legal & Regulatory Affairs


Christopher J. LichaucoHead, Business Area Operations

Top Management Team

Levi F. DiestroHead, Human Resources

Top Management Team


72

Herbert M. ConsunjiChief Operating OfficerRonaldo C. Padua

Head, Water Supply Operations


Irineo L. DimaanoHead, Central Non-Revenue Water

Marcos D. de JesusHead, Technical Services

Top Management Team


74

Yolanda C. LucasHead, Program Management

Francisco A. ArellanoHead, Corporate Quality, Environment, Safety & Health

Francisco C. CastilloHead, Information Technology Services

From Basic Utility, to Water Solutions Company-75

CONSOLIDATEDFINANCIAL STATEMENTS

The Stockholders and the Board of Directors

Maynilad Water Services, Inc.

MWSS Compound, Katipunan Road

Balara, Quezon City

We have audited the accompanying consolidated financial statements of Maynilad Water Services, Inc. and

Subsidiaries (a subsidiary of Maynilad Water Holding Company, Inc.), which comprise the consolidated statements

of financial position as at December 31, 2015 and 2014, and the consolidated statements of income, statements of

comprehensive income, statements of changes in equity and statements of cash flows for each of the three years

in the period ended December 31, 2015, and a summary of significant accounting policies and other explanatory

information.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements

in accordance with Philippine Financial Reporting Standards, and for such internal control as management

determines is necessary to enable the preparation of consolidated financial statements that are free from material

misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We

conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we

comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether

the consolidated financial statements are free from material misstatement.

INDEPENDENTAUDITORS' REPORT


76

CONSOLIDATEDFINANCIAL STATEMENTS

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the

consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the

assessment of the risks of material misstatement of the consolidated financial statements, whether due to

fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s

preparation and fair presentation of the consolidated financial statements in order to design audit procedures that

are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the

entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the

reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of

the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of

Maynilad Water Services, Inc. and Subsidiaries as at December 31, 2015 and 2014, and their financial performance

and their cash flows for each of the three years in the period ended December 31, 2015 in accordance with

Philippine Financial Reporting Standards.

SYCIP GORRES VELAYO & CO.

Johnny F. Ang

Partner

CPA Certificate No. 0108257

SEC Accreditation No. 1284-A (Group A),

February 14, 2013, valid until April 30, 2016

Tax Identification No. 221-717-423

BIR Accreditation No. 08-001998-101-2015,

November 25, 2015, valid until November 24, 2018

PTR No. 5321603, January 4, 2016, Makati City

February 17, 2016


CONSOLIDATED STATEMENTS OF FINANCIAL POSITION(Amounts in Thousands)

MAYNILAD WATER SERVICES, INC. AND SUBSIDIARIES

(A Subsidiary of Maynilad Water Holding Company, Inc.)

December 31

2015 2014

ASSETS

Current Assets

Cash and cash equivalents (Notes 4, 24 and 25) P3,093,012 P4,188,538

Short-term investments (Notes 4, 24 and 25) 6,088,541 2,915,000

Trade and other receivables (Notes 5, 24 and 25) 2,428,812 2,048,550

Other current assets (Notes 6, 10, 24 and 25) 3,216,752 2,674,631

Total Current Assets 14,827,117 11,826,719

Noncurrent Assets

Service concession assets (Notes 7, 10, 12, 14 and 22) 62,488,321 56,926,326

Deferred tax assets - net (Notes 15 and 20) 2,139,574 2,160,729

Property and equipment (Note 8) 833,821 809,718

Goodwill (Note 2) 288,082 288,082

Available-for-sale financial assets (Notes 9, 24 and 25) 132,387 110,377

Other noncurrent assets (Notes 2, 5, 24 and 25) 643,548 419,650

Total Noncurrent Assets 66,525,733 60,714,882

P81,352,850 P72,541,601

LIABILITIES AND EQUITY

Current Liabilities

Current portion of interest-bearing loans (Notes 7, 10, 24 and 25) P1,742,164 P1,692,163

Trade and other payables (Notes 11, 14, 16, 23, 24 and 25) 11,327,222 10,333,720

Current portion of service concession obligation payable to MWSS (Notes 7, 12, 24 and 25) 1,357,705 1,094,378

Total Current Liabilities 14,427,091 13,120,261

Noncurrent Liabilities

Interest-bearing loans - net of current portion (Notes 7, 10, 24 and 25) 23,337,175 22,509,248

Service concession obligation payable to MWSS - net of current portion (Notes 7, 12, 24 and 25) 6,737,157 7,040,965

Deferred credits (Notes 2, 7, 24 and 25) 583,643 1,153,459

Customers’ deposits (Notes 2, 24 and 25) 244,434 219,945

Pension liability (Note 16) 416,234 281,832

Other noncurrent liabilities (Note 16) 68,461 348,860

Total Noncurrent Liabilities 31,387,104 31,554,309

Total Liabilities (Carried Forward) 45,814,195 44,674,570


78

See accompanying Notes to Consolidated Financial Statements.

December 31

2015 2014

Total Liabilities (Carried Forward) 45,814,195 44,674,570

Equity

Capital stock (Notes 1 and 13) 4,546,982 4,546,982

Additional paid-in capital (Note 13) 9,979,786 9,979,786

Treasury shares (Note 13) (104,654) (98,526)

Other comprehensive income (Notes 9 and 16) 27,219 46,162

Other equity adjustments (Note 13) (163,152) (309,220)

Retained earnings (Note 13)

Unappropriated 13,752,474 9,701,847

Appropriated 7,500,000 4,000,000

Total Equity 35,538,655 27,867,031

P81,352,850 P72,541,601


Years Ended December 31

2015 2014 2013

OPERATING REVENUE

Water services:

West zone P15,161,712 P14,509,367 P13,468,569

Outside west zone 173,937 134,930 118,520

Sewer services -

West zone 3,367,186 3,294,000 2,909,369

Others 395,402 424,378 398,742

19,098,237 18,362,675 16,895,200

COSTS AND EXPENSES

Amortization of service concession assets (Note 7) 2,037,684 1,804,448 1,565,644

Salaries, wages and benefits (Notes 13, 14 and 16) 1,847,947 2,029,042 2,042,867

Contracted services 913,880 819,463 767,902

Utilities 831,853 846,894 824,950

Repairs and maintenance 388,703 495,833 467,546

Depreciation and amortization (Note 8) 260,174 256,745 231,241

Provision for (reversal of) doubtful accounts (Note 5) (231,978) 358 142,952

Materials and supplies 223,597 183,370 192,747

Taxes and licenses 189,184 168,791 155,178

Rental (Notes 22 and 23) 150,624 167,654 158,907

Collection charges 137,113 122,050 108,706

Transportation and travel 122,587 185,013 175,204

Business meetings and representations 95,834 82,147 121,744

Regulatory costs 94,344 71,431 63,106

Advertising and promotion 52,450 40,867 29,175

Insurance 43,541 42,990 40,782

Others 87,947 97,413 57,901

7,245,484 7,414,509 7,146,552

INCOME BEFORE OTHER INCOME (EXPENSES) (Carried Forward) 11,852,753 10,948,166 9,748,648

CONSOLIDATED STATEMENTS OF INCOME(Amounts in Thousands)




80



2015 2014 2013

INCOME BEFORE OTHER INCOME (EXPENSES) (Carried Forward) 11,852,753 10,948,166 9,748,648

OTHER INCOME (EXPENSES)

Revenue from rehabilitation works (Note 7) 7,728,506 4,162,174 5,146,214

Cost of rehabilitation works (7,728,506) (3,993,120) (5,020,772)

Interest expense and other financing charges (Note 17) (1,983,288) (2,163,476) (2,570,951)

Interest income (Note 4) 134,894 81,283 90,572

Foreign exchange losses - net (Note 2) (152,683) (112,619) (176,050)

Foreign currency differential adjustments (FCDA) (Note 2) 200,344 110,012 174,437

Others - net (Notes 9, 10 and 11) (434,096) (807,802) (862,826)

(2,234,829) (2,723,548) (3,219,376)

INCOME BEFORE INCOME TAX 9,617,924 8,224,618 6,529,272

PROVISION FOR (BENEFIT FROM) INCOME TAX (Notes 15 and 20)

Current 46,142 62,737 2,526

Deferred 21,155 (93,407) (409,468)

67,297 (30,670) (406,942)

NET INCOME P9,550,627 P8,255,288 P6,936,214

Basic Earnings Per Share (Note 18) P2,152.51 P1,850.78 P1,550.77

Diluted Earnings Per Share (Note 18) P2,151.55 P1,850.78 P1,550.77


CONSOLIDATED STATEMENTSOF COMPREHENSIVE INCOME (Amounts in Thousands)




2015 2014 2013

NET INCOME P9,550,627 P8,255,288 P6,936,214

OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) not to be reclassified to profit or loss in subsequent period (Note 16):

Remeasurement gain (loss) on retirement plans (40,953) 18,917 164,745

Income tax effect – (5,675) (49,424)

Other comprehensive income to be reclassified to profit or loss in subsequent period (Note 9) -

Reversal of impairment loss on available-for-sale financial assets 22,010 – –

(18,943) 13,242 115,321

TOTAL COMPREHENSIVE INCOME P9,531,684 P8,268,530 P7,051,535



82

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013(Amounts in Thousands)



Capital Stock

(Notes 1

and 13)

Additional Paid-in Capital

(Note 13)

Treasury Shares

(Note 13)

Other

Comprehensive

Income (Loss)

(Notes 9 and 16)

Other Equity

Adjustments

(Note 13)

Retained Earnings(N

ote 13) Total

Unappropriated

Appropriated

At Decem

ber 31, 2014P 4,546,982

P9,979,786(P98,526)

P46,162(P309,220)

P9,701,847P4,000,000

P27,867,031

Total comprehensive incom

e for the year

––

–(18,943)

–9,550,627

–9,531,684

Treasury shares(N

ote 13)–

–(6,128)

––

––

(6,128)

Cost of share-based payments

(Note 13)

––

––

146,068–

–146,068

Appropriation for capital expenditures (N

ote 13)–

––

––

(3,500,000)3,500,000

–

Dividends declared

(Note 13)

––

––

–(2,000,000)

–(2,000,000)

At Decem

ber 31, 2015P 4,546,982

P9,979,786(P104,654)

P27,219(P163,152)

P13,752,474P7,500,000

P35,538,655

At Decem

ber 31, 2013P 4,546,982

P9,979,786(P4,110)

P32,920(P309,220)

P2,446,559P4,000,000

P20,692,917


e for the year

––

–13,242

–8,255,288

–8,268,530

Treasury shares(N

ote 13)–

–(94,416)

––

––

(94,416)

Dividends declared

(Note 13)

––

––

–(1,000,000)

–(1,000,000)

At Decem

ber 31, 2014P 4,546,982

P9,979,786(P98,526)

P46,162(P309,220)

P9,701,847P4,000,000

P27,867,031

At Decem

ber 31, 2012P 4,010,893

P101,815(P9,730)

(P82,401)(P308,695)

P806,581P12,200,000

P16,718,463


e for the year

––

–115,321

–6,936,214

–7,051,535

Cost of share-based payments

(Note 13)

––

––

(525)–

–(525)

Issuance of shares(N

ote 13)536,089

9,863,911–

––

––

10,400,000

Issuance of treasury shares–

14,0605,620

––

––

19,680

Reversal of appropriation (N

ote 13)–

––

––

12,200,000(12,200,000)

–

Appropriation for capital expenditures (N

ote 13)–

––

––

(4,000,000)4,000,000

–

Dividends declared

(Note 13)

––

––

–(13,496,236)

–(13,496,236)

At Decem

ber 31, 2013P 4,546,982

P9,979,786(P4,110)

P32,920(P309,220)

P2,446,559P4,000,000

P20,692,917

See accompanying N

otes to Consolidated Financial Statements.


CONSOLIDATED STATEMENTSOF CASH FLOWS (Amounts in Thousands)




2015 2014 2013

CASH FLOWS FROM OPERATING ACTIVITIES

Income before income tax P9,617,924 P8,224,618 P6,529,272

Adjustments for:

Amortization of service concession assets (Note 7) 2,037,684 1,804,448 1,565,644

Interest expense and other financing charges (Note 17) 1,983,288 2,163,476 2,570,951

Depreciation and amortization (Note 8) 260,174 256,745 231,241

Cost of share-based payments (Note 13) 146,068 – (525)

Interest income (Note 4) (134,894) (81,283) (90,572)

Pension cost (income) (Note 16) 93,448 (155,111) 117,340

Dividend income (14,473) – –

Unrealized foreign exchange gains - net (6,863) (158) (78)

Gain on sale of property and equipment (232) (3,053) (1,081)

Impairment loss on available-for-sale financial assets (Note 9) – 100,207 –

Operating income before working capital changes 13,982,124 12,309,889 10,922,192

Decrease (increase) in:

Short-term investments (3,173,541) 712,000 (3,612,837)

Trade and other receivables (295,136) (247,488) 528,931

Other current assets (572,121) (281,749) (597,747)

Additions to service concession assets (Note 7) (7,732,006) (4,170,046) (5,153,750)

Increase (decrease) in trade and other payables 472,690 (1,696,858) (388,242)

Cash generated from operations 2,682,010 6,625,748 1,698,547

Interest received 118,805 76,938 84,390

Income taxes paid (46,467) (65,245) (2,526)

Net cash provided by operating activities (Carried Forward) 2,754,348 6,637,441 1,780,411


84


2015 2014 2013

Net cash provided by operating activities (Carried Forward) 2,754,348 6,637,441 1,780,411

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisitions of property and equipment (Note 8) (286,317) (526,192) (399,841)

Cash paid on acquisition of a subsidiary (Note 11) (29,592) (65,972) (195,368)

Dividends received 14,473 – –

Increase in other noncurrent assets (13,815) (50,837) (63,119)

Proceeds from sale of property and equipment 2,272 11,054 1,548

Acquisition of available-for-sale financial assets – – (210,584)

Net cash used in investing activities (312,979) (631,947) (867,364)

CASH FLOWS FROM FINANCING ACTIVITIES

Payments of:

Dividends (Note 13) (1,999,991) (1,000,135) (13,494,130)

Interest-bearing loans (Note 10) (1,692,164) (1,721,331) (22,459,233)

Service concession obligation payable to MWSS (Note 12) (1,026,693) (1,184,393) (1,252,634)

Proceeds from the availment/drawdown of interest-bearing loans (Note 10) 2,539,775 567,487 26,240,838

Interest paid (1,426,075) (1,442,576) (1,442,571)

Increase (decrease) in:

Customers’ deposits 75,551 23,021 69,684

Other noncurrent liabilities (1,170) 170,982 10,953

Issuance (acquisition) of treasury shares (Note 13) (6,128) (94,416) 5,620

Proceeds from issuance of shares (Note 13) – – 10,366,495

Net cash used in financing activities (3,536,895) (4,681,361) (1,954,978)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,095,526) 1,324,133 (1,041,931)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,188,538 2,864,405 3,906,336

CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 4) P3,093,012 P4,188,538 P2,864,405



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in Thousands, Except Number of Shares, Earnings Per Share Value and Unless Otherwise Specified)



Corporate Information and Status of Operations

GeneralMaynilad Water Services, Inc. (Maynilad or Parent Company) was incorporated on January 22, 1997 in the Philippines primarily to bid for the operation of the privatized system of waterworks and sewerage services of the Metropolitan Waterworks and Sewerage System (MWSS) for Metropolitan Manila.

On October 26, 2011, the Securities and Exchange Commission (SEC) approved the amendment of the Articles of Incorporation to amend its primary purpose to include the provision of allied and ancillary services and undertaking such other activities incidental to its secondary purposes.

Effective Interest in MayniladMWHCI and Maynilad Subscription Agreements. Pursuant to the Subscription Agreements executed between Maynilad and Maynilad Water Holding Company, Inc. (MWHCI), a company incorporated in the Philippines and a 51.27% owned subsidiary of Metro Pacific Investments Corporation (MPIC), MWHCI subscribed to 134,022 common shares of Maynilad at par value on December 28, 2012. Such shares, however, were issued only on February 13, 2013 and together with the additional subscription to 402,067 common shares increased MWHCI ownership interest in Maynilad to 92.85% as at December 31, 2013.

MCNK JV Corporation and MWHCI Subscription Agreements. On December 28, 2012, a Subscription Agreement between MCNK JV Corporation (MCNK, a subsidiary of a Japan-listed entity Marubeni Corp.) and MWHCI was executed, wherein MCNK subscribed to 169,617,682 common shares of MWHCI. On February 13, 2013, MCNK and MWHCI entered into another Subscription Agreement for the subscription by MCNK to an additional 508,853,045 common shares resulting in 21.54% interest in MWHCI. On the same date, MPIC purchased 154,992,852 common shares of stock of MWHCI from DMCI Holdings, Inc. (DMCI, a listed Philippine entity) resulting in 51.27% and 27.19% ownership interest as at December 31, 2013 by MPIC and DMCI, respectively.

As at December 31, 2015 and 2014, Maynilad is a 92.85% owned subsidiary of MWHCI. In addition, MPIC directly owns 5.19% of Maynilad thereby having effective ownership interest of 52.80%.

MPIC is 52.1% and 55.8% owned by Metro Pacific Holdings, Inc. (MPHI) as at December 31, 2015 and 2014, respectively. 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 (FPIL) (13.3%). First Pacific Company Limited (FPC), a company incorporated in Bermuda and listed in Hong Kong, through its subsidiaries, Intalink B.V. and FPIL, holds 40.0% equity interest in EIH and an 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 part of FPC group companies in Hong Kong.

The registered office address of the Parent Company is MWSS Compound, Katipunan Road, Balara, Quezon City.

1.


86

The accompanying consolidated financial statements were approved by the Audit Committee onFebruary 17, 2016 as authorized by the Board of Directors (BOD) in accordance with its resolution on January 25, 2016.

Concession AgreementOn February 21, 1997, the Parent Company entered into a Concession Agreement with the 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. The Concession Agreement sets forth the rights and obligations of the Parent Company throughout the concession period. The MWSS Regulatory Office (RO) acts as the regulatory body of the Concessionaires [the Parent Company and the East Concessionaire - Manila Water Company, Inc. (Manila Water)].

Under the Concession Agreement, MWSS grants the Parent Company (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 an extended period of 40 years commencing on August 1, 1997 (the Commencement Date) to May 6, 2037 or the early termination date as the case may be. The 15-year extension of the expiry of the Concession Agreement was approved by the MWSS in 2009 (see Notes 7, 12 and 22).

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

Fourth Rate Rebasing MWSS released Board of Trustees Resolution No. 2013-100-RO dated September 12, 2013 and RO Resolution No. 13-010-CA dated September 10, 2013 on the rate rebasing adjustment for the rate rebasing period 2013 to 2017 reducing Maynilad’s 2012 average all-in basic water charge by 4.82% or P1.46 per cubic meter (cu.m.) or P0.29 per cu.m. over the next five years. Maynilad has formally notified its objection and initiated arbitration proceedings. On October 4, 2013, Maynilad filed its Dispute Notice before the Appeals Panel. On December 17, 2013, the Regulatory Office released Resolution No. 13-011-CA regarding the implementation of a status quo for Maynilad’s Standard Rates and FCDA for any and all its scheduled adjustments until such time that the Appeals Panel has issued the Final Award.

On January 5, 2015, Maynilad officially received the Appeals Panel’s award dated December 29, 2014(the “Arbitral Award”) upholding Maynilad’s alternative Rebasing Adjustment for the Fourth Rate Rebasing Period of 13.41% or its equivalent of P4.06 per cu.m. This increase has effectively been reduced toP3.06 per cu.m., following the integration of the P1.00 Currency Exchange Rate Adjustment (CERA) into the basic water charge. To mitigate the impact of the tariff increase on its customers, Maynilad offered to stagger its implementation over a three-year period.

The Arbitral Award, being final and binding on the parties, Maynilad asked the MWSS to cause its Board of Trustees to approve the 2015 Tariffs Table so that the same can be published and implemented 15 days after its publication.

However, the MWSS and the RO have chosen, over Maynilad’s repeated objections, to defer the implementation of the Arbitral Award despite it being final and binding on the parties. In its letter dated February 9, 2015, the MWSS and RO, who received their copy of the Arbitral Award on January 7, 2015, informed Maynilad that they have decided to await the final outcome of their arbitration with the other concessionaire, Manila Water, before making any official pronouncements on the applicable resulting water rates for the two concessionaires.

On February 20, 2015, Maynilad wrote the Philippine Government, through the Department of Finance (DOF), to call on the undertaking which the Republic of the Philippines (the “Republic”) issued in favor of Maynilad on July 31, 1997 and March 17, 2010 (the “Undertaking”). The Undertaking provides, among


other things, that the Republic shall indemnify Maynilad in respect of any loss that is occasioned by a delay caused by the Republic or any government-owned agency in implementing any increase in the Standard Rates beyond the date for its implementation in accordance with the Concession Agreement.

On March 9, 2015, Maynilad again wrote the Republic, through the DOF, to reiterate its demand against the Undertaking. The letters dated February 20 and March 9, 2015 are collectively referred to as the “Demand Letters”. Maynilad demanded that it be paid, immediately and without further delay, theP3.4 billion in revenue losses that it had sustained as a direct result of the MWSS’ and the RO’s refusal to implement its correct Rebasing Adjustment from January 1, 2013 (the commencement of the Fourth Rate Rebasing Period) to February 28, 2015.

On March 27, 2015, Maynilad served a Notice of Arbitration and Statement of Claim upon the Republic, through the DOF. Maynilad gave notice and demanded that the Republic’s failure or refusal to pay the amounts required under the Demand Letters be, pursuant to the terms of the Undertaking, referred to arbitration before a three-member panel appointed and conduct proceedings in Singapore in accordance with the 1976 United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules.

On April 21, 2015, the MWSS Board of Trustees in its Resolution No. 2015-004-CA dated March 25, 2015 approved to partially implement the Arbitral Award of a tariff adjustment of P0.64 per cu.m. which, net of the P1.00 CERA, actually translates to a tariff adjustment of negative P0.36 per cu.m. as opposed to the Arbitral Award of P3.06 per cu.m. tariff adjustment, net of CERA. For being contrary to the Final Award as well as the provisions of the Concession Agreement, Maynilad did not implement this tariff adjustment.

On May 14, 2015, the MWSS Board of Trustees in its Resolution No. 2015-060-RO approved a 7.52% increase in the prevailing average basic charge of P31.25 per cu.m. or an upward adjustment ofP2.35 per cu.m. as partial implementation of the Arbitral Award. With the discontinuance of CERA, the net adjustment in average water charge is 4.32% or P1.35 per cu.m.

In the fourth quarter of 2015, the Arbitration Tribunal was constituted. On February 17, 2016, Maynilad again wrote the Republic, through the DOF, to reiterate its demand against the Undertaking and to update its claim in the amount of P5.6 billion. As of that date, the arbitration hearings have not yet started.

Summary of Significant Accounting and Financial Reporting Policies

Basis of PreparationThe consolidated financial statements have been prepared on a historical cost basis. The consolidated financial statements are presented in Philippine peso, which is the Parent Company’s functional and presentation currency, and all amounts are rounded to the nearest thousand (P000), except when otherwise indicated.

Statement of ComplianceThe accompanying consolidated financial statements have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). PFRS include statements named PFRS and Philippine Accounting Standards (PAS), including Philippine Interpretations from International Financial Reporting Interpretations Committee (IFRIC) issued by the Financial Reporting Standards Council (FRSC).


MAYNILAD WATER SERVICES, INC. AND SUBSIDIARIES(A Subsidiary of Maynilad Water Holding Company, Inc.)

2.


88

Basis of ConsolidationThe accompanying consolidated financial statements comprise the financial statements of the Parent Company and all of its subsidiaries (collectively referred to as the “Company”). Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Company controls an investee, if and only if, the Company has:

• power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee);

• exposure, or rights, to variable returns from its involvement with the investee; and• the ability to use its power over the investee to affect its returns.

The Company re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the date the Company gains control until the date the Company ceases to control the subsidiary.

A change in the ownership interest of a subsidiary, without loss of control, is accounted for as an equity transaction. If the Company loses control over a subsidiary, it derecognizes the related assets (including goodwill), liabilities, non-controlling interest and other components of equity while any resultant gain or loss is recognized in profit or loss. Any investment retained is recognized at fair value.

The consolidated financial statements comprise of the financial statements of Maynilad and the following subsidiaries that it controls:

All subsidiaries are wholly-owned and incorporated in the Philippines.

Phil Hydro. On August 3, 2012, the Parent Company, through a Share Purchase Agreement with a third party, acquired 100% ownership interest in Phil Hydro for a discounted consideration of P526.9 million payable in tranches upon fulfillment and completion of certain conditions precedent (see Note 11). Goodwill arising from the acquisition amounted to P288.1 million.

Phil Hydro is engaged in waterworks construction, engineering and engineering consulting services. Phil Hydro is currently undertaking water supply projects outside Metro Manila in line with the thrusts of the government under Presidential Decree No. 198, also known as the Provincial Water Utilities Act of 1973, which mandates the local government units to create and operate local water utilities and provide potable water to the public.

Phil Hydro has existing 25-year Bulk Water Supply Agreements with various provincial municipalities outside the West Service Area and a Memorandum of Agreement with certain provincial municipality for the construction and operation of water treatment facilities for water distribution services.

Amayi. Amayi is incorporated for the purpose of operating, managing, maintaining and rehabilitating waterworks, sewerage and sanitation system and services outside the Concession Area.

The financial statements of the subsidiaries are prepared for the same reporting year as the Parent Company using consistent accounting policies. All significant intercompany balances, transactions, income and expense and profits and losses from intercompany transactions are eliminated in full in the consolidation.

Subsidiaries Nature of Business

Philippine Hydro, Inc. (Phil Hydro)* Bulk water supply and water distribution (outside the West Service Area)

Amayi Water Solutions Inc. (Amayi)** Water distribution (outside the West Service Area)

*Acquired on August 3, 2012**Incorporated on July 18, 2012




Changes in Accounting Policies and DisclosuresThe accounting policies adopted in the preparation of the consolidated financial statements are consistent with those of the previous financial year, except for the adoption of the following amended PAS and PFRS which were adopted effective beginning January 1, 2015. Except as otherwise indicated, adoption of the new standards and amendments has no impact on the Company’s consolidated financial statements.

• PAS 19, Employee Benefits – Defined Benefit Plans: Employee Contributions (Amendments)

The improvements below are effective from January 1, 2015 and unless otherwise stated, these amendments have no significant impact on the Company’s consolidated financial statements:Annual Improvements to PFRS (2010-2012 cycle)

• PFRS 2, Share-based Payment – Definition of Vesting Condition This improvement is applied prospectively and clarifies various issues relating to the definitions of performance and service conditions which are vesting conditions, including:

• A performance condition must contain a service condition• A performance target must be met while the counterparty is rendering service• A performance target may relate to the operations or activities of an entity, or to those of

another entity in the same group• A performance condition may be a market or non-market condition• If the counterparty, regardless of the reason, ceases to provide service during the vesting period,

the service condition is not satisfied.

The Company shall consider this amendment for future share-based payment transactions.

• PFRS 3, Business Combinations – Accounting for Contingent Consideration in a Business Combination

The amendment is applied prospectively for business combinations for which the acquisition date is on or after January 1, 2015. It clarifies that a contingent consideration that is not classified as equity is subsequently measured at fair value through profit or loss whether or not it falls within the scope of PAS 39, Financial Instruments: Recognition and Measurement (or PFRS 9, Financial Instruments, if early adopted). The Company shall consider this amendment for future business combinations.

• PFRS 8, Operating Segments – Aggregation of Operating Segments and Reconciliation of the Total of the Reportable Segments’ Assets to the Entity’s Assets

• PAS 16, Property, Plant and Equipment, and PAS 38, Intangible Assets – Revaluation Method – Proportionate Restatement of Accumulated Depreciation and Amortization

• PAS 24, Related Party Disclosures – Key Management Personnel

Annual Improvements to PFRS (2011-2013 cycle) • PFRS 3, Business Combinations – Scope Exceptions for Joint Arrangements • PFRS 13, Fair Value Measurement – Portfolio Exception

• PAS 40, Investment Property


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Standards, Amendments and Interpretations Issued But Not Yet EffectiveThe Company did not early adopt the following amendments to existing standards and interpretations that have been approved but are not yet effective as at December 31, 2015. Except as otherwise indicated, the Company does not expect the adoption of these amendments and interpretations to have a significant impact on its consolidated financial statements.

• Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate

Effective 2016

• PFRS 10, Consolidated Financial Statements and PAS 28, Investments in Associates and Joint Ventures – Investment Entities: Applying the Consolidation Exception (Amendments)

• PFRS 11, Joint Arrangements – Accounting for Acquisitions of Interests (Amendments)

• PFRS 14, Regulatory Deferral Accounts

• PAS 1, Presentation of Financial Statements – Disclosure Initiative (Amendments)

The amendments are intended to assist entities in applying judgment when meeting the presentation and disclosure requirements in PFRS. They clarify the following:

• That entities shall not reduce the understandability of their financial statements by either obscuring material information with immaterial information; or aggregating material items that have different natures or functions

• That specific line items in the statement of income and other comprehensive income and the statement of financial position may be disaggregated

• That entities have flexibility as to the order in which they present the notes to financial statements

• That the share of other comprehensive income of associates and joint ventures accounted for using the equity method must be presented in aggregate as a single line item, and classified between those items that will or will not be subsequently reclassified to profit or loss.

The Company is currently assessing the impact of these amendments on its consolidated financial statements.

• PAS 16, Property, Plant and Equipment, and PAS 38, Intangible Assets – Clarification of Acceptable Methods of Depreciation and Amortization (Amendments)

• PAS 16, Property, Plant and Equipment, and PAS 41, Agriculture – Bearer Plants (Amendments)

• PAS 27, Separate Financial Statements – Equity Method in Separate Financial Statements (Amendments)

Annual Improvements to PFRS (2012-2014 cycle)

• PFRS 5, Non-current Assets Held for Sale and Discontinued Operations – Changes in Methods of Disposal• PFRS 7, Financial Instruments: Disclosures – Servicing Contracts• PFRS 7 – Applicability of the Amendments to PFRS 7 to Condensed Interim Financial Statements• PAS 19, Employee Benefits – Regional Market Issue Regarding Discount Rate• PAS 34, Interim Financial Reporting – Disclosure of Information ‘Elsewhere in the Interim Financial Report’

Effective 2018

• PFRS 9, Financial Instruments




The following new standards issued by the IASB have not yet been adopted by the FRSC:

• IFRS 15, Revenue from Contracts with Customers

IFRS 15 was issued in May 2014 by the IASB and establishes a new five-step model that will apply to revenue arising from contracts with customers. Under IFRS 15 revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 provide a more structured approach to measuring and recognizing revenue.

The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under IFRS. Either a full or modified retrospective application is required for annual periods beginning on or after January 1, 2018. Early adoption is permitted. The Company is currently assessing the impact of IFRS 15 and plans to adopt the new standard on the required effective date once adopted locally.

• IFRS 16, Leases

On January 13, 2016, the IASB issued its new standard, IFRS 16, which replaces International Accounting Standards (IAS) 17, the current leases standard, and the related Interpretations.

Under the new standard, lessees will no longer classify their leases as either operating or finance

leases in accordance with IAS 17. Rather, lessees will apply the single-asset model. Under this model, lessees will recognize the assets and related liabilities for most leases on their balance sheets, and subsequently, will depreciate the lease assets and recognize interest on the lease liabilities in their profit or loss. Leases with a term of 12 months or less or for which the underlying asset is of low value are exempted from these requirements.

The accounting by lessors is substantially unchanged as the new standard carries forward the principles of lessor accounting under IAS 17. Lessors, however, will be required to disclose more information in their financial statements, particularly on the risk exposure to residual value.

The new standard is effective for annual periods beginning on or after January 1, 2019. Entities may early adopt IFRS 16 but only if they have also adopted IFRS 15. When adopting IFRS 16, an entity is permitted to use either a full retrospective or a modified retrospective approach, with options to use certain transition reliefs. The Company is currently assessing the impact of IFRS 16 and plans to adopt the new standard on the required effective date once adopted locally.

The Company continues to assess the impact of the above new, amended and improved accounting standards and interpretations effective subsequent to December 31, 2015 on the consolidated financial statements in the period of initial application. Additional disclosures required by these amendments will be included in the consolidated financial statements when these amendments are adopted.

Business Combinations and GoodwillBusiness 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 costs and expenses.


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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.

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 is not 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.

Fair Value MeasurementThe Company measures financial instruments at fair value at each reporting date.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

• in the principal market for the asset or liability; or• in the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible by the Company.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities

Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable


Level 3 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable

For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

The Company’s management determines the policies and procedures for both recurring and nonrecurring fair value measurements.

For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.

Fair value measurement disclosures are presented in Note 25.

Cash and Cash EquivalentsCash 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 from acquisition date and that are subject to an insignificant risk of change in value.

Short-term InvestmentsShort-term investments are investments with maturities of more than three months to one year.

Financial Assets and Financial Liabilities

Date of Recognition. The Company recognizes a financial asset or a financial liability in the consolidated statement of financial position when it becomes a party to the contractual provisions of the instrument. In the case of a regular way purchase or sale of financial assets, recognition and derecognition, as applicable, are done using trade date accounting.

Initial Recognition. Financial assets and financial liabilities are recognized initially at fair value. Transaction costs are included in the initial measurement of all financial assets and liabilities, except for financial instruments measured at fair value through profit or loss (FVPL).

Categories of Financial Assets. Financial assets are classified into the following categories: financial assets at FVPL, loans and receivables, held-to-maturity (HTM) investments, and available-for-sale (AFS) financial assets. Financial liabilities are classified as financial liabilities at FVPL or other financial liabilities. The Company determines the classification at initial recognition and, where allowed and appropriate,re-evaluates this designation at each reporting date.

‘Day 1’ difference. Where the transaction price in a non-active market is different from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Company recognizes the difference between the transaction price and fair value (a ‘Day 1’ difference) in the consolidated statement of income unless it qualifies for recognition as some other type of asset.




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In cases where use is made of data which 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’ difference amount.

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 or designated as AFS financial assets or financial assets at FVPL. After initial recognition, loans and receivables are carried at amortized cost in the consolidated statement of financial position using the effective interest method, less allowance for impairment. Amortization is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. Gains and losses are recognized in the consolidated statement of income when loans and receivables are derecognized and impaired, as well as through the amortization process. Loans and receivables are included in current assets if maturity is within twelve months from the reporting date. Otherwise, these are classified as noncurrent assets.

This category includes the Company’s cash and cash equivalents, short-term investments, trade and other receivables, sinking fund, deposits and miscellaneous deposits shown as part of “Other noncurrent assets” account in the consolidated statements of financial position (see Notes 4, 5 and 6).

AFS Financial Assets. Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. These are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. After initial recognition, available-for-sale financial assets are measured at fair value with unrealized gains or losses being recognized in the consolidated statement of comprehensive income and presented as a separate component of equity until the investment is derecognized or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the consolidated statement of income. Investments in equity instruments that do not have a quoted market price in an active market and whose fair values cannot be reliably measured are carried at cost, net of impairment, if any. Assets under this category are classified as current assets if the Company intends to hold the assets within 12 months from financial reporting date and as noncurrent assets if it is more than a year from financial reporting date.

Other Financial Liabilities at Amortized Cost. Financial liabilities are classified in this category if these are not held for trading or not designated as at FVPL upon the inception of the liability. These include liabilities arising from operations or borrowings.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the effective interest method.

Gains or losses are recognized in the consolidated statement of income when the liabilities are derecognized as well as through the amortization process.

Debt issuance costs are amortized using the effective interest method. The unamortized debt issuance costs are netted against the related carrying value of the debt instrument.

This category includes trade and other payables, interest-bearing loans, service concession obligation payable to MWSS and customers’ deposits (see Notes 10, 11 and 12).

Classification of Financial Instruments Between Debt and EquityA financial instrument is classified as a 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. 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.

Impairment of Financial AssetsThe Company assesses at each reporting date whether a financial asset or group of financial assets is impaired. A financial asset or 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 assets that can be reliably measured. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and when observable date indicate that there is a measureable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Assets Carried at Amortized Cost. If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has 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 shall be reduced either directly or through use of an allowance account. The amount of the loss shall be recognized in the consolidated statement of income.

The Company first assesses whether objective evidence 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, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to 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 on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument has 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 discounted at the current market rate of return for a similar financial asset.




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AFS Financial Assets. The Company assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired. The evidence of impairment for equity securities classified as AFS financial assets would include a significant or prolonged decline in fair value of investments below its 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 other comprehensive income – is removed from other comprehensive income and recognized in profit or loss in the consolidated statement of income. Impairment losses on equity investments are not reversed through the profit or loss in the consolidated statement of income. Increases in fair value after impairment are recognized directly in other comprehensive income in the consolidated statement of comprehensive income.

Derecognition of Financial Assets and Financial Liabilities

Financial Assets. 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 right to receive cash flows from the asset has expired; or• 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 right to receive cash flows from the asset and either (a) has

transferred substantially all the risks and rewards of the assets, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Company has transferred its right to receive cash flows from an asset 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. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of 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.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated statement of income.Offsetting of Financial InstrumentsFinancial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. The Company assesses that it has a currently enforceable right of offset if the right is not contingent on a future event, and is legally enforceable in the normal course of business, event of default, and event of insolvency or bankruptcy of the Company and all of the counterparties.

Materials and SuppliesMaterials and supplies (shown as part of “Others” under “Other current assets” account) are valued at the lower of cost and net realizable value. Cost is determined using the weighted average method. Net realizable value is the current replacement cost.

Service Concession Assets

Parent Company. The Parent Company accounts for its concession arrangement with MWSS in accordance with IFRIC 12, Service Concession Arrangement under the Intangible Asset model as it receives the right (license) to charge users of public service. Under the Concession Agreement, the Parent Company is granted the sole and exclusive right and discretion during the concession period to manage, occupy, operate, repair, maintain, decommission and refurbish the identified facilities required to provide water services. The legal title to these assets shall remain with MWSS at the end of the concession period.




Phil Hydro. Phil Hydro accounts for its Bulk Water Supply Agreements in accordance with IFRIC 12 under the Intangible Asset model as it receives the right (license) to charge users of public service.

Service concession assets are recognized to the extent that the Company receives a license or right to charge the users of the public service. The service concession assets pertain to the fair value of the service concession obligations at drawdown date and construction costs related to the rehabilitation works performed by the Company. The Parent Company’s service concession assets is amortized using unit-of-production (UOP) method over the projected total billable volume during the remaining term of the service concession arrangement. Phil Hydro amortizes its service concession assets using straight-line method over the terms of the Bulk Water Supply Agreements.

The Company recognizes and measures revenue from rehabilitation works using the percentage-of-completion method. Under this method, revenue is recognized as the related obligations are fulfilled, measured principally on the basis of the estimated physical completion of the contract work.

Cost of rehabilitation works, which includes all direct materials, labor costs, and those indirect costs related to contract performance, is recognized consistent with the revenue recognition method applied. Expected losses on contracts are recognized immediately when it is probable that the total contract costs will exceed total contract revenue. Changes in contract performance, contract conditions and estimated profitability including those arising from contract penalty provisions and final contract settlements which may result in revisions to estimated costs and gross margins are recognized in the year in which the revisions are determined. Subsequent costs and expenditures related to the concession agreement are recognized as additions to service concession assets at fair value of obligations at drawdown date and cost of rehabilitation works.

Property and EquipmentProperty and equipment, except land, are stated at cost less accumulated depreciation and any impairment in value (see policy on “Impairment of Nonfinancial Assets”). Land is stated at cost.

The initial cost of property and equipment comprises its purchase price, including import duties, taxes and any directly attributable costs in bringing the asset to its working condition and location for its intended use. Expenditures incurred after the property and equipment have been put into operation, such as repairs and maintenance, are normally charged to income 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 costs of property and equipment.

Depreciation is calculated for each significant item or part of an item of property and equipment on a straight-line basis over the following estimated useful lives:

The Company computes for depreciation charges based on the significant component of the asset.

The useful lives and depreciation method are reviewed periodically to ensure that the periods and method of depreciation are consistent with the expected pattern of economic benefits from items of property and equipment.

Land improvements 5 to 25 years

Instrumentation, tools and other equipment 5 years

Office furniture, fixtures and equipment 5 years

Transportation equipment 5 years


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Fully depreciated property and equipment are retained in the accounts until they are no longer in use and no further depreciation is charged to current operations.

An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. 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 items) is included in the consolidated statement of income in the year the item is derecognized. Impairment of Nonfinancial Assets (Property and Equipment and Service Concession AssetsAn assessment is made at each reporting date to determine whether there is any indication of impairment of any nonfinancial assets, or whether there is any indication that an impairment loss previously recognized for an asset in prior years may no longer exist or may have decreased. If any such indication exists, the asset’s recoverable amount is estimated. An asset’s recoverable amount is calculated as the higher of the asset’s value in use or its fair value less cost to sell. 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.

An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged to operations in the year in which it arises.

A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount of an asset, however, not to an amount higher than the carrying amount that would have been determined (net of any depreciation and amortization) had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is credited to current operations.

GoodwillGoodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognized for 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 synergies of the combination irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Each unit or group of units to which the goodwill is so allocated:

• represents the lowest level within the Company at which the goodwill is monitored for internal management purposes; and

• not larger than an operating segment determined in accordance with PFRS 8, Operating Segments.

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.

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 by assessing the recoverable amount of the cash-generating unit, to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognized. Where goodwill forms part of a cash-generating


unit and part of the operation within that unit is disposed, 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 and the portion of the cash-generating unit retained. Impairment loss with respect to goodwill is not reversed.

Negative goodwill which is the excess of the fair values of acquired identifiable assets and liabilities of subsidiaries over the acquisition cost of that interest, is credited directly to income. Transfers of assets between commonly controlled entities are accounted for under historical cost accounting.

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 profit or loss.

When subsidiaries are sold, the difference between the selling price and the net assets plus cumulative translation adjustments and goodwill is recognized in the consolidated statement of income.

Foreign Currency-Denominated Transactions Foreign exchange differentials arising from foreign currency transactions are credited or charged to operations. As approved by the MWSS Board of Trustees under Amendment No. 1 of the Concession Agreement, the following will be recovered through billings to customers:

• Restatement of foreign currency-denominated loans;• Excess of actual Concession Fee payments over the amounts of Concession Fees translated using the

base exchange rate assumed in the business plan approved every rate rebasing exercise;• Excess of actual interest payments translated at exchange spot rates on settlement dates over the

amounts of interest translated at drawdown date rates; and• Excess of actual payments of other financing charges relating to foreign currency-denominated loans

translated at exchange spot rates on settlement dates over the amount of other financing charges translated at drawdown date rates.

In view of the automatic reimbursement mechanism, the Parent Company recognized a deferred FCDA (included as part of “Other noncurrent assets” or “Deferred credits” accounts in the consolidated statements of financial position) with a corresponding credit (debit) to FCDA revenues for the unrealized foreign exchange losses (foreign exchange gains) which have not been billed or which will be refunded to the customers. The write-off of the deferred FCDA or reversal of deferred credits pertaining to concession fees will be made upon determination of the new base foreign exchange rate, which is assumed in the business plan approved by the RO during the latest Rate Rebasing exercise, unless indication of impairment of the deferred FCDA would be evident at an earlier date.

Deferred FCDA and deferred credits are calculated as the difference between the drawdown or rebased rate versus the closing rate. These were presented as part of “Other noncurrent assets” and “Deferred credits” accounts in the consolidated statements of financial position, respectively.As at December 31, 2015 and 2014, deferred FCDA (credits) amounted to P279.1 million and (P620.9 million), respectively.




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Customers’ DepositsCustomers’ deposits are initially measured at fair value. After initial recognition, these deposits are subsequently measured at amortized cost using the effective interest method. Amortization of customers’ deposits is included under “Interest expense and other financing charges” account in the consolidated statement of income. The discount is recognized as deferred credits and amortized over the remaining concession period using the effective interest method. Amortization of deferred credits is included as part of “Other income” account in the consolidated statement of income.

As at December 31, 2015 and 2014, the discount, shown as part of “Deferred credits” account in the consolidated statements of financial position, amounted to P583.6 million and P532.6 million, respectively.

Assets Held in TrustAssets which are owned by MWSS but are used in the operations of the Parent Company under the Concession Agreement are not reflected in the consolidated statement of financial position but carried as Assets Held in Trust, except for certain assets transferred to the Parent Company as mentioned in Note 23.

Revenue RecognitionRevenue 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. Revenue is measured at the fair value of consideration received, excluding discounts, rebates and value-added tax (VAT). Water and sewerage are billed every month according to the bill cycles of the customers. As a result of bill cycle cut-off, monthly service revenue earned but not yet billed at end of the month are estimated and accrued. These estimates are based on historical consumption of the customers.

Revenue from water and sewerage services is recognized upon supply of water to the customers and when the related services are rendered. Billings to customers consist of the following:

a. Water charges• Basic charges represent the basic tariff charged to consumers for the provision of water

services.• FCDA is the tariff mechanism that allows the Parent Company to recover foreign exchange

losses or to compensate foreign exchange gains on a current basis beginning January 1, 2002 until the Expiration Date.

• Maintenance service charge represents a fixed monthly charge per connection. The charge varies depending on the meter size.

b. Environmental charge (included as part of revenue from sewer/sanitation services) represents 20% of the water charges, except for maintenance charge.

c. Sewerage charge represents 20% of the water charges, excluding maintenance service charge, for all consumers connected to the Company’s sewer lines. Effective January 1, 2012, pursuant to RO Resolution No. 11-007-CA, sewerage charge applies only to commercial and industrial customers connected to sewer lines.

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

When the Company provides construction or upgrade services, the consideration received or receivable is recognized at its fair value. The Company accounts for revenue and costs relating to operation services based on the percentage of completion (shown as “Revenue from rehabilitation works” and “Cost of rehabilitation works” accounts in the consolidated statement of income).

Cost and Expense Recognition Expenses are decreases in economic benefits during the accounting period in the form of outflows or decrease of assets or incurrence of liabilities that result in decrease in equity, other than those relating to distributions to equity participants. Expenses are recognized in the consolidated statement of income as these are incurred.


LeasesThe determination of whether an arrangement is, or contains a lease, is based on the substance of the arrangement at inception date, whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset.

A reassessment is made after the inception of the lease only if one of the following applies:

(a) There is a change in contractual terms, other than a renewal of or extension of the arrangement;(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 fulfillment is dependent on a specified asset; or(d) There is a substantial change to the asset.

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

A lease where the lessor retains substantially all the risks and benefits of ownership of the asset is classified as an operating lease.

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

Borrowing CostsBorrowing costs are generally expensed as incurred. Borrowing costs are capitalized if they are directly attributable to the acquisition or construction 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 to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Capitalization of borrowing costs ceases when all the activities necessary to prepare the asset for its intended use or sale are substantially complete. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is recognized.

EquityCapital stock is measured at par value for all shares issued. Incremental costs incurred directly attributable to the issuance of new shares are shown in equity as a deduction from proceeds, net of tax. Proceeds and fair value of consideration received in excess of par value are recognized as additional paid-in capital.




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Treasury shares representing own equity instruments that are reacquired are recognized at cost and deducted from equity. No gain or loss is recognized in the consolidated statement of income on the purchase, sale, issuance or the cancellation of the Parent Company’s own equity instruments.

Retained earnings represent the Company’s accumulated earnings, net of dividends declared.

Value-Added Tax (VAT)Revenues, expenses and assets are recognized net of the amount of VAT except: where the VAT incurred on a purchase of assets or services is not recoverable from the tax 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; and receivables and payables that are stated with the amount of VAT included.

The net amount of current VAT recoverable from and payable to the tax authority is included as part of “Other current assets” and “Trade and other payables” accounts in the consolidated statements of financial position.

Income Taxes

Current Income 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 taxation authority. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted as at the financial reporting date.

Deferred Income Tax. Deferred income tax is provided, using the liability method, on all temporary differences at the reporting date 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. Deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized. Deferred income tax, however, is not recognized when the deductible and taxable temporary differences arise from the initial recognition of asset or liability in a transaction that is not a business combination and, at the time of transaction, affects neither the accounting profit nor taxable profit or loss.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profit will allow all or part of the deferred tax assets to be recovered.

Deferred tax assets and deferred tax liabilities are measured at the tax rate that is expected to apply to the period when the assets are realized or the liabilities are settled, based on the tax rates (and tax laws) that have been enacted or substantively enacted as at the reporting date.

Deferred tax assets and deferred tax liabilities are offset only 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.

ProvisionsProvisions 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 obligations and a reliable estimate can be made of the amount of the obligation. When the Company expects a provision to be reimbursed, such as 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 determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as an interest expense.




Pension CostThe Parent Company has a funded, noncontributory defined benefit plan. The cost of providing benefits under the defined benefit plans is actuarially determined using the projected unit credit method.

The net defined benefit liability or asset is the aggregate of the present value of the defined benefit obligation at the end of the reporting period reduced by the fair value of plan assets (if any), adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The asset ceiling is the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

Defined benefit costs comprise the following: (1) service cost; (2) net interest on the net defined benefit liability or asset; and (3) remeasurements of net defined benefit liability or asset.

Service costs which include current service costs, past service costs and gains or losses on non-routine settlements are recognized as expense in profit or loss. Past service costs are recognized when plan amendment or curtailment occurs. These amounts are calculated periodically by independent qualified actuaries.

Net interest on the net defined benefit liability or asset is the change during the period in the net defined benefit liability or asset that arises from the passage of time which is determined by applying the discount rate based on government bonds to the net defined benefit liability or asset. Net interest on the net defined benefit liability or asset is recognized as expense or income in profit or loss.

Remeasurements comprising actuarial gains and losses, return on plan assets and any change in the effect of the asset ceiling (excluding net interest on defined benefit liability) are recognized immediately in other comprehensive income in the period in which they arise. Remeasurements are not reclassified to profit or loss in subsequent periods.

Plan assets are assets that are held by a long-term employee benefit fund or qualifying insurance policies. Plan assets are not available to the creditors of the Parent Company, nor can they be paid directly to the Parent Company. Fair value of plan assets is based on market price information. When no market price is available, the fair value of plan assets is estimated by discounting expected future cash flows using a discount rate that reflects both the risk associated with the plan assets and the maturity or expected disposal date of those assets (or, if they have no maturity, the expected period until the settlement of the related obligations). If the fair value of the plan assets is higher than the present value of the defined benefit obligation, the measurement of the resulting defined benefit asset is limited to the present value of economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

Long-term Employee BenefitsThe Long Term Incentive Plan (LTIP) of the Parent Company (starting 2013) grants cash incentives to eligible employees of the Parent Company. 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 comprise the present value of the defined benefit obligation (using discount rate based on government bonds) vested at the end of the reporting period.


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Share-based PaymentsEmployees of the Parent Company receive remuneration in the form of share-based payments, whereby employees render services as consideration for equity instruments (equity-settled transactions) under the Employee Stock Option Plan (ESOP).

The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an appropriate valuation model. That cost is recognized, together with a corresponding increase in other equity adjustments, over the period in which the performance and/or service conditions are fulfilled, in “Salaries, wages and benefits” account.

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

No expense is recognized for awards that do not ultimately vest, except for equity-settled transactions for which vesting is conditional upon a market or non-vesting condition. These are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied.

When the terms of an equity-settled award are modified, the minimum expense recognized is the expense had the terms not been modified, if the original terms of the award are met. An additional expense is recognized for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee as measured at the date of modification.

ContingenciesContingent liabilities are not recognized in the consolidated financial statements. They 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. Contingent assets are not recognized unless virtually certain.

Events After the Reporting PeriodPost year-end events that provide additional information about the Company’s position at the financial reporting date (adjusting events) are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to the consolidated financial statements when material.

Earnings per Share (EPS)Basic EPS is computed based on the weighted average number of outstanding shares and adjusted to give retroactive effect to any stock split during the year. The dilutive effect of outstanding ESOP shares is reflected as additional share dilution in the computation of diluted EPS (see Note 18).

Significant Accounting Judgments, Estimates and Assumptions

The preparation of the consolidated financial statements in accordance with PFRS requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses and disclosure of contingent liabilities at the reporting date. In preparing the Company’s consolidated financial statements, management has made its best estimates and judgments of certain amounts, giving due consideration to materiality. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of relevant facts and circumstances as at the date of the consolidated financial statements. Future events may occur which will cause the assumptions used in arriving at the estimates to change. The effects of any change in estimates are reflected in the consolidated financial statements as they become reasonably determinable.

3.


Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

JudgmentsIn 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:

Fourth Rate Rebasing. In September 2013, the MWSS released its resolutions on the rate rebasing adjustment for the rebasing period 2013 to 2017 reducing Maynilad’s 2012 average all-in tariff. Maynilad has formally notified its objection and filed its Dispute Notice before the Appeals Panel. On January 5, 2015, Maynilad officially received the Appeals Panel’s award dated December 29, 2014. Maynilad already wrote the Philippine Government, through the DOF, to call on the Undertaking after the MWSS and RO’s delayed approval of the adjusted rates. Maynilad had subsequently served a Notice of Arbitration and Statement of Claim upon the Republic, through the DOF.

On May 14, 2015, the MWSS Board of Trustees in its Resolution No. 2015-060-RO approved a net adjustment of 4.32% to be applied to the prevailing average basic charge of P31.25 per cu.m. as partial implementation of the Arbitral Award. As at December 31, 2015, Maynilad’s revenue losses due to the delayed implementation of the Arbitral Award are estimated at P5.6 billion (see Note 1). The consolidated financial statements do not include any adjustments that might result from the decision of the Arbitration Tribunal and approval by the MWSS and RO.

Amortization of Service Concession Assets. The Parent Company accounts for its concession arrangement with MWSS in accordance with IFRIC 12 under the Intangible Asset model as it receives the right (license) to charge users of public service.

The Parent Company amortizes its service concession assets using UOP method, given that the economic benefit of these assets are more closely aligned with billed volume, which the Parent Company can already estimate reliably. Service concession assets, net of accumulated amortization of P18.7 billion and P16.7 billion, amounted to P62.5 billion and P56.9 billion as at December 31, 2015 and 2014, respectively (see Note 7).

Disputes with MWSS. Pending resolution of the dispute between the Parent Company and MWSS on certain claims of MWSS, the disputed amount of P5.1 billion and P5.0 billion as at December 31, 2015 and 2014, respectively, is considered as contingent liability (see Notes 7, 12 and 19).

Operating Lease Commitments – Company as Lessee. The Company has determined, based on the evaluation of the terms and conditions of the arrangements, that the significant risks and rewards for properties leased from third parties are retained by the lessors and accordingly accounts for these lease contracts as operating leases.

Total rental expense amounted to P150.6 million, P167.7 million and P158.9 million in 2015, 2014 and 2013, respectively (see Note 22).

Contingencies. The Company is currently involved in various legal and administrative proceedings. The Company’s estimate of the probable costs for the resolution of these claims has been developed in consultation with outside legal counsel handling defense in these matters and is based upon an analysis of potential results. The Company currently does not believe these proceedings will have a material adverse effect on the Company’s financial position. It is possible, however, that future results of




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operations could be materially affected by changes in the estimates or in the effectiveness of strategies relating to these proceedings (see Notes 12 and 19).

Estimates and AssumptionsThe key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Fair Value of Service Concession Payable. The determination of the cost of service concession payable requires management to make estimates and assumptions to determine the extent to which the Company receives a right or license to charge users of the public service. In making those estimates, management is required to determine a suitable discount rate to calculate the present value of these cash flows. While the Company believes that the assumptions used are reasonable and appropriate, these estimates and assumptions can materially affect the consolidated financial statements.

Fair Values of Financial Assets and Financial Liabilities. PFRS requires that certain financial assets and financial liabilities be carried at fair value, which requires the use of accounting estimates and judgments. While significant components of fair value measurement are determined using verifiable objective evidence (i.e., foreign exchange rates, interest rates, volatility rates), the timing and amount of changes in fair value would differ with the valuation methodology used. Any change in the fair value of these financial assets and financial liabilities would directly affect income and equity.

The fair values of financial assets and financial liabilities are set out in Note 25.

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.

Recognition of Revenue and Cost. The Company’s revenue recognition policies require management to make use of estimates and assumptions that may affect the reported amount of revenue. The Company measures revenue from rehabilitation works at the fair value of the consideration received or receivable. The Company’s revenue from rehabilitation works recognized based on the percentage of completion are measured principally on the basis of the estimated completion of a physical proportion of the contract works. Given that the Company has subcontracted the rehabilitation works to outside contractors (excluding the cost of some materials for some contractors), the recognized revenue from rehabilitation works substantially approximates the related cost.

Estimated Billable Water Volume. The Parent Company estimated the billable water volume, where the amortization of service concession assets is derived from, based on the period over which the Parent Company’s concession agreement with MWSS is in force. The Parent Company reviews annually the billable water volume based on factors that include market conditions such as population growth and consumption, and the status of the Parent Company’s projects and their impact on non-revenue water. It is possible that future results of operations could be materially affected by changes in the Parent Company’s estimates brought about by changes in the aforementioned factors. A reduction in the projected billable water volume would increase amortization and decrease noncurrent assets.

Service concession assets, net of accumulated amortization of P18.7 billion and P16.7 billion, amounted to P62.5 billion and P56.9 billion as at December 31, 2015 and 2014, respectively (see Note 7).

Allowance for Doubtful Accounts. The Company estimates the allowance for doubtful accounts related to the trade receivables based on two methods. The amounts calculated using each of these methods 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 receivables that the Company expects to collect, discounted at the receivables’ original effective interest rate and the carrying amount of the receivable. This specific allowance is 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 throughout the year.

The amount and timing of recorded expenses for any period would therefore differ based on the judgments or estimates made. Reversal of provision for doubtful accounts amounted to P232.0 million in 2015 while provision for doubtful accounts amounted to P0.4 million and P143.0 million in 2014 and 2013, respectively. An increase in allowance for doubtful accounts would increase the Company’s recorded expenses and decrease trade and other receivables. Trade and other receivables, net of allowance for doubtful accounts, amounted to P2.4 billion and P2.0 billion as at December 31, 2015 and 2014, respectively (see Note 5).

Determination of Impairment of AFS Financial Assets. The Company determines that AFS financial assets are impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The Company determines that a decline in fair value of greater than 20% of cost is considered to be a significant decline and a decline for a period of more than 12 months is considered to be a prolonged decline. This determination of what is significant or prolonged requires judgment. In making this judgment, the Company evaluates, among other factors, the normal volatility in share price for quoted equities. In addition, AFS financial assets are considered impaired when the Company believes that future cash flows generated from the investment is expected to decline significantly. The Company’s management makes significant estimates and assumptions on the future cash flows expected and the appropriate discount rate to determine if impairment exists. Impairment may also be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance. Impairment losses recognized in profit or loss for an investment in an equity instrument classified as AFS are not reversed through profit or loss. Subsequent increases in the fair value after the impairment are recognized directly in other comprehensive income.

Impairment loss on AFS financial assets recognized in 2014 amounted to P100.2 million while reversal of impairment loss amounted to P22.0 million in 2015 due to improvement in future cash flows. The carrying value of AFS financial assets are disclosed in Note 9.

Estimated Useful Lives of Property and Equipment. The useful life of each item of the Company’s property and equipment is 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 practices of similar businesses, internal technical evaluation and experience with similar assets. The estimated useful life of each asset is reviewed periodically 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 property and equipment would increase the recorded depreciation expense and decrease property and equipment.

There was no change in estimated useful lives of property and equipment in 2015 and 2014.Property and equipment, net of accumulated depreciation and amortization of P1.7 billion and




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P1.4 billion, amounted to P833.8 million and P809.7 million as at December 31, 2015 and 2014, respectively (see Note 8).

Deferred Tax Assets. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. However, there is no assurance that sufficient taxable profit will be generated to allow all or part of the deferred tax assets to be utilized.

The Company recognized deferred tax assets on deductible temporary differences expected to reverse after the income tax holiday (ITH) (see Note 20). The Company did not recognize deferred tax assets on deductible temporary differences that are expected to reverse during the ITH period and on items where doubt exists as to the tax benefits these deferred tax assets will bring in the future. Net deferred tax assets recognized amounted to P2.1 billion and P2.2 billion as at December 31, 2015 and 2014, respectively (see Notes 2 and 15). Unrecognized deferred tax assets amounted to P47.8 million and P864.9 million as at December 31, 2015 and 2014, respectively (see Note 15).

Deferred FCDA and Deferred Credits. Under Amendment No. 1 of the Concession Agreement, the Parent Company is entitled to recover (refund) foreign exchange losses (gains) arising from MWSS loans and any concessionaire loans. For the unrealized foreign exchange losses, the Parent Company recognized deferred FCDA as an asset since this is a resource controlled by the Company as a result of past events and from which future economic benefits are expected to flow to the Parent Company. Unrealized foreign exchange gains, however, are presented as deferred credits and will be refunded to the customers.

Pursuant to MWSS-RO Resolution No. 2014-099-RO, the new base foreign exchange rate was changed from P48.04 to P41.19 effective January 1, 2015 (see Note 7).

Deferred FCDA (credits) representing the net effect of unrealized foreign exchange losses (gains) on service concession obligation payable to MWSS, and restatement of foreign currency-denominated interest-bearing loans and related interest that are recoverable from (refundable to) the customers amounted to P279.1 million and (P620.9 million) as at December 31, 2015 and 2014, respectively.

Asset Impairment. The Company assesses impairment on assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The factors that the Company considers important which could trigger an impairment review include the following:

• significant underperformance relative to expected historical or projected future operating results;• significant changes in the manner of use of the acquired assets or the strategy for overall business; and• significant negative industry or economic trends.

The Company recognizes an impairment loss whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is computed using the value in use (VIU) approach. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit to which the asset belongs. Determining the recoverable amount 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 amounts and any resulting impairment loss could have a material adverse impact on the results of operations.

Noncurrent nonfinancial assets and AFS financial assets carried at cost and subject to impairment test when certain impairment indicators are present follow:

2015 2014

Service concession assets (see Note 7) P62,488,321 P56,926,326

Property and equipment (see Note 8) 833,821 809,718

Goodwill (see Note 2) 288,082 288,082

AFS financial assets (see Note 9) 132,387 110,377

Total P63,742,611 P58,134,503


The goodwill arising from the acquisition of Phil Hydro represents the fair value of expected incremental economic benefits that the Parent Company expects to obtain. The impairment test of goodwill is based on VIU calculations that used the discounted cash flow model. The VIU was based on the cash flow projections on the most recent financial budgets and forecast of Phil Hydro. The length of the projections is up to 2035 based on the existing Bulk Water Supply Agreements. The discount rate applied was 10.7%, which was based on the weighted average cost of capital. Based on the impairment test, the Parent Company did not identify any impairment loss. With regard to the assessment of VIU, management believes that no reasonably possible change in any key assumptions would cause the carrying values of the units to materially exceed the recoverable amount. As at December 31, 2015 and 2014, no impairment loss on goodwill was recognized.

The Company performs its annual impairment test close to year-end, after finalizing the annual financial budget and forecast. The impairment test of goodwill is based on VIU calculation that uses the discounted cash flow model. Cash flow projections are based on most recent financial budget and forecast. Discount rate applied is based on market weighted average cost of capital with estimated premium over cost of equity. The key assumptions used to determine the recoverable amount are discussed below.

Based on the impairment test performed, management did not identify impairment loss on goodwill. Management also believes that no reasonably possible change in any of the key assumptions would cause the carrying value to materially exceed the recoverable amount.

The forecasted period is greater than five (5) years as management can reliably estimate the cash flow for the entire duration of Phil Hydro’s concession period covered by the Bulk Water Supply Agreements and Memorandum of Agreement.

Impairment loss on AFS financial assets recognized in 2014 amounted to P100.2 million while reversal of impairment loss amounted to P22.0 million in 2015. Computation of Pension Cost. The cost of defined benefit pension plans and other post-employment benefits as well as the present value of the pension obligation are determined using actuarial valuations. The actuarial valuation involves making various assumptions. These include the determination of the discount rate, turnover rate, mortality rate and salary increase rate. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, defined benefit obligations are highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date.

In determining the appropriate discount rate, management considers the interest rates of government bonds that are denominated in the currency in which the benefits will be paid, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. Turnover rate is based on a 3-year historical information of voluntary separation and resignation by plan members.



2015 2014

Revenue growth rate* 2.0% 2.0%

Average forecast period 20 years 21 years

Discount rate 8.7% 8.7%

*Average growth represents average of year-over-year growth over the terms of the Bulk Water Supply Agreements and Memorandum of Agreement


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The mortality rate is based on publicly available mortality tables for the specific country and is modified accordingly with estimates of mortality improvements. Future salary increases and pension increases are based on expected future inflation rates for the specific country.

Pension liability amounted to P416.2 million andP281.8 million as at December 31, 2015 and 2014, respectively (see Note 16).

Computation of Share-based Payment Transactions. 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 estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the option, volatility, discount rates 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 13.

Equity-based compensation expense presented as part of “Salaries, wages and benefits” account in consolidated statements of income amounted to P146.1 million, nil and P2.8 million in 2015, 2014 and 2013, respectively (see Note 13).

Determination of Other Long Term Incentives Benefits. The LTIP for key executives of MPIC and certain subsidiaries, including the Parent Company, was approved by the Executive Compensation Committee and the BOD of MPIC which is based on profit targets for the covered Performance Cycle. In addition, in 2013, the Parent Company has approved an LTIP for its managers and executives which is also based on profit targets for the covered Performance Cycle of 2013 to 2015. 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.Accrued LTIP amounted to P429.0 million and P279.2 million as at December 31, 2015 and 2014, respectively. The total cost of the LTIP recognized by the Company presented as part of “Salaries, wages and benefits” account in the consolidated statements of income amounted to P149.8 million,P130.9 million and P148.3 million in 2015, 2014 and 2013, respectively (see Notes 11 and 16).

Cash and Cash Equivalents

This account consists of:

Cash in banks earn interest at the respective bank deposit rates. Cash equivalents are made for varying periods between one day and three months depending on the immediate cash requirements of the Company and earn interest at the respective short-term investment rates.

Short-term investments amounting to P6.1 billion and P2.9 billion as at December 31, 2015 and 2014, respectively, with original maturities of more than three months to one year are separately shown in the consolidated statements of financial position.

Interest income earned from cash in banks and short-term investments amounted to P134.9 million, P81.3 million and P90.6 million in 2015, 2014 and 2013, respectively.

4.

2015 2014

Cash on hand and in banks P982,791 P828,138

Cash equivalents 2,110,221 3,360,400

P3,093,012 P4,188,538




Trade and Other Receivables

This account consists of receivables from:

The classes of the Company’s receivables from customers are as follows:

• Residential – pertains to receivables arising from water and sewer service use for domestic purposes only.• Semi-business – pertains to receivables arising from water and sewer service use for small businesses.• Commercial – pertains to receivables arising from water and sewer service use for commercial purposes.• Industrial – pertains to receivables arising from water and sewer service use for industrial purposes,

including services for manufacturing.• Bulk water supply – pertains to receivables arising from water service to water districts outside the

West Service Area.

Receivables from customers and bulk water supply are non-interest bearing and generally have 60 day term.

Other receivables consist mainly of receivables from collecting agents normally received within 30 days and advances for construction and installation of water reticulation systems for subdivisions in the West Service Area payable on installment basis over a period of 3-5 years. Portion of advances for water reticulation systems expected to be collected beyond one year is presented as part of “Other noncurrent assets” account in the consolidated statements of financial position.

The movements in the Company’s allowance for doubtful accounts follow:

5.

2015 2014

Customers:

Residential P1,908,889 P1,958,371

Semi-business 241,700 199,060

Commercial 721,963 625,593

Industrial 155,901 130,567

Bulk water supply 42,362 29,937

3,070,815 2,943,528

Employees 39,899 32,966

Others 348,722 340,027

3,459,436 3,316,521

Less allowance for doubtful accounts 1,030,624 1,267,971

P2,428,812 P2,048,550

2015

Receivables from Customers Other

Residential Semi-business Commercial Industrial Receivables Total

At January 1 P566,133 P149,377 P344,104 P131,787 P76,570 P1,267,971

Reversal during the year

(109,991) (29,143) (67,133) (25,711) – (231,978)

Write-off (5,369) – – – – (5,369)

At December 31 P450,773 P120,234 P276,971 P106,076 P76,570 P1,030,624


112

Other Current Assets


Sinking fund represents the amount set aside to cover semi-annual principal and interest payment of loans, and unutilized proceeds from the US$137.5 million loan drawdowns for the Metro Manila Wastewater Management Project maintained in a designated bank account (see Note 10).

Advances to contractors are normally applied within a year against progress billings.

Deposits mainly consist of refundable rental deposits.

Prepayments mainly pertain to insurance, premium bond, and taxes (see Note 22).

Service Concession Assets

The movements in this account are as follows:

Service concession assets consist of the present value of total estimated concession fee payments pursuant to the Concession Agreement and the costs of rehabilitation works incurred.

The aggregate Concession fee pursuant to the Concession Agreement is equal to the sum of the following:

a. 90% of the aggregate peso equivalent due under any MWSS loan which has been disbursed prior to the Commencement Date, including MWSS loans for existing projects and the raw water conveyance component of the Umiray-Angat Transbasin Project (UATP), on the relevant payment date set forth on the pertinent schedule of the Concession Agreement;

2014

Receivables from Customers Other

Residential Semi-business Commercial Industrial Receivables Total

At January 1 P565,775 P149,377 P344,104 P131,787 P76,570 P1,267,613

Provision during the year

358 – – – – 358

At December 31 P566,133 P149,377 P344,104 P131,787 P76,570 P1,267,971

6.

7.

2015 2014

Sinking fund (see Note 10) P1,773,843 P1,746,491

Advances to contractors 987,035 410,475

Input VAT 191,749 158,908

Deposits 140,250 138,290

Prepayments (see Note 22) 59,311 159,880

Others 64,564 60,587

P3,216,752 P2,674,631

2015 2014

Cost:

Balance at beginning of year P73,633,419 P69,463,373

Additions 8,232,006 4,170,046

Effect of change in rebased rate (632,327) –

Balance at end of year 81,233,098 73,633,419

Accumulated amortization:

Balance at beginning of year 16,707,093 14,902,645

Amortization 2,037,684 1,804,448

Balance at end of year 18,744,777 16,707,093

P62,488,321 P56,926,326


b. 90% of the aggregate peso equivalent due under any MWSS loan designated for the UATP which has not been disbursed prior to the Commencement Date on the relevant payment date set forth on the pertinent schedule of the Concession Agreement;

c. 90% of the local component costs and cost overruns related to the UATP in accordance with the pertinent schedule of the Concession Agreement;

d. 100% of the aggregate peso equivalent due under any MWSS loan designated for existing projects, which have not been disbursed prior to the Commencement Date and have been either awarded to third party bidders or been elected by the Parent Company for continuation in accordance with the pertinent sections of the Concession Agreement;

e. 100% of the local component costs and cost overruns related to the existing projects in accordance with relevant schedule of the Concession Agreement; and

f. Maintenance and operating expenditure (MOE) representing one-half of the annual budget for MWSS for that year, provided that such annual budget shall not exceed P200.0 million (as at 1997), subject to annual CPI adjustment (see Note 22).

Tranche B Concession Fees are additional concession fees being charged by MWSS to the Parent Company representing the cost of borrowings by MWSS as at December 2004. As at December 31, 2015 and 2014, the Parent Company had recognized and fully paid Tranche B Concession Fees of US$36.9 million and the related accrued interest thereon (see Note 12).

Pursuant to the recommendation of the Receiver, the disputed amount being claimed by MWSS of additional Tranche B Concession Fees of US$18.1 million is considered as contingent liability of the Parent Company, as discussed in Note 19.

The Parent Company recognized additional concession fees amounting to P503.5 million and P4.9 million in 2015 and 2014, respectively, mainly pertaining to various rehabilitation projects and UATP-related local component costs (see Note 12).

Specific borrowing costs capitalized as part of service concession assets amounted to P99.4 million and nil in 2015 and 2014, respectively (see Note 10).

On March 11, 2015, the MWSS Board of Trustees approved and confirmed the recommendation of the MWSS-RO to set aside the status quo of the FCDA and resume its normal operation starting first quarter of 2015. Under MWSS-RO Resolution No. 2014-002-CA, the MWSS-RO approved an FCDA equivalent to 1.12% of the 2015 basic charge of P33.97 per cu.m. or P0.38 per cu.m., effective January 1, 2015. The said FCDA adjustment was determined using the new rebased rate of P41.19 approved by the MWSS-RO, applicable to concession fee payments starting January 1, 2013.

The effect of change in rebased rate amounting to P632.3 million was accounted for as an adjustment to “Service concession assets” and “Deferred credits” accounts to adjust their carrying value based on the newly determined and approved rebased rate (see Note 3).




114

Property and Equipment

The rollforward analysis of this account follows:

AFS Financial Assets

This account pertains to the Company’s investments in unquoted equity shares:

In 2014, impairment loss recognized amounted to P100.2 million, presented as part of “Others - net” under “Other income (expenses)” in the consolidated statement of income. In 2015, the Company recognized reversal of impairment loss amounting to P22.0 million under “Other comprehensive income” in the consolidated statement of comprehensive income.

8.

9.

2015

Land and Land Improvements

Instrumentation, Tools and Other

Equipment

Office Furniture, Fixtures and

Equipment

Transportation Equipment

Total

Cost

At January 1 P41,275 P1,177,403 P773,756 P259,111 P2,251,545

Additions – 114,659 124,858 46,800 286,317

Disposals – (1,327) (11,040) (8,731) (21,098)

At December 31 41,275 1,290,735 887,574 297,180 2,516,764

Accumulated Depreciationand Amortization

At January 1 2,876 677,662 606,032 155,257 1,441,827

Depreciation and amortization 747 117,018 106,677 35,732 260,174

Disposals – (1,327) (11,002) (6,729) (19,058)

At December 31 3,623 793,353 701,707 184,260 1,682,943

Net Book Value at December 31 P37,652 P497,382 P185,867 P112,920 P833,821

2014

Land and Land Improvements

Instrumentation, Tools and Other

Equipment

Office Furniture,Fixtures and

Equipment

Transporta-tion Equip-

ment

Total

Cost

At January 1 P40,075 P810,658 P697,252 P224,908 P1,772,893

Additions 1,200 383,709 82,821 58,462 526,192

Reclassification – (3,771) 3,771 – –

Disposals – (13,193) (10,088) (24,259) (47,540)

At December 31 41,275 1,177,403 773,756 259,111 2,251,545

Accumulated Depreciation and Amortization

At January 1 2,347 567,472 511,519 143,283 1,224,621

Depreciation and amortization 529 122,460 104,592 29,164 256,745

Disposals – (12,270) (10,079) (17,190) (39,539)

At December 31 2,876 677,662 606,032 155,257 1,441,827

Net Book Value at December 31 P38,399 P499,741 P167,724 P103,854 P809,718

2015 2014

Cost P221,093 P221,093

Less allowance for impairment loss 88,706 110,716

P132,387 P110,377


Interest-bearing Loans


P21.2 billion Term LoanOn March 22, 2013, the Parent Company entered into several loan agreements for the refinancing of all of its existing loans under the 2008 and 2011 Omnibus Notes Facility and Security Agreements (ONFSA) (collectively referred to as “Corporate Notes”), whereby the Parent Company was granted a Term Loan Facility (the “Term Loan”) in the aggregate amount of P21.2 billion. Under the new terms, the loans shall be payable in semi-annual installments within ten years to commence at the end of the 6th month after the initial issue date and bears an interest rate per annum equal to the higher of (i) the applicable benchmark rate plus 0.75% per annum, or (ii) 5.75% per annum. The benchmark rate shall be determined by reference to the PDST-F rate. The Term Loan is secured by a negative pledge. The change in the terms of the loan contracts was assessed as substantial modification of the Corporate Notes and thus, resulted to derecognition of the old loan and recognition of new financial liability.

All transaction costs incurred in relation to the loan refinancing totaling P748.5 million and unamortized debt issuance costs related to ONFSA amounting to P14.8 million were charged to expense presented as part of “Interest expense and other financing charges” and “Others - net” accounts under “Other income (expenses)” in the 2013 consolidated statement of income (see Note 17). P5.0 billion Corporate NotesOn April 29, 2013, the Parent Company entered into a Loan Agreement (Corporate Notes) with a local bank. The loan shall be payable in semi-annual installments within ten years to commence at the end of the 42nd month, and bears a fixed rate per annum equal to the higher of (i) the applicable benchmark rate plus 0.75% per annum, or (ii) 5.75% per annum. The benchmark rate shall be determined by reference to the PDST-F rate. The P5.0 billion Corporate Notes is secured by a negative pledge.

Debt Issuance Costs. All legal and professional fees incurred in relation to the debt totaling P42.8 million were capitalized in 2013. Debt issuance costs are amortized using the effective interest method. Amortization of debt issuance costs attributed to this loan amounting to P3.9 million,P3.6 million and P2.5 million in 2015, 2014 and 2013, respectively, is presented as part of“Interest expense and other financing charges” account in the consolidated statements of income(see Note 17).



10.

2015 2014

P21.2 billion Term Loan P16,921,639 P18,613,802

P5.0 billion Corporate Notes 5,000,000 5,000,000

US$137.5 million Loan 2,016,649 662,902

P5.2 billion Corporate Notes 1,000,000 −

Peso-denominated Bank Loan 255,000 –

25,193,288 24,276,704

Less unamortized debt issuance costs 113,949 75,293

25,079,339 24,201,411

Less current portion 1,742,164 1,692,163

P23,337,175 P22,509,248


116

US$137.5 million Loan The World Bank (WB), through the Metro Manila Wastewater Management Project (MWMP), provided a US$275.0 million loan to the Land Bank of the Philippines (LBP) for relending at an equal share to the two Concessionaires of the MWSS namely, Maynilad and Manila Water. The MWMP is expected to finance investments in wastewater collection and treatment, and septage management in Metro Manila.

The loan will fund the following projects:

1. Rehabilitation of Ayala Alabang Sewage Treatment Plant (STP) 2. Talayan STP (part of the San Juan River Basin Project) 3. Valenzuela STP and associated wastewater conveyance system 4. Pasay STP and associated wastewater conveyance system 5. Muntinlupa STP and associated wastewater conveyance system 6. South Septage Treatment Plant The WB and the LBP signed the Loan Agreement on May 31, 2012 while the Subsidiary Loan Agreement between LBP and Maynilad was executed on October 25, 2012.

The loan shall be payable in semi-annual installments within 25 years, inclusive of seven years grace period. The interest shall be paid semi-annually based on the same rate of interest payable by LBP under the WB Loan Agreement, plus fixed spread of 1.25% per annum. The loan is secured by a negative pledge.

Summary of transactions during the year is as follows:

The US$6.2 million and US$4.9 million balance as at December 31, 2015 and 2014, respectively, represents the outstanding balance of LBP designated account No. 3404-031-936, under the account name MWMP - Category 2 - MWSI, and is presented as part of “Sinking fund” under “Other current assets” account in the consolidated statements of financial position (see Note 6).

The US$42.9 million and US$14.8 million cumulative drawn amount as at December 31, 2015 and 2014, respectively, is presented as part of the noncurrent portion of the interest-bearing loans. As atDecember 31, 2015, undrawn amount from this facility amounting to US$94.6 million out of Maynilad’s share of US$137.5 million from the facility, is available until June 30, 2017.

The proceeds of the World Bank loan have been expended in accordance with the intended purposes as specified in the Loan Agreement.

Debt Issuance Costs. All legal and professional fees incurred in relation to the debt totaling P42.8 million were capitalized in 2013. Debt issuance costs are amortized using the effective interest method. Amortization of debt issuance costs attributed to this loan amounting to P2.5 million, P3.0 million and P1.3 million in 2015, 2014 and 2013, respectively, is presented as part of “Interest expense and other financing charges” account in the consolidated statements of income (see Note 17).


P5.2 billion Corporate NotesOn February 24, 2014, the Parent Company entered into a Loan Agreement (Corporate Notes) with the Development Bank of the Philippines. The loan proceeds shall be used to finance the first stage of the Parañaque-Las Piñas STP and associated wastewater conveyance system. The loan shall be payable in

2015 2014

Balance at beginning of year US$4,861,622 US$1,462,215

Amount received during the year 28,029,328 12,823,388

Bank charges (50) (70)

Net amount 32,890,900 14,285,533

Expenditures during the year (26,669,125) (9,423,911)

Balance at end of year US$6,221,775 US$4,861,622




semi-annual payments within fifteen years to commence at the end of the fifth year, which bears a fixed rate per annum equal to 6.0%. The first drawdown amounting to P1.0 billion was made on March 2, 2015. Undrawn amount from this facility amounting to P4.2 billion as at December 31, 2015 is available until February 2017. The P5.2 Billion Corporate Notes is secured by a negative pledge.

Debt Issuance Costs. All legal and professional fees incurred in relation to the debt totaling P46.1 million were capitalized in 2015. Debt issuance costs are amortized using the effective interest method. Amortization of debt issuance costs attributed to this loan amounting to P2.2 million in 2015 is presented as part of “Interest expense and other financing charges” account in the consolidated statement of income (see Note 17).


Covenants. The loan agreements contain, among others, covenants 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 (see Note 6). As at December 31, 2015 and 2014,the Parent Company has complied with these covenants.

Under the terms of the loan agreements, the Parent Company may, at its option and without premium and penalty, redeem the Corporate Notes in whole or in part, subject to the conditions stipulated in the agreements. The embedded early redemption and prepayment options are clearly and closely related to the host debt contract, and thus, do not require to be bifurcated and accounted for separately in the host contract.

Peso-denominated Loan of Phil HydroOn May 4, 2015, Phil Hydro entered into a Loan Agreement with the Land Bank of the Philippines. The loan shall be payable in quarterly installments within eight years to commence after the end of the8th quarter, and bears an interest rate per annum equal to the higher of (i) the applicable benchmark rate plus 1.0% per annum, or (ii) 5.5% per annum. The benchmark rate shall be determined by reference to the PDST-R2 rate. The peso-denominated loan is secured by a negative pledge.

Debt Issuance Costs. All legal and professional fees incurred in relation to the debt totaling P1.3 million were capitalized in 2015. Debt issuance costs are amortized using the effective interest method. Amortization of debt issuance costs attributed to this loan amounting to P0.1 million is presented as part of “Interest expense and other financing charges” account in the 2015 consolidated statement of income (see Note 17).

Covenants. The loan agreement contains, among others, covenants regarding the maintenance of certain financial ratios such as debt-to-equity ratio and debt service coverage ratio. As at December 31, 2015, Phil Hydro has complied with these covenants.

The movements in the balance of unamortized debt issuance costs related to all interest-bearing loans are as follows:

2015 2014

Balance at beginning of year P75,293 P81,888

Additions during the year 47,326 −

Amortization during the year (see Note 17) (8,670) (6,595)

P113,949 P75,293


118

The repayments of loans based on existing terms are scheduled as follows:

Trade and Other Payables


Trade and other payables are non-interest bearing and are normally settled within one year.

Trade payables include liabilities relating to assets held in trust (see Note 23) used in the Company’s operations amounting to P97.3 million as at December 31, 2015 and 2014.

Other accrued expenses mainly consist of provisions, salaries, wages and benefits, contracted services and interest payable to the banks. Details of provisions required by PAS 37, Provisions, Contingent Liabilities and Contingent Assets, are not disclosed as these may prejudice the Company’s positions in relation to the cases pending before the courts or quasi-judicial bodies.

Acquisition of Phil HydroAs discussed in Note 2, the Parent Company acquired Phil Hydro in August 2012 for a net consideration of P526.9 million payable in tranches upon satisfaction of certain conditions precedent. Initial payment at the date of acquisition amounted to P210.0 million. Subsequent payments made amounted toP29.6 million, P66.0 million and P195.4 million in 2015, 2014 and 2013, respectively. Upon final payment of the last tranche of the purchase price in 2015, the Parent Company was able to further negotiate a discount amounting to P25.9 million recognized as part of “Others - net” under “Other income (expenses)” in the 2015 consolidated statement of income. As at December 31, 2015 and 2014, the remaining unpaid purchase price included as part of “Trade and other payables” account amounted to nil and P55.5 million, respectively.

Service Concession Obligation Payable to MWSS


In Original Currency

Year US Dollar-denominated* Peso Loans Total Peso Equivalent*

(In Millions)

2016 $– P1,742.16 P1,742.16

2017 – 1,808.10 1,808.10

2018 – 1,824.04 1,824.04

2019 1.19 1,824.04 1,880.10

2020 onwards 41.66 15,978.30 17,938.89

$42.85 P23,176.64 P25,193.29

*Translated using the December 31, 2015 exchange rate of P47.06:US$1.

11.

2015 2014

Trade payables P2,304,384 P1,929,602

Accrued construction costs (see Note 14) 2,886,154 2,377,168

Due to related party (see Note 14) 1,900 1,900

Other accrued expenses (see Note 16) 6,134,784 6,025,050

P11,327,222 P10,333,720

12.

2015 2014

Concession fees payable (see Note 7) P7,487,645 P7,528,126

Accrued interest 607,217 607,217

8,094,862 8,135,343

Less current portion 1,357,705 1,094,378

P6,737,157 P7,040,965


Disputes with MWSSIn prior years, the Parent Company has been contesting certain charges billed by MWSS relating to:(a) the basis of the computation of interest; (b) MWSS cost of borrowings; and (c) additional penalties. Consequently, the Parent Company has not provided for these additional charges. These disputed charges have been reflected by virtue of the Debt and Capital Restructuring Agreement (DCRA) entered into in 2005. Accordingly, the Parent Company has recognized these additional charges, referred to as Tranche B Concession Fees in the DCRA, amounting to US$30.1 million. As discussed in Note 7, the Receiver determined an additional amount of Tranche B Concession Fees of US$6.8 million. As at December 31, 2015 and 2014, the Parent Company had recognized Tranche B Concession Fees of US$36.9 million (see Note 7).

The Parent Company reconciled its liability to MWSS with the confirmation and billings of MWSS. The difference between the amount confirmed by MWSS and the amount recognized by the Parent Company amounted to P5.1 billion and P5.0 billion as at December 31, 2015 and 2014, respectively. The difference mainly pertains to disputed claims of MWSS consisting of additional Tranche B Concession Fees (see Note 7), borrowing cost and interest penalty under the Concession Agreement (prior to the DCRA). The Parent Company’s position on these charges is consistent with the Receiver’s recommendation which was upheld by the Rehabilitation Court (see Notes 7 and 19).

Following the issuance of the Rehabilitation Court’s Order on December 19, 2007 disallowing the MWSS’ disputed claims and the termination of the Parent Company’s rehabilitation proceedings, the Parent Company and MWSS sought to resolve the matter in accordance with the dispute resolution requirements of the TCA.

Prior to the DCRA, the Parent Company has accrued interest on its payable to MWSS based on the terms of the Concession Agreement, which was disputed by the Parent Company before the Rehabilitation Court. These already amounted to P985.3 million as at December 31, 2011 and have been charged to interest expense in prior years. The Parent Company maintains that the accrued interest on its payable to MWSS has been adequately replaced by the Tranche B Concession Fees discussed above. The Parent Company’s position is consistent with the Receiver’s recommendation which was upheld by the Rehabilitation Court (see Notes 7 and 19). With the prescription of the TCA and in light of the Parent Company’s current negotiation and outstanding offer of US$14.0 million to fully settle the claim of MWSS, the Parent Company reversed the amount of accrued interest in excess of the US$14.0 million settlement offer amounting to P378.1 million and charged to other income in 2012. The remaining balance of P607.2 million as at December 31, 2015 and 2014, which pertains to the disputed interest penalty under the Concession Agreement prior to DCRA, has remained in the books pending resolution of the remaining disputed claims of MWSS.

The schedule of undiscounted estimated future concession fee payments, based on the term of the Concession Agreement, is as follows:



In Original Currency

Year Foreign Currency Loans(Translated to US$)*

Peso Loans/ProjectLocal Support

Total Peso Equivalent*

(In Millions)

2016 $19.1 P1,518.6 P2,419.6

2017 14.2 518.0 1,186.9

2018 14.2 536.1 1,204.1

2019 14.2 536.2 1,204.9

2020-2037 58.8 9,638.6 12,406.7

$120.5 P12,747.5 P18,422.2

* Translated using the December 31, 2015 exchange rate of P47.06:US$1.


120

Additional concession fee liability relating to the extension of the Concession Agreement (see Note 1) is only determinable upon loan drawdown of MWSS and the actual construction of the related concession projects.

Equity

a. The Parent Company’s authorized and issued shares as at December 31, 2015 and 2014 are presented below:

Class A shares, comprising sixty percent (60%) of the authorized common shares, may only be subscribed by Filipino citizens or corporations or associations organized under the laws of the Philippines with at least sixty percent (60%) of the capital owned by Filipino citizens.

Class B shares, comprising forty percent (40%) of the authorized common shares, may be subscribed by, transferred to and owned by either Filipino citizens or by aliens.

b. ESOP

The employees of the Parent Company are allowed equity participation of up to six percent (6%) of the issued and outstanding capital stock of the Parent Company upon the effective date of the increase in authorized capital stock of the Parent Company pursuant to and in accordance with the provisions of Clause 2.6 of the DCRA. For this purpose, a series of 88,500,000 nonvoting convertible redeemable shares (ESOP Shares) was created from common Class A shares as reflected in the Parent Company’s amended Articles of Incorporation. In 2008, the ESOP shares were effectively reduced to 88,500 shares due to change in par value from P1 to P1,000. The ESOP shares have no voting rights, except for those provided under Section 6 of the Corporation Code and have no pre-emptive rights to purchase or subscribe to future or additional issuances or disposition of shares of the Parent Company.

Within thirty (30) days after the earlier of (i) the end of the fifth year from the creation of the ESOP Shares, and (ii) the listing date for common shares in a recognized Philippine Stock Exchange, the Parent Company may redeem the ESOP shares at a redemption ratio equal to one common share for every ESOP share held and such common shares so exchanged shall have the same rights and privileges as all other common shares.

Each ESOP Share will be convertible, at the option of the holder thereof, at any time during the period commencing the earlier of (i) the end of the fifth year from the creation of the ESOP Shares; or (ii) the listing date for common shares in a recognized Philippine Stock Exchange into one fully-paid and non-assessable common share. Such common share shall have the same rights and privileges as all other common shares. Conversion of the ESOP Share may be effected by surrendering the certificates representing such shares to be converted to the Parent Company at the Parent Company’s principal office or at such other office or offices as the BOD may designate, and a duly signed and completed notice of conversion in such form as may from time to time be specified by the Parent Company (a “Conversion Notice”), together with such evidence as the Parent Company may reasonably require to prove the title of the person exercising such right. A Conversion Notice once given may not be withdrawn without the consent in writing of the Parent Company.

13.

Number of Shares

2015 2014

Authorized and issued - P1,000 par value

Common shares

Class A 4,222,482 4,222,482

Class B 236,000 236,000

ESOP 88,500 88,500

4,546,982 4,546,982




In 2012, ESOP shares reacquired by the Parent Company from its resigned employees amounting to P3.2 million were presented as treasury shares.

In 2012, the Board and shareholders of the Parent Company approved the amendment of its Articles of Incorporation to allow for the reissuance of ESOP shares that have been bought back by the Parent Company from separated employees. Upon approval by the SEC of the amendment on January 31, 2013, said ESOP shares were subsequently reissued to all qualified employees of the Parent Company.

In 2014, ESOP shares reacquired by the Company from employees who availed of the Special Opportunity Program (SOP) amounting to P94.4 million were presented as part of “Treasury shares” account shown under the equity section of the consolidated statements of financial position (see Note 16).

In 2015, ESOP shares reacquired by the Parent Company from its resigned employees amounting to P6.1 million were presented as treasury shares.

c. Dividends

On February 13, 2013, Parent Company’s BOD set and approved the declaration of cash dividends of P2,841.32 per common share amounting to P11.4 billion to all shareholders of record as at February 4, 2013. Payments were made in tranches from February 13, 2013 up to April 5, 2013.

On June 24, 2013, during the regular meeting, the Parent Company’s BOD set and approved the declaration of cash dividends of P241.92 per common share amounting to P1.1 billion to all shareholders of record as at June 24, 2013. Payments were made in tranches from July 22, 2013 up to September 27, 2013.

On November 25, 2013, during the regular meeting, the Parent Company’s BOD set and approved the declaration of cash dividends of P219.93 per common share amounting to P1.0 billion to all shareholders of record as at November 25, 2013. Payments were made in tranches from December 10 to 26, 2013.

On February 24, 2014, during the regular meeting, the Parent Company’s BOD set and approved the declaration of cash dividends of P220.01 per common share amounting to P1.0 billion to all shareholders of record as at February 24, 2014. Payments were made in tranches from April 2, 2014 to June 25, 2014.

On February 23, 2015, during the regular meeting, the Parent Company’s BOD set and approved the declaration of cash dividends of P442.09 per common share amounting to P2.0 billion to all shareholders of record as at March 1, 2015. Payments were made on March 17, 2015.

d. Appropriation of Retained Earnings

On November 26, 2012, the Parent Company’s BOD approved the appropriation of P10.2 billion for distribution of cash dividends to its stockholders. On February 13, 2013, the BOD reversed the P2.0 billion previously appropriated for capital expenditures and declared cash dividends amounting to P11.4 billion.


122

On November 25, 2013 and February 23, 2015, the Parent Company’s BOD approved the appropriation of its retained earnings amounting to P4.0 billion and P3.5 billion, respectively, for various water and sewerage projects expected to be implemented in the next two years.

e. Equity Adjustments

The Parent Company has issued and redeemed preferred shares in 2008. Foreign exchange fluctuation from date of issuance of the preferred shares to the date of notice of redemption is issued, amounting to P351.0 million, is recognized as part of “Other equity adjustments” account shown under the equity section of the consolidated statements of financial position.

MPIC 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 10 years. An amended plan was approved by the stockholders on February 20, 2009.

As amended, the overall limit on the number of shares that 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 exercise price in relation to each option shall be determined by the Parent 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 business days on which dealings in the shares are made immediately preceding the option offer date; and (iii) the par value of the shares.

MPIC allocated and set aside stock options relating to an additional 145,000,000 common shares, of which, (a) 94,300,000 common shares were granted to its new directors and senior management officers, as well as members of the management committee of certain MPIC subsidiaries (includes 15,200,000 common shares granted to officers of the Parent Company) at the exercise price of P2.73 per common share on July 2, 2010 and (b) another 10,000,000 common shares were granted at the exercise price of P3.50 on December 21, 2010 to officers of the Parent Company.

On March 8, 2011, 1,000,000 common shares were granted at the exercise price of P3.53 to senior management of the Parent Company. The weighted average remaining term to expiry for the share options outstanding as at December 31, 2015 and 2014 is as follows:

2015 2014

(In Years)

Second grant − 0.5

Third grant 0.1 1.1




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:

Starting in 2012, no additional stock option activity was received from MPIC.

Maynilad Share-based PaymentOn November 23, 2015, the BOD approved the awarding of 23,777 ESOP shares to all qualified Maynilad employees to be paid through stock purchase bonus (equity-settled transaction). The ESOP covers employees who have met the following eligibility criteria:

a. The employee has completed a full year’s service, from November 2, 2014 to November 1, 2015 (the “Period”);b. The employee has obtained at least a satisfactory performance rating for the appraisal

period immediately preceding November 1, 2015;c. The employee has not been suspended at any time during the Period;d. The employee has not exceeded 10 days of absences without official leave during the Period; ande. The employee has not exceeded 20 days of leave without pay during the Period.

Grant dated July 2, 2010

30.0% vestingon July 2, 2011



Spot price P2.65 P2.65 P2.65

Exercise price P2.73 P2.73 P2.73

Risk-free rate 4.61% 5.21% 5.67%

Expected volatility* 69.27% 67.52% 76.60%

Term to vesting (in days) 365 731 1,096

Call price P0.73 P1.03 P1.39

Grant dated December 21, 2010

30.0% vestingon August 1, 2011





Risk-free rate 1.62% 2.83% 3.73%


Term to vesting (in days) 223 589 954


Grant dated March 8, 2011

30.0% vestingon March 8, 2012





Risk-free rate 2.56% 4.38% 5.01%


Term to vesting (in days) 366 731 1,096


*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 be the actual outcome.


124

Communication to eligible employees was made on December 1, 2015.

The fair value of ESOP shares amounting to P6,143.22 per share was determined based on the Parent Company’s equity value at the date of grant using the discounted cash flows (DCF) method.

The grant of shares under the ESOP does not require an exercise price to be paid by the employees nor are there cash alternatives. All ESOP shares will be held in treasury until issuance. On February 9, 2016, the ESOP shares have been issued to qualified employees.

Equity-based compensation expense recognized by the Parent Company under “Salaries, wages and benefits” account in the consolidated statements of income amounted to P146.1 million, nil and P2.8 million in 2015, 2014 and 2013, respectively.

Carrying value of the ESOP recognized under “Other equity adjustments” in the equity section of the consolidated statements of financial position amounted to P187.9 million and P41.8 million as at December 31, 2015 and 2014, respectively.

Related Party Transactions

Parties are considered to be related if one party has the ability to control, directly or indirectly,the other party or exercise influence over the other party in making financial and operating decisions. Parties are considered to be related if they are subject to common control or common significant influence.

Category Year Amount/Volume of Transactions

OutstandingReceivable (Payable)

Terms Conditions

Affiliates

DM Consunji, Inc.

Revenue from water and sewer services

2015

2014

P15.2 million

9.9 million

P1.6 million

1.2 million

Noninterest-bear-ing, settlement in cash and payable on demand

Unsecured

Construction costs (see Note 11)

2015

2014

952.0 million

583.2 million

284.6 million

(1.9 million)


Unsecured

Manila Electric Company


2015

2014

6.0 million

5.0 million

1.0 million

1.0 million


Unsecured

Electricity costs 2015

2014

776.8 million

783.3 million

(29.6 million)

(29.3 million)


Unsecured

Indra Philippines, Inc.

Commercial outsourcing of information technolo-gy and system services

2015

2014

170.8 million

198.6 million

(26.0 thousand)

–


Unsecured

Meralco Industrial Engineering Services Corporation

Construction costs (see Note 11)

2015

2014

195.5 million

152.1 million

(24.5 million)

(15.9 million)


Unsecured

Philippine Long Distance Telephone Company


2015

2014

5.4 million

4.3 million

0.3 million

0.3 million


Unsecured

Communication ex-penses

2015

2014

10.8 million

16.0 million

(0.4 million)

(0.1 million)


Unsecured

14.




Category Year Amount/Volume of Transactions

OutstandingReceivable (Payable)

Terms Conditions

Others


2015

2014

P 7.9 million

8.9 million

P 50.5 thousand

0.1 million


Unsecured

Communication ex-penses

2015

2014

32.4 million

25.1 million

(73.0 thousand)

(9.8 thousand)


Unsecured

Donations 2015

2014

26.2 million

21.3 million

–

–


Unsecured

(Forward)

Outsourced services 2015

2014

15.3 million

27.3 million

(1.6 million)

(1.5 million)


Unsecured

Insurance 2015

2014

6.5 million

5.5 million

10.0 thousand

10.0 thousand


Unsecured

Sponsorship fees 2015

2014

25.0 thousand

50.0 thousand

(25.0 thousand)

(25.0 thousand)


Unsecured

Repairs and maintenance 2015

2014

17.8 thousand

–

–

–


Unsecured

Terms and Conditions of Transactions with Related PartiesOutstanding balances at year-end are unsecured, interest-free, settlement occurs in cash and payable on demand.

Total compensation and benefits of key management personnel of the Company consist of:

Income TaxesProvision for current income tax in 2015 and 2014 represents the total of the regular corporate income tax on Phil Hydro’s net taxable income and the Parent Company’s miscellaneous income not covered by the ITH. Provision for current income tax in 2013 represents regular corporate income tax on the Parent Company’s miscellaneous income not covered by the ITH (see Note 20).

15.

2015 2014 2013

Compensation P193,626 P154,325 P142,051

Pension costs 11,628 9,597 8,176

Short-term benefits 7,285 7,823 7,580

P212,539 P171,745 P157,807


126

The Company recognized deferred taxes on deductible (taxable) temporary differences expected to reverse after the ITH period (see Note 20). The components of the net deferred tax assets (liability) of the Company as at December 31, 2015 and 2014 shown in the consolidated statements of financial position are as follows:

The Company has the following deductible temporary differences for which no deferred tax assets have been recognized since these are expected to reverse during the ITH period or management believes that it is not probable that these will be realized in the near future:

Service concession assets consist of concession fees and property, plant and equipment.

For income tax purposes, concession fees are amortized using UOP method while property, plant and equipment are depreciated on a straight-line basis over the estimated useful lives or remaining concession period whichever is shorter.

The reconciliation of provision for income tax computed at the statutory income tax rate to provision for (benefit from) income tax as shown in the consolidated statements of income is summarized as follows:

Employee Benefits

LTIPThe Parent Company has approved an LTIP for its managers and executives which is based on profit targets for the covered Performance Cycle of 2013 to 2015.

2015 2014

Service concession assets - net P1,031,947 P1,001,395

Accrued expenses 836,519 947,930

Unamortized debt issuance costs 119,280 119,280

Pension liability and unamortized past service cost 117,656 70,080

Allowance for inventory obsolescence 19,049 −

Unearned revenue 16,754 21,643

Unrealized foreign exchange gain (2,059) −

Allowance for doubtful accounts 428 401

P2,139,574 P2,160,729

2015 2014

Impairment loss on AFS financial assets P78,197 P30,062

Pension liability and unamortized past service cost 40,953 13,859

Share-based payment 40,199 −

Service concession assets - net − 1,781,429

Accretion of financial liabilities − 490,700

Accrued expenses − 434,390

Allowance for inventory obsolescence − 77,764

Unamortized debt issuance costs − 54,842

P159,349 P2,883,046

2015 2014 2013

Income tax at statutory tax rate of 30% P2,885,377 P2,467,385 P1,958,782

Add (deduct) the tax effects of:

Net taxable income under ITH (see Note 20) (2,405,872) (2,077,981) (1,806,223)

Change in unrecognized net deferred tax assets and others (817,109) (380,601) (502,751)

Write-off of deferred tax assets relating to accrued expenses 414,913 − −

Interest income already subjected to final tax (40,468) (24,385) (27,172)

Other nondeductible items and others 30,456 (15,088) (29,578)

Provision for (benefit from) income tax P67,297 (P30,670) (P406,942)

16.




The total cost of the LTIP recognized by the Parent Company in 2015, 2014 and 2013 which is presented as part of “Salaries, wages and benefits” account in the consolidated statements of income amounted to P149.8 million, P130.9 million and P148.3 million, respectively. Accrued LTIP amounting to P429.0 million as at December 31, 2015 and P279.2 million as at December 31, 2014 were respectively presented as part of “Trade and other payables” account and “Other noncurrent liabilities” account in the consolidated statements of financial position.

Pension Plan

MayniladThe Parent Company has a funded, noncontributory and actuarially computed pension plan covering substantially all of its employees. The benefits are based on years of service and compensation during the last year of employment.

In line with its strategic goal to improve operational efficiency, the Parent Company offered a Redundancy and Right-Sizing Program in 2014. The redundancy program offered a separation package based on the number of years, or fractions thereof, on a pro-rated basis, of service with the Company plus monetary equivalent of some benefits. This resulted to a curtailment gain of P257.3 million. Changes in net defined benefit liability of funded funds in 2015 are as follows:

Changes in net defined benefit liability of funded funds in 2014 are as follows:

Present value of defined benefit

obligation

Fair value of plan assets

Net definedbenefit liability

At December 31, 2014 P893,364 P612,327 P281,037

Net benefit cost in the consolidated statement of income:

Current service cost 81,136 – 81,136

Net interest 39,576 27,126 12,450

1,014,076 639,453 374,623

Benefits paid (16,653) (16,653) –

Remeasurements in other comprehensive income:

Interest income (excluding amount included in net interest) – (17,920) 17,920

Actuarial changes arising from changes in financial assumptions 23,033 – 23,033

23,033 (17,920) 40,953

At December 31, 2015 P1,020,456 P604,880 P415,576

Present value of defined benefit

obligation

Fair value ofplan assets

Net definedbenefit liability

At January 1, 2014 P998,362 P805,463 P192,899

Net benefit cost in the consolidated statement of income:

Current service cost 87,799 – 87,799

Curtailment gain (257,341) – (257,341)

Net interest 46,316 32,680 13,636

875,136 838,143 36,993


128

Net benefit cost in the consolidated statement of income (Carried Forward):

875,136 838,143 36,993

Benefits paid (2,854) (2,854) –

Settlements – (262,961) 262,961

Remeasurements in other comprehensive income:

Interest income (excluding amount included in net interest) – 39,999 (39,999)

Actuarial changes arising from changes in financial assumptions 21,082 – 21,082

21,082 39,999 (18,917)

At December 31, 2014 P893,364 P612,327 P281,037

The maximum economic benefit available is a combination of expected refunds from the plan and reductions in future contributions. The fair value of plan assets by each class as at the end of the reporting period are as follows:

The plan asset’s carrying amount approximates its fair value since the plan assets are short-term in nature or marked-to-market. All equity and debt instruments held have quoted prices in active market. The remaining plan assets do not have quoted market prices in active market.

The plan assets have diverse investments and do not have any concentration risk.

As at December 31, 2015, the plan assets consist of the following:

• Investments in government securities consist primarily of fixed-rate treasury notes and retail treasury bonds that bear interest ranging from 2.13% to 9.5% per annum and have maturities from 2015 to 2035.

• Investments in equity securities are composed of investment in shares of various listed entities. The carrying amounts of investments in equity securities also approximate their fair values since they are marked-to-market.

• Unit trust funds include mutual funds invested in quoted shares.

• Loans and notes receivables include unsecured fixed-rate notes of a related party and unsecured notes of an unaffiliated company. The notes bear interest ranging from 6.26% to 6.73%.

• Cash and cash equivalents include regular savings and time deposits, which bear interest at 5.50% per annum.

• Receivables and others include certificate of deposit with a term of 7 years and bear interest at 5.25%.

The cost of defined benefit pension plans and other post-employment benefits as well as the present value of the pension obligation are determined using actuarial valuations. The actuarial valuation involves making various assumptions. The principal assumptions used in determining pension and post-employment benefit obligations for the defined benefit plans are shown below:

2015 2014

Investments in:

Government securities P273,937 P304,401

Equity securities 226,292 268,743

Unit trust funds 17,195 16,058

Loans/notes receivable 2,970 2,980

Cash and cash equivalents 2,110 2,117

Receivables and others 82,376 18,028

P604,880 P612,327

2015 2014

Discount rate 4.86% 4.43%

Salary increase rate 4.00% 4.00%

Turnover rate 0.78% 0.80%




In 2015, the sensitivity analysis below has been determined based on reasonably possible changes of each significant assumption on the defined benefit obligation as at the end of the reporting period, assuming all other assumptions were held constant:

Shown below are the maturity analyses of the undiscounted benefit payments:

There are no expected contributions to the defined benefit pension plan in 2016.

Phil HydroPhil Hydro recognized pension liability amounting to P0.7 million and P0.8 million in 2015 and 2014, respectively, in the consolidated statements of financial position determined in accordance with Republic Act 7641.

Interest Expense and Other Financing Charges

Increase (decrease) in Basis Points Amount

Discount rate 100(100)

(P86,880)102,676

Salary increase rate 100(100)

97,507(84,141)

Turnover rate 100(78)

(10,293)8,376

2015

Normal Retirement Other than Normal Retirement Total

Less than one year P37,216 P7,992 P45,208

More than one year to five years 315,305 49,396 364,701

More than 5 years to 10 years 732,021 71,902 803,923



More than 20 years 3,137,143 258,263 3,395,406

P4,807,931 P521,389 P5,329,320

2014

Normal Retirement Other than Normal Retirement Total

Less than one year P25,317 P6,915 P32,232

More than one year to five years 185,228 44,609 229,837




More than 20 years 2,882,441 262,462 3,144,903

P4,428,290 P515,105 P4,943,395

2015 2014 2013

Bank loans (see Note 10) P1,346,163 P1,453,080 P1,377,285

Accretion on service concession obligation payable to MWSS(see Note 12)

622,425 696,904 716,605

Amortization of debt issuance costs (see Note 10) 8,670 6,595 18,553

Accretion on financial liabilities 6,030 6,897 17,133

Loan refinancing costs – – 441,375

P1,983,288 P2,163,476 P2,570,951

17.


130

Basic/Diluted Earnings Per Share

Contingent Liabilities

Following are the significant contingent liabilities of the Company as at December 31, 2015 and 2014:

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 P5.1 billion and P5.0 billion as at December 31, 2015 and 2014, respectively. 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 Parent Company’s rehabilitation proceedings, the Parent Company and MWSS sought to resolve this matter in accordance with the dispute requirements of the TCA (see Note 12).

b. On October 13, 2005, the Parent Company and Manila Water (the “Concessionaires”) were jointly assessed by the Municipality of Norzagaray, Bulacan for real property taxes on certain common purpose facilities purportedly due from 1998 to 2005 amounting to P357.1 million. It is the position of the Concessionaires that it is the Republic of the Philippines that owns these properties, and is therefore, exempt from taxation.

The supposed joint liability of the Concessionaires for real property tax, including interests, amounted to about P1.0 billion as at December 31, 2015.

After 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. As at February 17, 2016, the case is still pending.

c. The Parent Company 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.

Registration with the Board of Investments (BOI)

MayniladThe Parent Company is registered with the BOI under Executive Order No. 226, as amended, as a new operator of water supply and sewerage system for the West Service Area on a pioneer status.

The registration entitles the Parent Company to incentives which include, among others, an ITH for a period of six years beginning on Commencement Date or from actual start of commercial operations, whichever comes first.

18.2015 2014 2013

Net income (a) P9,550,627 P8,255,288 P6,936,214

Weighted average number of shares at beginning of year 4,460,428 4,472,762 4,004,032

Add weighted average number of additional issuances (see Note 13) − − 469,078

Less weighted average number of treasury shares (see Note 13) 23,465 12,334 348

Weighted average number of shares at end of year for basic earnings per share (b)

4,436,963 4,460,428 4,472,762

Add weighted average potential dilutive shares from ESOP (see Note 13) 1,981 − −

Weighted average number of shares at end of year for diluted earnings per share (c)

4,438,944 4,460,428 4,472,762

Basic earnings per share (a/b) P2,152.51 P1,850.78 P1,550.77

Diluted earnings per share (a/c) P2,151.55 P1,850.78 P1,550.77

19.

20.




On April 16, 2008, the BOI granted the request of the Parent Company for the extension of the period for the ITH availment from August 2001 – July 2007 to January 2003 – December 2008.

On October 20, 2008, the Parent Company filed an application for an ITH bonus year. The application was for the extension of the availment of the ITH incentive by the Parent Company for one (1) year or for the period January 1, 2009 to December 31, 2009. The BOI approved the Parent Company’s application on December 22, 2008.

On December 3, 2009, the Parent Company was issued with BOI Certificate of Registration No. 2009-171 as a new operator of the 200 million liters per day (MLD) Bulk Water Supply and Distribution Project (Putatan, Muntinlupa). On December 16, 2009, Certificates of Registration 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, were likewise issued by the BOI. The registrations entitle the Parent Company to incentives which include an ITH for six years commencing on January 2010 or actual start of commercial operations, whichever is earlier, but in no case earlier than the date of registration. Commercial operations of the 1500 MLD and 900 MLD Bulk Water Supply and Distribution Projects started on January 1, 2010 while the 200 MLD Project started on January 1, 2011. The ITH for all these projects is set to expire on December 31, 2015. 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 the Parent Company. ITH incentive enjoyed by the Company amounted to P2,405.9 million, P2,078.0 million and P1,806.2 million in 2015, 2014 and 2013, respectively (see Note 15).

Phil HydroOn November 22, 2007, Phil Hydro’s operations in Legazpi City were registered with the BOI as New Bulk Supplier of Treated Water on a pioneer status under Omnibus Investments Code of 1987 (the Code). Subject to certain conditions and requirements, Phil Hydro’s operations in Legazpi City are entitled to the following benefits, among others:

a. ITH for six years until December 31, 2013 limited to the revenue generated from the sales of bulk water supply to LCWD representing the value of transactions as covered by the registration;

b. Employment of foreign nationals for supervisory, technical or advisory positions for five years;c. Importation of consigned equipment for a period of 10 years from date of registration, subject

to the posting of re-export bond; andd. Importation of capital equipment at 0% duty from date of registration up to June 16, 2011.

For (d) above, Phil Hydro has not imported any capital equipment in 2015, 2014 and 2013.

On December 18, 2009, the BOI approved Phil Hydro’s another application for ITH for the operations in Norzagaray, Bulacan as New Operator of Bulk Water Supply Facility (Water Filtration Plant) on a non-pioneer status under the Code. As a registered enterprise, Phil Hydro is entitled to the following benefits, among others, subject to certain conditions and requirements:

a. ITH for four years until December 31, 2013 limited to the revenue generated from the registered bulk water supply facility with NWD; and

b. Importation of capital equipment at 0% duty from date of registration up to June 16, 2011.

For (b) above, Phil Hydro has not imported any capital equipment in 2015, 2014 and 2013.


132

Significant Contracts with Manila Water (East Concessionaire)

In relation to the Concession Agreement, the Parent Company 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 the Parent Company and the East Concessionaire may choose to delegate to the Joint Venture, subject to the approval of MWSS.

Commitments

Concession AgreementSignificant commitments under the Concession Agreement follow:

a. Payment of Concession Fees (see Note 7)

b. Posting of performance bond (see Note 6)

Under Section 6.9 of the Concession Agreement, the Parent Company 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.

Within 30 days from the commencement of each renewal date, the Parent Company shall cause the performance bond to be reinstated to the full amount applicable to the rate rebasing period as set forth above.

In connection with the extension of the term of the Concession Agreement (see Note 1), certain adjustments to the obligation of the Parent Company to post the performance bond under Section 6.9 of the Concession Agreement have been approved and summarized as follows:

• The aggregate amount drawable in one or more installments under each performance bond during the Rate Rebasing Period to which it relates has been adjusted to US$30.0 million until the Expiration Date.

• The amount of the Performance Bond for the period covering 2023 to 2037 shall be mutually agreed upon in writing by the MWSS and the Parent Company consistent with the provisions of the Concession Agreement.

21.

22.

Rate Rebasing Period Aggregate Amount Drawable Under 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




• The Parent Company posted the Surety Bond for the amount of US$90.0 million issued by Prudential Guarantee and Assurance, Inc. (the Surety) in favor of MWSS, as security for the Parent Company’s proper and timely performance of its obligations under the Concession Agreement. On December 6, 2012, the Parent Company renewed the Surety Bond for the amount of US$80.0 million issued by the Surety in favor of MWSS. The liability of the Surety under this bond will expire on December 31, 2017 (see Note 6).

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 P200.0 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%, subject to CPI adjustments, effective January 2010 (see Notes 1 and 7).

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 the Parent Company).

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 the Parent Company 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 prior notice to MWSS.

Failure of the Parent Company 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 to be terminated.

Operating Lease CommitmentsThe Company leases the office space and branches where service outlets are located, equipment and service vehicles, renewable under certain terms and conditions to be agreed upon by the parties. Total rent expense for the above operating leases amounted to P150.6 million, P167.7 million and P158.9 million in 2015, 2014 and 2013, respectively (see Note 23).

Future minimum operating lease payments as at December 31 are as follows:

Period Covered 2015 2014

(In Millions)

Not later than one year P94.83 P111.58

More than one year and not later than five years 207.53 154.30

More than five years 169.48 170.31


134

Assets Held in Trust

Materials and SuppliesThe Parent Company 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.

FacilitiesThe Parent Company has been granted 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 the Parent Company, such movable property shall be returned to MWSS in its then-current condition at no charge to MWSS or the Parent Company (see Note 7).

The Concession Agreement also provides the Parent Company 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 the Parent Company on Commencement Date based on MWSS’ closing audit report amounted to P7.3 billion with a sound value of P13.8 billion.

Beginning at the Commencement Date, MWSS’ corporate headquarters were made available for a one-year lease to the Parent Company and the East Concessionaire, subject to yearly renewal with the consent of the parties concerned. As at December 31, 2015, the lease has been renewed for another year. Rent expense amounted to P38.0 million in 2015 and 2014 and P33.8 million in 2013 (see Note 22).

Financial Risk Management Objectives and PoliciesThe Company’s principal financial instruments are its debts to the local banks and concession fees payable to MWSS per Concession Agreement. Other financial instruments of the Company are purchase contracts, cash and cash equivalents and short-term investments. The main purpose of those financial instruments is to finance the Company’s operations.

The main risks arising from the Company’s principal financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk.

The BOD reviews and approves the policies for managing the Company’s financial risks. The Company monitors risks arising from all financial instruments and regularly reports financial management activities and the results of these activities to the BOD.

Interest Rate RiskInterest rate risk is the risk that the future cash flows of financial instruments will fluctuate because of the changes in market interest rates. The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s interest-bearing loans.

The Company maintains a mix of floating and fixed rate interest-bearing loans, currently at a ratio of 8% floating and 92% fixed per abovementioned loan agreements. The floating rate interest-bearing loans will increase to a higher portion over time because of future drawdowns in connection to the MWMP loan agreement.

23.

24.




The following table shows the Company’s significant financial liabilities that are exposed to cash flow interest rate risk:

Interest on financial liabilities classified as fixed rate is fixed until the maturity of the instrument.

The following tables show information about the Company’s financial liabilities that are exposed to cash flow and fair value interest rate risks.

P21.2 billion Term Loan Fixed rate benchmark+0.75%(5.75%, March 25, 2013 to March 25, 2018)

P5.0 billion Corporate Notes(1st drawdown)

Fixed rate benchmark+0.75%(5.75%, April 29, 2013 to April 29, 2018)

P5.0 billion Corporate Notes(2nd drawdown)

Fixed rate benchmark+0.75%(5.75%, October 29, 2013 to October 29, 2018)

US$137.5 million Loan(US$42.9 million drawdown)

Floating rate benchmark+1.25%(2.40%, November 15, 2015 to May 15, 2016)

P5.2 billion Corporate Notes(1st drawdown)

Fixed rate benchmark(6.00%, March 2, 2015 to March 2, 2035)

Peso-denominated Bank Loan Fixed rate benchmark(5.50%, June 29, 2015 to June 29, 2025)

2015

Within 1 Year Total

Short-term cash investments:

Cash and cash equivalents (1-90 days)* P3,069,280 P3,069,280

Short-term investments (91-364 days) 6,088,541 6,088,541

P9,157,821 P9,157,821

*Excludes cash on hand amounting to P23,732.

2015

Within 1 Year More than 1 Year Total - Gross(In US$)

Total - Gross(In P)

Liabilities:

Interest-bearing loans:

Interest rate 5.75% 5.75%, 2.40% and 6.00%

Current - local P1,742,164 – – P1,742,164

Noncurrent - foreign – $42,084 $42,084 1,980,458

Noncurrent - local – P21,356,717 – 21,356,717

25,079,339

Service concession obligation payable to MWSS:

Interest rate 8.21%

Current - foreign $9,244 – $9,244 435,008

Current - local P922,697 – – 922,697

Noncurrent - foreign – $85,617 85,617 4,029,148


8,094,862

P 33,174,201


136

2014

Within 1 Year Total

Short-term cash investments:

Cash and cash equivalents (1-90 days)* P4,147,586 P4,147,586

Short-term investments (91-364 days) 2,915,000 2,915,000

P7,062,586 P7,062,586

*Excludes cash on hand amounting to P40,952.

2014

Within 1 Year More than 1 Year Total - Gross(In US$)

Total - Gross(In P)

Liabilities:

Interest-bearing loans:

Interest rate 5.75% 5.75%, 2.40% and 6.00%

Current - local P1,692,163 – – P1,692,163

Noncurrent - foreign – $13,957 $13,957 624,175


24,201,411

Service concession obligation payable to MWSS:

Interest rate 3.0%

Current - foreign $3,880 – $3,880 173,510

Current - local P920,868 – – 920,868

Noncurrent - foreign – $96,529 96,529 4,316,792


8,135,343

P32,336,754

The following table demonstrates the sensitivity of the Company’s profit before tax to a reasonably possible change in interest rates for the years ended December 31, 2015 and 2014, with all variables held constant (through the impact on floating rate borrowings). The estimates are based on the management’s annual financial forecast. There is no impact on the Company’s equity other than those already affecting income.

Foreign Currency RiskForeign currency risk is the risk that the fair value or future value of financial instruments will fluctuate because of changes in foreign exchange rates.

The Company’s foreign currency risk results primarily from movements of the Philippine Peso against the United States Dollar, European Euro and the Japanese Yen. The servicing of foreign currency denominated loans of MWSS is among the requirements of the Concession Agreement. Revenues are generated in Philippine Peso. However, there is a mechanism in place as part of the Concession Agreement wherein the Company (or the end consumers) can recover currency fluctuations through the FCDA that is approved by the Regulatory Office.

2015

Increase/Decrease in Basis Points Effect on Income Before Tax

Floating rate borrowings +50 (P9,902)

-50 9,902

2014

Increase/Decrease in Basis Points Effect on Income Before Tax

Floating rate borrowings +50 (P3,121)

-50 3,121




Information on the Company’s foreign currency-denominated monetary assets and liabilities and the Philippine Peso equivalent of each as at December 31, 2015 and 2014 is presented as follows:

The following table demonstrates the sensitivity to a reasonably possible change in foreign exchange rates, with all variables held constant, of the Company’s profit before tax (due to changes in the fair value of monetary assets and liabilities) and equity as at December 31, 2015 and 2014. The estimates in the movement of the foreign exchange rates were based on the management’s annual financial forecast.

2015

US Dollar Euro JPY Total Peso Equivalent

Asset

Cash and cash equivalents, short term invest-ments and sinking fund

$6,346 €– ¥– P298,664

Liabilities

Interest-bearing loans ($42,084) €– ¥– (P1,980,458)

Service concession obligation payable to MWSS (84,589) (33) (1,228,775) (4,464,156)

(126,673) (33) (1,228,775) (6,444,614)

Net foreign currency denominated liabilities ($120,327) (€33) (¥1,228,775) (P6,145,950)

The spot exchange rates used were P47.06:US$1, P51.74:EUR1, and P0.39:JPY1 as at December 31, 2015.

2014

US Dollar Euro JPY Total Peso Equivalent

Asset

Cash and cash equivalents, short-term invest-ments and sinking fund

$5,054 €– ¥– P226,012

Liabilities

Interest-bearing loans ($14,823) €– ¥– (P662,902)

Service concession obligation payable to MWSS (92,802) (438) (855,090) (4,490,302)

(107,625) (438) (855,090) (5,153,204)

Net foreign currency denominated liabilities ($102,571) (€438) (¥855,090) (P4,927,192)

The spot exchange rates used were P44.72:US$1, P54.34:EUR1, and P0.37:JPY1 as at December 31, 2014.

Increase/Decrease in Peso andU.S Dollar, Euro and JPY Exchange Rates

Foreign ExchangeRate

Effect on Income Before Income Tax

2015

U.S Dollar +1% 47.06 (P56,626)

Euro +1% 51.74 (17)

JPY +1% 0.39 (4,792)

U.S Dollar -1% 47.06 56,626

Euro -1% 51.74 17

JPY -1% 0.39 4,792

Increase/Decrease in Peso andU.S Dollar, Euro and JPY Exchange Rates

Foreign Exchange Rate Effect on Income Before Income Tax

2014

U.S Dollar +1% 44.72 (P45,870)

Euro +1% 54.34 (238)

JPY +1% 0.37 (3,164)

U.S Dollar -1% 44.72 45,870

Euro -1% 54.34 238

JPY -1% 0. 37 3,164


138

The Company recognized net foreign exchange gain of P152.7 million and P112.6 million in 2015 and 2014, respectively, mainly arising from the translation of the Company’s cash and cash equivalents, short-term investments, deposits, interest-bearing loans and service concession obligation payable to MWSS. However, the net foreign exchange gain/loss on interest-bearing loans and service concession obligation payable to MWSS is subject to foreign exchange recovery mechanisms under the Concession Agreement (see Note 2).

Credit RiskCredit risk is the risk that a counter party will not meet its obligations under a financial instrument or customer contract, leading to a financial loss.

The Company trades only with recognized, creditworthy third parties. It is the Company’s policy that except for connection fees and other highly meritorious cases, it does not offer credit terms to its customers. Because of the basic need service it provides, historical collections of the Company are relatively high. Credit exposure is widely dispersed. Receivable balances are monitored on an ongoing basis with the result that the Company’s exposure to bad debts is not significant.

With respect to credit risk arising from the other financial assets of the Company, consisting of cash and cash equivalents, short-term cash investments, deposits and sinking fund and miscellaneous deposits, the Company’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. The Company transacts only with institutions or banks which have demonstrated financial soundness for the past five years.

The Company has no significant concentrations of credit risk.

The table below shows the maximum exposure to credit risk for the components of the consolidated statements of financial position as at December 31, 2015 and 2014:

As at December 31, 2015 and 2014, the credit quality per class of financial assets that were neither past due nor impaired are as follows:

2015 2014

Cash and cash equivalents* (see Note 4) P3,069,280 P4,147,586

Short-term investments 6,088,541 2,915,000

Trade and other receivables - net (see Note 5) 2,428,812 2,048,550

Deposits and sinking fund (see Note 6) 1,914,093 1,884,781

Miscellaneous deposits** 220,016 206,202

Total credit risk exposure P13,720,742 P11,202,119

*Excludes cash on hand amounting to P23,732 and P40,952 as at December 31, 2015 and 2014, respectively.**Included as part of “Other noncurrent assets” in the consolidated statements of financial position.

2015

Neither Past Due nor Impaired Past Due but not Impaired

Impaired Total

High Grade Standard

Cash and cash equivalents* P3,069,280 P– P– P– P3,069,280

Short-term investments 6,088,541 – – – 6,088,541

Trade and other receivables 2,166,300 160,752 101,760 1,030,624 3,459,436

Deposits and sinking fund 1,914,093 – – – 1,914,093

Miscellaneous deposits** – 220,016 – – 220,016

P13,238,214 P380,768 P101,760 P1,030,624 P14,751,366




Past due accounts amounting to P101.8 million and P109.0 million as at December 31, 2015 and 2014, respectively, are not impaired since based on the Company’s experience, these receivables are normally collected the following year.

The credit quality of the financial assets was determined as follows:

Cash and cash equivalents, short-term investments, and deposits and sinking fund are placed in various banks. These are held by large prime financial institutions that have good reputation and low probability of insolvency. Management assesses the quality of these financial assets as high grade.

For trade and other receivables, high grade relates to those which are consistently collected before the maturity date, normally seven days from bill delivery. Standard grade includes receivables from customers that are collectible beyond seven days from bill delivery even without an effort from the Company to follow them up, or those advances from officers and employees that are collected through salary deduction. For miscellaneous deposits, standard grade consists of meter and security deposits that are normally refundable upon termination of service.

Liquidity RiskLiquidity risk is the potential for not meeting the obligations as they become due because of an inability to liquidate assets or obtain adequate funding.

The Company monitors its risk to a shortage of funds using a recurring liquidity planning. Cash planning considers the maturity of both its financial investments and financial assets (e.g., trade and other receivables, other financial assets) and projected cash flows from operations.

The Company’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank drafts, bank loans, debentures, preference shares, finance leases and hire purchase contracts.

2014

Neither Past Due nor Impaired Past Due but not Impaired

Impaired Total

High Grade Standard

Cash and cash equivalents* P4,147,586 P– P– P– P4,147,586

Short-term investments 2,915,000 – – – 2,915,000

Trade and other receivables 1,566,262 373,303 108,985 1,267,971 3,316,521

Deposits and sinking fund 1,884,781 – – – 1,884,781

Miscellaneous deposits** – 206,202 – – 206,202

P10,513,629 P579,505 P108,985 P1,267,971 P12,470,090


140

2015

On Demand Due Within 3 Months

Due Between 3 and 12 Months

Due after 12 Months

Total

Interest-bearing loans* P– P1,100,226 P972,157 P23,337,175 P25,409,558

Trade and other payables** 1,045,691 2,804,270 2,222,174 4,649,417 10,721,552

Service concession obligation payable to MWSS

– – 1,357,705 6,737,157 8,094,862

Customers’ deposits – – – 828,077 828,077

P1,045,691 P3,904,496 P4,552,036 P35,551,826 P45,054,049

*Principal plus interest payment**Excludes taxes payable and interest payable

2014



Due after 12 Months

Total

Interest-bearing loans* P– P1,134,467 P897,596 P22,509,248 P24,541,311

Trade and other payables** 545,559 1,492,657 2,941,583 4,746,646 9,726,445

Service concession obligation payable to MWSS

– – 1,094,378 7,040,965 8,135,343

Customers’ deposits – – – 752,526 752,526

P545,559 P2,627,124 P4,933,557 P35,049,385 P43,155,625

*Principal plus interest payment**Excludes taxes payable and interest payable

2015



Due after 12 Months

Total

Cash and cash equivalents

P982,790 P2,110,222 P– P– P3,093,012

Short-terminvestments

– – 6,088,541 – 6,088,541

Trade and other receivables

2,039,961 230 388,621 – 2,428,812

Deposits andsinking fund

1,773,843 – 140,250 – 1,914,093

AFS financial assets 132,387 – – – 132,387

Miscellaneous deposits

– – – 220,016 220,016

P4,928,981 P2,110,452 P6,617,412 P220,016 P13,876,861

The tables below summarize the maturity profile of the Company’s financial liabilities as at December 31, 2015 and 2014 based on contractual undiscounted payments.

The table below shows the maturity profile of the Company’s financial assets based on contractual undiscounted cash flows as at December 31, 2015 and 2014:

2014



Due after 12 Months

Total

Cash and cash equivalents

P828,137 P3,360,401 P– P– P4,188,538

Short-terminvestments

– – 2,915,000 – 2,915,000

Trade and other receivables

1,675,247 33,275 340,028 – 2,048,550

Deposits andsinking fund

1,746,491 – 138,290 – 1,884,781

AFS financial assets 110,377 – – – 110,377

Miscellaneous deposits

– – – 206,202 206,202

P4,360,252 P3,393,676 P3,393,318 P206,202 P11,353,448




2015 2014

Interest-bearing loans and service concession obligation payable to MWSS (see Notes 10 and 12)

P33,174,201 P32,336,754

Trade and other payables (see Note 11) 11,327,222 10,333,720

Less cash and cash equivalents, short-term investments, deposits and sinking fund (see Notes 4 and 6)

(11,095,646) (8,988,319)

Net debt (a) 33,405,777 33,682,155

Net equity 35,538,655 27,867,031

Net equity and debt (b) P68,944,432 P61,549,186

Gearing ratio (a/b) 48% 55%

Capital ManagementThe primary objective of the Company’s capital management strategy is to ensure that it maintains a healthy capital structure in order to maintain a strong credit standing while it maximizes shareholder value.

The Company closely manages its capital structure vis-a-vis a certain target gearing ratio, which is net debt divided by total capital plus net debt. The Company’s target gearing ratio is 75%. This target is to be maintained over the next five years by managing the Company’s level of borrowings and dividend payments to shareholders.

For purposes of computing its net debt, the Company 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, the Company uses net equity.

For purposes of monitoring debt ratio covenants, the Company computes using both interest-bearing debt and total liabilities. The Company closely monitors its debt covenants and maintains a capital expenditure program and dividend declaration policy that keeps the compliance of these covenants into consideration.

Financial Assets and Financial Liabilities

The following table summarizes the carrying values and fair values of the Company’s financial assets and financial liabilities as at December 31, 2015 and 2014:

2015 2014

Carrying Value Fair Value Carrying Value Fair Value

Financial Assets

Loans and receivables -

Miscellaneous deposits (included under “Other noncurrent assets” account)

P220,016 P171,339 P206,202 P159,622

Financial Liabilities

Other financial liabilities:

Interest-bearing loans P25,079,339 P26,959,364 P24,201,411 P27,749,815

Service concession obli-gation payable to MWSS

8,094,862 9,569,586 8,135,343 9,967,797

Customers’ deposits 244,434 271,883 219,945 648,896

P33,418,635 P36,800,833 P32,556,699 P38,366,508

25.


142

The following methods and assumptions were used to estimate the fair value of each class of financial assets and financial liabilities for which it is practicable to estimate such value:

Cash and Cash Equivalents, Short-term Investments, Trade and Other Receivables, Deposits and Sinking Fund, and Trade and Other Payables. Due to the short-term nature of these transactions, the carrying values approximate the fair values as at the reporting date.

AFS Financial Assets. Fair value is equivalent to the carrying value because the Company’s AFS financial assets pertain to unquoted equity investments.

Interest-bearing Loans. For floating rate loans, the carrying value approximates the estimated fair value as at the reporting date due to quarterly repricing of interest rates. For fixed rate loans, the estimated fair value is based on the discounted value of future cash flows using the applicable rates for similar types of financial instruments.

Miscellaneous Deposits, Service Concession Obligation Payable to MWSS and Customers’ Deposits. Estimated fair value is based on the discounted value of future cash flows using the applicable rates for similar types of financial instruments.

The fair values of fixed rate interest-bearing loans, miscellaneous deposits, service concession obligation payable to MWSS and customers’ deposits are determined using Fair Value Hierarchy Level 3.

Supplemental Disclosure of Cash Flow Information

In 2015, the noncash operating activities pertain to unpaid concession fees amounting to P500.0 million and effect of change in rebased rate amounting to P632.3 million (see Note 7).

Events After the Reporting Period

On January 25, 2016, during the regular meeting, the Parent Company’s BOD set and approved the declaration of cash dividends amounting to P2.0 billion to all shareholders of record as at February 9, 2016.

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