witnessing progress - maynilad water services inc.€¦ · with water level in angat dam reaching...

WITNESSING PROGRESS

2010 Annual Report

Contents

Key Figures 2 Year at a Glance 3 Chairman’s Message 4 Conversation with the President 6 Growth Strategies 8 Operational Highlights 12 Financial Review and Analysis 18 Growth Plans 20 Corporate Social Responsibility 23 Board of Directors 26 Top Management Team 28Financial Statements 30

About the Cover

At Maynilad, we witness progress every day.

We see how our services enable our customers to live better, healthier lives. We watch as our investments spur economic growth and employment in the Philippines. And we marvel at how our efforts pave the way for nation-building.

JANUARY• Pressure Pipe Inspection Company of Canada engaged to train Maynilad engineers in the use of Sahara® technology which accurately detects leaks, pockets of trapped

gas, and structural defects in water main lines.

• Maynilad partnered with the United States Agency for International Development (USAID) and Rotary

International for a comprehensive health and

sanitation program in selected communities in Manila

and Quezon City.

FEBRUARY• “Text Tubig” infoboard service launched to enhance the information dissemination initiatives of the company.

• Maynilad received an Anvil Award of Excellence for its corporate social responsibility program, “Samahang Tubig Maynilad”.

• Greenhouse Gases and Air Emissions Inventory Development Project launched in partnership with the Philippine Business for the Environment (PBE) and the Clean Air Initiatives for Asian Cities (CAI-Asia).

MARCH• Dagat-Dagatan Sewage and Septage Treatment Plant (DDSSTP) recertified for Quality Management System (ISO 9001:2008) and Environment Management System (ISO 14001:2004). • Twinning arrangement for Sewage Design and Promotion renewed with USAID and the Indah Water Konsortium of Malaysia.

• Maynilad becomes first Asian water utility company to use Sahara® mobile leak detection system.

APRIL• Concession Agreement with the Metropolitan Waterworks and Sewerage System (MWSS) extended by another 15 years.

MAY• Newly constructed Villamor

Reservoir and Pumping Station in Pasay City activated.

JUNE• The state-of-the-art Putatan Water Treatment Plant began operations.

JULY• Rogelio L. Singson resigned as President and Chief Executive Officer of Maynilad to assume the Department of Public Works and Highways Secretary position under the administration of President Benigno Simeon Aquino III.

• Maynilad water allocation from Angat dam cut by 30%; water services in the West Zone affected.

• Lowest water level in Angat dam history recorded; efforts to mitigate impact on water service levels intensified.

AUGUST• Victorico P. Vargas became President and Chief Executive Officer of Maynilad.

• Production ouput of Putatan Water Treatment Plant increased from 25 MLD to 50MLD; additional 9,400 households in Muntinlupa benefit from the increased capacity.

• Read and Bill technology for generating Statements of Account initially adopted in the South Caloocan Business Area.

SEPTEMBER• Construction of P40 million interceptor pipe system along Estero de Paco in Manila started; project to help clean up the Estero and improve the sanitation condition in the area.

• Four new STM communities in Caloocan City inaugurated.

OCTOBER• The laying of eight kilometers of primary lines along Alabang-Zapote Road to Daang Hari Road in Las Piñas City began. The P800-million project will benefit over 29,000 households and is expected to generate as much as 7,500 jobs.

• Total replacement of 46 kilometers of old, leaky pipes in Sampaloc, Manila started.

• Maynilad starts construction of wastewater treatment plants in Quezon City. The new facilities are expected to benefit some 6,000 households and establishments once completed in 2012.

NOVEMBER• After two decades of waiting, water supply

availability in Parañaque finally became 24

hours.

• The International Association of Business Communicators/Philippines awarded five Merit Awards to Maynilad, for its communication projects and programs.

DECEMBER• Maynilad entered Non-Revenue Water Management Twinning Partnerships with the Bacolod City Water District, Leyte Metro Water District, and San Pedro Water District.

Events and Highlights

2 Maynilad Water Services, Inc. 3

Annual Report 2010

Witnessing Progress

2007 2008 2009 2010

Financial Performance (In Billion Pesos)

Revenue 7.38 8.24 10.62 12.05

Net Income 1.67 1.99 2.82 4.78

Core Net Income 1.68 2.32 3.46 4.83

Core EBITDA 4.16 4.98 6.97 7.90

Core EBITDA Margin (%) 56 60 66 66

Assets 24.46 34.75 38.18 42.59

Liability 27.70 33.81 34.42 34.65

Equity (3.24) 0.94 3.76 7.94

Operating Highlights

Number of Billed Water Services 703,519 762,319 814,645 903,682

Water Service Coverage (%) 81 82 86 88

Billed Volume (million cubic meters) 287 315 350 374

Non-Revenue Water (Average, %) 66 64 60 53

24-hour water service (%) 46 58 65 71

Minimum 7 psi. water pressure (%) 53 67 79 86

Pipes laid to date (in km.) 4,893 5,578 6,019 6,476

Capex spent (in P million) 3,085 6,629 4,504 7,873

Maynilad Water Services, Inc. (Maynilad) is the water and wastewater services provider for the 17 cities and municipalities that comprise the West Zone of Metro Manila. We are a concessionaire of the Metropolitan Waterworks and Sewerage System (MWSS).

The largest private water concessionaire in the Philippines in terms of customer base, we are owned and managed by the DMCI-MPIC Water Company, Inc. (DMWCI), a joint venture between Metro Pacific Investments Corporation (MPIC) and DMCI Holdings, Inc. (DMCIHI). The consortium took over Maynilad on January 24, 2007.

Our service area includes the cities of Manila (all but portions of San Andres and Sta. Ana), Quezon City (west of San Juan River, West Avenue, EDSA, Congressional, Mindanao Avenue, the northern part starting from the Districts of the Holy Spirit and Batasan Hills), Makati (west of South Super Highway), Caloocan, Pasay, Parañaque, Las Piñas, Muntinlupa, Valenzuela, Navotas, Malabon and Cavite City; and the towns of Bacoor, Imus, Kawit, Noveleta and Rosario in Cavite province.

Business Overview Year at a Glance

Key Figures

Billed serviceBilled volume(MCM)

24-hour water availability(in %)

Average NRW(in %)

7%

9% 9% 71.4%

10%

0

200

400

09 10

11%2010 –374 MCM2009 – 350 MCM

2010 –903,6822009 – 814,645

2010 – 53.6%2009 – 59.7%

2010 – 71% 2009 – 65%

Water pressure over 7 psi. Net Income(in billion)

2010 – 86%2009 – 79%

2010 – P 4.82009 – P 2.8


Annual Report 2010

Witnessing Progress

TO MY FELLOW STAKEHOLDERS,

In a year of unparalleled challenges, Maynilad delivered results few thought were possible.

Despite our significantly reduced raw water supply from Angat dam, we registered improvements in key growth metrics by expanding our customer base, implementing system-wide efficiencies, and challenging our people to deliver projects ahead of schedule. And, of course, historic high profitability.

That we were able to witness such progress during the toughest of times is a testament to how far Maynilad has come since Metro Pacific Investments Corporation and DMCI Holdings, Inc. took over its operations in 2007.

Record highsToday, our service levels and billed volume are at their highest, while water losses are the lowest they have ever been. Our financial position reflects robust growth and strengthened profitability and cash flows.

Our service connections increased by nearly 11%—from 814,645 in 2009 to 903,682 in 2010. Billed volume grew by nearly 7%, from 350 MCM to 374 MCM. These improvements pushed our Core Net Income to expand by 40% to P4.83 billion from P3.47 billion the previous year.

We also recovered 73 million liters per day (MLD) of water through our aggressive leak repair program in the primary distribution line, improving our average NRW to 53.49% in 2010 from 59.67% in the same period last year.

We expect these trends to continue because of key improvements in our business and operations.

More progress aheadIn April 2010, our Concession Agreement with the Metropolitan Waterworks and Sewerage System was extended by another 15 years. This extended term will provide us with a longer investment recovery period and more time to grow our business.

To reduce our dependency on a single water source, we built a state-of-the-art facility in Muntinlupa that will draw and treat water from Laguna Lake. This treatment plant is a solid step towards ensuring long-term water security for our customers.

With the completion of the additional pumping stations and water reservoirs in Parañaque, Pasay and Muntinlupa, we can now accelerate our pipelaying projects in Las Piñas and parts of Cavite. In time, we will be able to serve our customers in the South, most of whom still do not have access to clean, surface water.

Change in leadershipWe witnessed a change in leadership with Victorico “Ricky” P. Vargas taking over the leadership position from Rogelio “Babes” L. Singson.

Mr. Singson retired as President and Chief Executive Officer of Maynilad to become Secretary of Department of Public Works and Highways, under the administration of President Benigno S. Aquino III. Babes has been instrumental in Maynilad’s transformation and I am sincerely

Chairman’s Message

We witnessed progress during the toughest of times

grateful for everything that he has done for the company. We wish Babes all the best in this critical Government post, and in his new role as a public servant.

I am confident that Ricky can build on the successes of Babes, and continue the company’s track record of delivering solid value and excellent service to our stakeholders.

In closing Our Board could not be more enthusiastic about, and supportive of, Maynilad’s future. We have successfully laid the groundwork for transforming our company, and are poised to deliver even more value to our customers and other stakeholders.

I would also like to commend the employees and the senior Management of Maynilad for heeding the call for excellence during the most difficult of times. With your continued cooperation, hard work and perseverance, we can improve the lives of even more Filipinos through our water and wastewater services.

MANUEL V. PANGILINANChairman

With the completion of the additional pumping stations and water reservoirs in Parañaque, Pasay and Muntinlupa, we can now accelerate our pipelaying projects in Las Piñas and parts of Cavite. In time, we will be able to serve our customers in the South, most of whom still do not have access to clean, surface water.

Service connections

Core Net Income

+11%

+40%

Service levels and billed volume are at their highest, while water losses are the lowest they have ever been. Our financial position reflects robust growth and strengthened profitability and cash flows.


Annual Report 2010

Witnessing Progress

Ricky P. Vargas joined Maynilad just days after the company started feeling the full impact of El Niño.

With water level in Angat dam reaching its lowest level in history and the organization working doubly hard to maintain service levels for majority of its customers, the challenge of delivering value to the shareholders and boosting company morale became his top priorities.

As he looks back on the previous year, he shares his assessment of the situation, plans for the company and prospects for the immediate future.

How would you assess the overall performance of Maynilad in 2010? All things considered, I think Maynilad performed well. We were able to fast-track the completion of key projects which allowed us to recover, store and source additional water supply for our customers. All these, combined with our improved control and efficiency of the water network, enabled us to grow the business despite the difficult operating conditions.

We also made significant headway in terms of business sustainability. From 92% in 2009, we were able to increase our collection efficiency to 96% the following year. We also adopted a new meter reading system that now allows us to print water bills on site, cutting down our billing cycle by 7 days.

Under the leadership of then President and CEO Rogelio L. Singson, Maynilad obtained a 15-year extension on its exclusive right to provide water and wastewater services to the West Zone. With this extended term, we plan to increase our investments by more than 270% and temper future water rate increases for our customers.

What are your immediate plans for the company?El Niño brought to light certain areas which we really have to improve on. My immediate plans for the company will focus on these areas.

First is our water supply holding capacity. Since we do not have a large impounding area like La Mesa Dam, we are more susceptible to fluctuating water releases from Angat dam.

To address this, we will build additional reservoirs and pumping stations in strategic locations in our concession area. Our engineering teams are also looking into the possibility of using modular type reservoirs so we can reduce costs and construction lead times, without sacrificing quality and efficiency.

Second is our organizational structure, which is critical to the execution of our objectives and plans. While our current set-up has worked well, thus far, we need to take the long view on organizational efficiency.

In the coming months, we will undertake a thorough review of our organizational structure so we can streamline our work processes and centralize key functions. Our goal is to establish a structure that will strengthen accountability and encourage employees to become more involved in the decision-making process.

Third, we need to have a better understanding of the water supply requirements of our current and future customers. This way, we can execute business decisions that are timely, responsive and cost-effective.

Next year, we will commission a reputable third-party expert to do a comprehensive water

Conversation with the President

demand forecast for us. We will fine-tune our business strategies and medium-term plans depending on the results of this study.

What are Maynilad’s targets for 2011?Our financial commitment in 2011 will focus on delivering the following: An increase in billed service of 6%, billed volume of 13%, revenues of 26%, core net income of 24%, and Core EBITDA of 28%.

We intend to accomplish all these by reducing our commercial losses, expanding our service coverage, connecting more customers to our network and increasing our collection efficiency. We will also keep a tight rein on our operating expenses through careful budgeting and prudent spending.

Other operations targets for 2011 are to reduce our non-revenue water (NRW) to 48%, commission our Putatan Water Treatment Plant to generate 100 MLD of water, construct additional sewage treatment plants (STPs), and improve water supply and availability for our customers.

What can shareholders look forward to under your leadership?I think we have the technical side of the business down pat. We just have to reinforce our competencies by acquiring and using the latest cost-efficient technologies available.

What we really need to work on is the customer and relationship aspect of our business—that is, to strengthen our linkages with our regulators and embed the customer-centric mindset among our employees. Maynilad, after all, is the product of a public-private partnership that aims to improve lives.

We also have to look beyond our physical borders for growth opportunities. Millions of Filipinos still do not have access to clean water, and we would like to be part of the solution to this problem. In less than five years, we were able to improve and expand water and wastewater services in our concession area. We look forward to sharing our expertise to those areas most in need of it.

VICTORICO P. VARGASPresident

We will build additional reservoirs and pumping stations in strategic locations in our concession area. Our engineering teams are also looking into the possibility of using modular type reservoirs.

Increase in collection efficiency

Current billing cycle

92% to 96%

7 days

Millions of Filipinos still do not have access to clean water, and we would like to be part of the solution to this problem.


Annual Report 2010

Witnessing Progress

Growth Strategies

Potable water should flow to every household and establishment in the West Zone. This is why Maynilad is investing heavily in infrastructure to reach the over 9 million people within its concession area. The task is not easy, but our strategic direction is as clear as the water we distribute.

MAYNILAD’S STRATEGIC GOALS

2011 TARGETS AND STRATEGIES

Network and operational efficiency

Implement capital expenditure program to rehabilitate old pipes and other water facilities, as well as develop water sources.

• Reduce system losses to 48% in 2011; to 40% in 2012

• Increase Putatan WTP output to 100 MLD

• Complete a comprehensive water demand forecast

Organizational efficiency Enhance people development with more streamlined organizational structure and processes.

• Realign marketing, technical support and research, business development and information technology

• Continue to recruit the best people through the Cadet Engineer Program

• Develop employee leadership and technical skills

Shareholder value Boost financial growth through increased billed volume and continued expansion to unserved areas.

• Achieve P6 Billion core net income

• Expand distribution business further south of the concession area

• Enter into an agreement for new water supply

Customer care Promote a customer-centric mindset among Maynilad employees.

• Improve service levels throughout the concession area

• Get Integrated Management System certifications for more Maynilad facilities and offices

• Continue to increase customer base and reach more waterless communities in the West Zone

Corporate image Strengthen Maynilad brand identity.

• Increase visibility of key accounts specialists to corporate and industrial customers

• Consolidate operating teams directly related to the provision of client services

• Establish Maynilad’s Carbon Footprint in response to the global call on responses to climate change

Witnessing ProgressProviding Clean, Potable Water

Since its reprivatization in 2007, Maynilad has been aggressively implementing capital expenditure projects that would improve water and wastewater services in the West Zone. This involved the replacement of old, leaky pipes, expansion of the distribution network, construction of major facilities, recovery of water losses, and development of a new water source.

Four years down the line, key structural changes have been made, allowing us to execute growth strategies for our customers and shareholders.

Operational Highlights, Financial Performance and Growth Plans

“We no longer buy water from refilling stations because the water Maynilad supplies is clean.”

The water supply Maynilad produces meets the Philippine National Standards for Drinking Water (PNSDW). Regular monitoring of over 800 sampling points throughout the West Concession ensures that water for Maynilad customers is potable and safe for consumption.


Annual Report 2010

Witnessing Progress

Improved Water Services and EfficienciesMaynilad spent P7.87 Billion on capital expenditure projects in 2010 to enhance the company’s service delivery capabilities. A total of 457 kilometers of primary, secondary and tertiary lines was laid, bringing the total pipe network in the West Zone to 6,476 kilometers.

An additional 89,037 new water service connections were linked to our expanded network, representing a growth of 10% in billed services. Included here are over 30,000 households in Muntinlupa, which previously relied on deep wells for their water supply.

The delivery of surface water to Muntinlupa was an operational milestone that was made possible through the commissioning of our Putatan Water Treatment Plant which sources water from Laguna Lake. From its original output of 24 MLD in June 2010, water production was later increased to around 60 MLD in December 2010.

Operational Highlights

With the full operation of our pumping station and reservoir in Villamor, we were able to reach another service milestone in 2010: Our customers in Parañaque City began receiving 24-hour surface water supply, after two decades of relying on irregular, expensive and unsafe water supply deliveries by private vendors.

In the entire West Zone, service levels registered overall improvement as well. People who receive water on a 24-hour basis increased from 65% in 2009 to 71% in 2010. Similarly, connections that receive water at a pressure exceeding 7 psi. improved from 79% in 2009 to 86% this year.

As of December 2010, the NRW level of Maynilad has been reduced to 51%. This is a 16% point reduction compared with the December 2007 baseline level of 67%, which was prior to the implementation of the company’s NRW Management Program. This NRW reduction translates to over 470 MLD of recovered water during the last three years.

We expect these positive trends to continue with our accelerated service improvement projects across our concession area.

Temporary Reduction in Service LevelsMaynilad experienced a significant raw water supply reduction this year due to El Niño.

MONITORING OF ANGAT ELEVATION

The proximity of this new water source to the southern part of the West concession reduced our reliance on Angat Dam, and established the viability of Laguna Lake as an alternative water source for Metro Manila and nearby areas.

Year 2010 also saw the completion and commissioning of our Villamor Pumping Station and Reservoir in Pasay City. This facility was provided with advanced equipment and stronger pumps, allowing us to increase water pressure and reach elevated areas in the Parañaque area. Our reservoir can also store up to 10 MLD of water during off-peak hours so that potable water can be made available during hours of peak customer demand.

The delivery of surface water to Muntinlupa was an operational milestone that was made possible through the commissioning of our Putatan Water Treatment Plant which sources water from Laguna Lake. From its original output of 24 MLD in June 2010, water production was later increased to around 60 MLD in December 2010.

The start of the year already saw water elevation in Angat dam below the Lower Rule Curve (LRC) of 207.3 meters, which did not bode well for the sustainability of Metro Manila’s domestic water supply through the summer months.


Annual Report 2010

Witnessing Progress

Water level further receded to 200.91 meters in February 1, and to around 181.82 meters in April due to high temperatures and the persistent lack of rain in the Angat Watershed area.

To manage its plummeting level, raw water supply allocation for Metro Manila was reduced in stages. In April, the allocation for Maynilad was cut by 10%, from 2,400 MLD to 2,150 MLD.

This raw water reduction resulted in lowered water pressure and shortened water supply schedule in portions of the West Zone, prompting Maynilad to implement mitigating measures such as valving operations and resetting of Pressure-Regulating Valves (PRVs).

By July 13, water level plunged to 157.6 meters—the lowest it has ever reached in history. Raw water allocation was further cut to 30%, equivalent to 720 MLD. This reduced water pressure and shortened the water supply schedule of 46% of Maynilad’s customer base, 10% of which (or 117 barangays) were severely affected as they received between zero to six hours of water supply.

Among those severely affected by the July reduction are 22 barangays in Quezon City, 13 in Caloocan, four in Malabon, four in Valenzuela, two in Las Piñas, and one in Navotas.

To help ease the water supply problem in these areas, Maynilad continued conducting regular system adjustments in the pipe distribution network. The company also deployed 28 water tankers, installed five stationary water tanks, reactivated four deepwells, and recovered over 113 MLD of water since February through its intensified leak repair program.

Additional mitigating measures included the sourcing of additional water tankers outside of Metro Manila, tapping of fire trucks to assist in the tankering operations, temporary sourcing of treated water from the East Zone distribution network, and the establishment of additional El Niño Hotlines manned by volunteer employees to accommodate customer calls.

The situation began to ease by the latter part of July when raw water supply gradually improved, and water production levels were increased.

WATER PRODUCTION LEVEL

SUPPLY MLD

The increased raw water allocation allowed Maynilad to boost service levels to the 117 severely affected barangays from less than six hours of water supply to 13 hours. Tankering operations were later suspended, although the company kept several water tankers on standby in case of any fluctuations in the water supply and production.

Recovering and Reallocating More WaterOur focused and aggressive NRW reduction program allowed us to recover more water for reallocation to our customers.

Even with El Niño, we were able to implement service improvements and expansion projects in certain areas in Parañaque, Muntinlupa, Cavite and Las Piñas because we were able to recover more than 154 MLD (December 2009 versus December 2010) in Sampaloc, Tondo, South Manila and Pasay.

A combined recovery of 100 MLD in the areas of Tondo and Sampaloc was also realized because of various NRW reduction activities such as pressure management, mainline decommissioning, leak repair and pipe rehabilitation.

Pipe rehabilitation and decommissioning of old mainlines within the Central Manila District also decreased our NRW from 60% in December 2009 to 53% after 12 months.

Modernizing the Network An important part of Maynilad’s pipe modernization program is the establishment of District Metered Areas (DMAs). Dividing the West Zone into hydraulic areas, which are further subdivided into smaller DMAs, allows the company’s t echnical group to better control, monitor and maintain water loss. Each DMA only has one entry and exit point for water supply, so any


The increased raw water allocation from Angat dam allowed Maynilad to boost service levels to the 117 barangays severely affected by El Niño.


Annual Report 2010

Witnessing Progress

spike in registered water consumption within a DMA could indicate physical leaks in the system or even illegal connections.

To date, 692 DMAs were already established, mostly in locations with higher potential for NRW recoveries, namely in the areas of Roosevelt, Central Manila, Pasay and Parañaque.

This put DMA coverage to 67% of the total service connections. Average NRW level in all DMAs is only 32%. Of the total 692 DMAs, 456 (equivalent to 66%) have NRW levels lower than 30%.

Through our fully trained and well-equipped leak detection teams, we successfully repaired 40,392 leaks this year, which is 123% higher than the 18,149 leaks we repaired in 2009.

Since the deployment and use of the SAHARA® Leak Detection System in the primary mains last March 2010, a total of 115 kilometers of primary lines were surveyed. This resulted in the detection of 210 leaks and the discovery of 78 unknown laterals, 14 of which were decommissioned.

For 2010, the Integrated Meter Management (IMM) completed the calibration and proper sizing of the meters of Maynilad’s top large accounts, totaling to 1,007 customers.

Expanding Wastewater ServicesIn 2010, we initiated the first phase of the laying of an interceptor sewer pipe system with manhole pumps along Estero de Paco. The infrastructure was designed to catch wastewater flow from customers living along the creek who could not be served by individual sewer connections. The collected wastewater is then diverted to our nearest sewer network to receive proper treatment before discharge.

Households in the Paco area not located along the interceptor pipe system, meanwhile, will be served by a 410 CMD (cubic meter per day) wastewater treatment plant that Maynilad is developing.

We also began upgrading three of five communal septic tanks in Quezon City, which will benefit some 6,000 households and establishments once completed in 2011. This project, besides improving the sanitation and health conditions in the area, also supports multi-sectoral initiatives to clear the San Juan River Basin that empties to major water systems such as the Pasig River and Manila Bay.

Relative to this effort, Maynilad sought to increase the number of accounts connected to the existing sewer system by offering free sewer connections to households and establishments located along waterways. By year-end, we connected some 1,000 new accounts to the sewer line.

Customers not connected to the sewer network were covered by our desludging services. Over 58,000 households throughout the concession area benefited this year from our septic tank cleaning services.

Improving Customer ServicesWe recognize the benefits of tapping into the latest technologies to enhance our service to customers. This initiative was most evident in our adoption this year of a new meter reading system called “Agad Basa, Bilis Imprenta” or Read-and-Bill Project. The new system uses technology that allows the printing of a customer’s water bill as soon as the meter is read, allowing us to address bill-related complaints on the spot. We have implemented this in the Central A District, composed of South Caloocan, Quirino-Roosevelt and Malabon BAs. The rollout of this project will continue until we cover the entire concession.

We likewise took advantage of existing communications technology in our efforts to become more proactive in addressing customer needs. Maynilad partnered with Smart Communications Inc. and launched an infoboard service called “Text Tubig” to enhance our information dissemination initiatives.

Text Tubig is a web-based SMS facility that has different modules to address the information needs of Maynilad customers. Through this technology, Maynilad can upload, manage and provide customized data to its customers. Text Tubig subscribers may pull information from the infoboard, such as water service advisories, Business Area locations, application requirements, and other useful details. They can also send feedback, complaints and requests directly to Maynilad through SMS.


The “Agad Basa, Bilis Imprenta” or Read-and-Bill Project uses technology that allows the printing of a customer’s water bill as soon as the meter is read, allowing us to address bill-related complaints on the spot.


Annual Report 2010

Witnessing Progress

Financial Review and Analysis

Combined revenues from water and sewer services for the year grew 14% to P11.64 billion from P10.20 billion last year. The increase in revenues was due to the combined effect of the 7% increase in billed volume coupled with an average effective tariff increase of around 7%.

Total revenues from operations, including other fees and services such as installation fees, amounted to P12.05 billion—a 13% increase from P10.62 billion last year.

With revenues continuing to grow at a double-digit rate, income from operations increased by a healthy 26% to P7.11 billion from P5.64 billion last year.

Net income grew by an even more substantial 70% to P4.78 billion in 2010 from P2.82 billion in 2009, primarily due to the impact of last year’s write-off of approximately P1.70 billion in deferred tax assets following the approval of Maynilad’s new six-year income tax holiday (ITH). The impact of the write-off, however, was mitigated by the one-time gain arising from the derecognition of deferred credits as a result of rate rebasing.

Excluding these extraordinary gains and losses, as well as foreign exchange gains or losses, corenet income grew a robust 40% to P4.83 billion from P3.47 billion last year.

Earnings before Interest, Taxes, and Depreciation (EBITDA) appeared to decline by 2.5% to P7.85 billion versus P8.05 billion last year. However, excluding the impact of the previously mentioned one-time gain from rate rebasing, as well as foreign exchange gains or losses, core EBITDA was P7.90 billion—a 13.3% increase versus P6.97 billion last year. The growth in core EBITDA was more representative of the improved performance of Maynilad in line with revenue growth as current year’s net income also included gains from recognition of deferred tax assets.

Customer Classification 2010

Residential 807,164

Semi-Business 40,370

Commercial 46,753

Industrial 9,395

TOTAL NUMBER OF CUSTOMERS (Billed Services)

903,682

Revenue (in billion pesos)

Core EBITDA(in billion pesos)

Water Service Coverage (%)

82 86 8808 09 10

58 65 7108 09 10

P8.24 P10.62 P12.0508 09 10

P4.98 P6.97 P7.9008 09 10

With revenues continuing to grow at a double-digit rate, income from operations increased by a healthy 26% to P7.11 billion from P5.64 billion last year.

The year 2010 was an especially challenging year for Maynilad. It was marked by the occurrence of El Niño that significantly reduced rainfall and brought water levels at Angat Dam to new lows. Despite this hurdle, improvements in the control and efficiency of our network, as well as our continued expansion, enabled us to attain new highs in our operating and financial performance.

24-hour Water Service (%)


Annual Report 2010

Witnessing Progress

Growth Plans

In particular, we have been mandated to bring our NRW level down to an average of 46%. This we aim to achieve by sustaining our NRW reduction program. Exploring the possible use of other technologies in detecting leaks and anomalies in our primary mains is also part of the agenda.

We likewise expect to hit a billed volume growth of 10% through continued expansion in the south. Our Putatan Water Treatment Plant is also scheduled to operate at its full capacity by 2011, so we can serve more customers in Muntinlupa and nearby areas.

The construction of the new Pagcor Pumping Station and Reservoir in Pasay City, once finished in 2011, will enhance our holding capacity and improve service levels as well. It can store up to 23 million liters and has a pump station that can generate up to 330 MLD, which would be more than sufficient to meet the additional 100 MLD supply requirement of its influence area. Its target supply recipients are Parañaque, Las Piñas, Cavite City, and some areas of five municipalities in Cavite Province.

Our El Niño experience highlighted the need to tap additional sources of raw water. We are working to accelerate plans for this, together with MWSS and the other concessionaire. The initial plan is to develop smaller sources that are geographically spread out, as this may minimize the risk of water supply disruptions in case of calamities. This may also help to spread out the cost of investment so that any resulting adjustment to the tariff may have a longer recovery period.

For 2011, we are gearing up for a major fund-raising exercise to raise P7 Billion from the local capital markets to fund our CAPEX program. We are also exploring the possibility of tapping Official Development Assistance (ODA) facilities to accelerate our sewerage and sanitation projects. Among our wastewater projects for 2012 are the construction of sewage treatment

plants in several areas of Quezon City and Manila, particularly those located along waterways. Maynilad plans to build 20 Sewage Treatment Plants until 2016.

Also in line with our commitment to environmental conservation was the completion this year of the inventory to establish Maynilad’s greenhouse gases (GHG) baseline, with the end in view of reducing our carbon emissions. The Maynilad GHG/ Air Pollutants Emissions Inventory Management Program was intended for certification on ISO 14064—the international standard for GHG accounting and verification. Once this inventory is verified by TUV Rheinland Taiwan next year, ours would become the first company in the water industry sector to have our carbon footprint certified.

Meanwhile, a necessary component of improving customer services is the alignment of the business process of information technology (IT) to the requirements of Maynilad’s line organization. Included in the long-term plans to enhance the company’s IT infrastructure are the outsourcing of IT’s operations and management, deployment of the Geographic Information System to BAs and other departments that require access, streamlining of processes in SAP, and implementation of a more robust email system that would be accessible through internet and mobile devices.

Such enhancements in internal processes will enhance efficiencies, enabling our employees to become more responsive to the needs of Maynilad customers.

We have been mandated to bring our NRW level down to an average of 46%. This we aim to achieve by sustaining our NRW reduction program. Exploring the possible use of other technologies in detecting leaks and anomalies in our primary mains is also part of the agenda.

The construction of the new Pagcor Pumping Station and Reservoir in Pasay City, once finished in 2011, will enhance our holding capacity and improve service levels as well. It can store up to 23 million liters and has a pump station that can generate up to 330 MLD.

The year 2011 is critical for Maynilad. Our performance for this year will serve as our regulators’ criteria during negotiations for the rate rebasing exercise in 2012.

Witnessing ProgressCommitment to Stakeholders

Corporate Social Responsibility (CSR) is an integral part of our business strategy. We are currently engaged in initiatives that promote poverty alleviation, sustainable water management and community development. At the same time, we cultivate partnerships for enhanced services and extend valuable assistance to charitable institutions and calamity-stricken areas.

Corporate Social Responsibility

“The residents near my school don’t line up for water anymore, thanks to Maynilad.”

Maynilad is always seeking ways to connect poor households to its network despite obstacles such as lack of land titles and right-of-way concerns. Among these innovative Corporate Social Responsibility initiatives is the Samahang Tubig Maynilad (STM), which provides potable water to urban poor areas and transforms these communities into cooperatives that will manage their own water distribution among residents.


Annual Report 2010

Witnessing Progress

Samahang Tubig Maynilad (STM)Making potable water accessible to all is not just a job—it is a mission. Of particular importance to us is making our services available to the marginalized areas of our concession. This is why we have come up with innovative ways to reach pockets of communities in the West Zone that remain waterless due to reasons such as lack of land titles and right-of-way approvals for pipelaying from land owners.

One such innovative project is our STM, which provides a public faucet to urban poor areas and mobilizes the community to form a cooperative that will manage the water supply. Profits earned by the cooperative are plowed back into the community through the creation of livelihood projects for the benefit of residents.

Initially implemented in year 2009 at Barangay 123 in Tondo, Manila, STM has since seen implementation in other areas of the West concession. This year, Maynilad formed eight new STM communities, benefiting 1,139 households in several areas of North Caloocan, Malabon, Pasay, and Quezon City.

Lingkod EskuwelaThe problems of poor and inadequate water supply in public schools were directly addressed by Maynilad’s Lingkod Eskuwela program, which provided drink-and-wash stations for 45 beneficiary schools in the West Zone since 2008. This year, the program benefited the 1,169 students of Calalay Elementary School in Quezon City.

The implementation of the program this year tapped the support of volunteers. This new initiative, dubbed “Maynilad Volunteer Program,” had Maynilad employees working together to build the drink-and-wash station for Calalay Elementary School. The volunteers not only provided labor for building the facility; they also granted technical assistance in the maintenance of the school’s internal plumbing system and taught the students about the practice of good hygiene.

Environmental ManagementA company that relies on natural resources, Maynilad makes sure that its operations are environmentally sustainable. We believe that it is not only the responsible thing to do—it also makes good business sense. We have our very own “Green Team” which worked to establish the baseline data for the company’s fuel consumption, air pollutants and greenhouse gas emissions for every ton of water produced. The result of this effort will serve as basis for setting Maynilad’s GHG reduction target.

Our Ipo watershed rehabilitation and reforestation effort continues with Maynilad planting this year a total of 47,000 trees over 60 hectares. This program—done in partnership with PLDT, Smart, the National Commission on Indigenous People (NCIP), Department of Environment and Natural Resources (DENR), MWSS, and the local government of Bulacan—seeks to avert the denudation of the Ipo forest cover.

The year also saw Maynilad volunteers participating actively in the coastal cleanup of Manila Bay, which is a yearly project of the International Maritime Organization and spearheaded by the DENR in the Philippines. Part of this effort was the assessment of wastes entering the bay for better prediction of the water’s future characteristics.

Corporate Social Responsibility

Relief missions and cause-oriented eventsMaynilad extended a helping hand to victims of calamities. Our employees distributed potable drinking water in jugs to over 1,100 families displaced by fire in Pitong Gatang and Davila in Barangay Sipac Almacen, Navotas City. We also donated water jugs to Isla Puting Bato in Tondo and to four STM communities in North Caloocan.

Meanwhile, our drinking station became a popular fixture in several cause-oriented events such as feeding programs and medical missions. We were likewise present in advocacy running events such as the 10.10.10 Run for Pasig River and the Laguna Lake Development Authority 200-K Ultramarathon, which were both organized to raise funds for the rehabilitation of the polluted water systems.

The Maynilad Volunteer Program had employees working together to build the drink-and-wash station for Calalay Elementary School.

This year, Maynilad formed eight new STM communities, benefiting 1,139 households in several areas of North Caloocan, Malabon, Pasay, and Quezon City.


Annual Report 2010

Witnessing Progress

Board of Directors

Manuel V. Pangilinan, ChairmanMaynilad chairman since January 1, 2007, Mr. Pangilinan founded the First Pacific in 1981 and served as Managing Director until 1999. He was appointed as Executive Chairman until June 2003, when he was named as CEO and Managing Director. Within the First Pacific Group, he holds the position of president commissioner of P.T. Indofood Sukses Makmur Tbk, the largest food company in Indonesia.

He is Chairman of the Board of Metro Pacific Investments Corp. since March 2006. He was likewise appointed as Chairman of the Board of PLDT after serving as its President and CEO from November 1998 to February 2004 and became Chairman of the Board of PLDT Communications and Energy Ventures Inc. (PCEV, formerly Piltel) on November 3, 2004. He also serves as Chairman of Smart Communications Inc., ePLDT Inc., Landco Pacific Corp., Philex Mining Corp., Metro Pacific Tollways Corp., Manila North Tollways Corp., Medical Doctors Inc. (Makati Medical Center), Colinas Verdes Inc. (Cardinal Santos Medical Center), and Davao Doctors Inc. He is also a Director and the President and CEO of Manila Electric Company (Meralco).

Isidro A. Consunji, Vice ChairmanVice Chairman of the Maynilad Board since January 1, 2007, Mr. Consunji is a Member of the Board of Directors of D.M. Consunji, Inc., Semirara Mining Corp., and Crown Equities, Inc. He is the Chairman of the Board of DMCI Project Developers Inc. and DMCI-Homes; and President of DMCI Holdings, Inc., Dacon Corp., and Beta Electric Corp.

Victorico P. Vargas, MemberConcurrently the President and CEO of Maynilad, Mr. Vargas took over from Rogelio L. Singson in August 2010. Prior to his appointment, he was Senior Vice President for the Human Resources Group and Head of the Business Transformation Office of PLDT. In the field of sports, Mr. Vargas currently holds the position of President for the Amateur Boxing Association of the Philippines (ABAP) and Alternate Governor of the Philippine Basketball Association (PBA).

Rogelio L. Singson, Former MemberPresident and CEO of Maynilad from July 1, 2007 until July 2010, Mr. Singson left the company to enter government service as secretary of the Department of Public Works and Highways under the Aquino administration. He was former Chairman and President of the Bases Conversion Development Authority (BCDA) of the Philippines, Senior Vice President of Citadel Holdings Inc., and Chairman of the Board of John Hay Poro Point Development Corp., BCDA Management Holdings Inc., and North Luzon Railways Corp. He was likewise a member of the Board of Directors of Clark Development Corp., Clark International Airport Corp. and Fort Bonifacio Development Corp.

Herbert M. Consunji, MemberMr. Consunji is the Chairman of Subic Water and Sewerage Company, Inc.; also a regular Director of DMCI Holdings, Inc., DMCI Project Developers, Inc., Semirara Mining Corp., DMCI-MPIC Water Company, Inc., DMCI Mining Corp., DMCI Power Corp., Semirara-Calaca Power Corp., Semirara-Calaca Industrial Park Development Corp.; and the Chief Operating Officer of Maynilad Water Services, Inc.

Randolph T. Estrellado, MemberConcurrently the Chief Finance Officer of Maynilad, Mr. Estrellado was Director and CFO of Metro Pacific Investments Corporation. He served in various positions of senior responsibility with the Lopez Group of Companies including that of Vice President and CFO of ABS-CBN Broadcasting Corp. He also served in financial positions at Phinma and P.T. Dwi Satrya Utama in Indonesia.

Jorge A. Consunji, MemberMr. Consunji is also a member of the Board of Directors of DMCI Concepcion Power, DMCI Holdings Inc., DMCI Power Corp., DMCI Mining Corp., DMCI-PDI, Dacon Corp., M&S Company Inc., Semirara Mining Corp., Semirara-Calaca Power Corp., Sirawai Plywood & Lumber, Manila Herbal Corp., and Beta Electric Corp. He also serves as Chairman of the Board of Wire Rope Corp. and DMCI Masbate Power Corp.; and President and COO of DM Consunji Inc.

He is currently Chairman of the Asean Constructors Federation, Board Member of the Construction Industry Authority of the Phils., and Director of Private Infrastructure Development Corp.

Jose Maria K. Lim, MemberMr. Lim has been President and CEO of Metro Pacific Investments Corp. since 2006. He is also currently a Director in the following MPIC subsidiary and/or affiliate companies: Beacon Electric Asset Holdings, Inc., Metro Pacific Tollways Corp., Manila North Tollways Corp., Tollways Management Corp., Medical Doctors, Inc. (owner and operator of the Makati Medical Center), Davao Doctors Hospital (Clinica Hilario) Inc., and Landco Pacific Corp. (including several Landco subsidiaries). Mr. Lim likewise serves as President of Metro Strategic Infrastructure Holdings, Inc., which holds a minority ownership interest in Citra Metro Manila Tollways Corp. (Skyway).

Edward A. Tortorici, MemberMr. Tortorici presently oversees corporate strategy for First Pacific and guides the Group’s strategic planning and corporate development activities. He also serves as Commissioner of PT Indofood Sukses Makmur Tbk and as Direc-tor of Metro Pacific Investments Corp., Philex Mining Corp., Medical Doctors Inc., Landco Pa-cific Corp., FEC Resources Inc. of Canada and AIM-listed Forum Energy Plc. He is a Trustee of the Asia Society Philippines and is in the Board of Advisors of the Southeast Asia Division of the Center for Strategic and International Studies, a Washington D.C. non-partisan think tank. Mr. Tortorici also serves as Commissioner of the U.S. ASEAN Strategy Commission.


Annual Report 2010

Witnessing Progress

Top Management Team

Victorico P. VargasPresident and CEO (August to present)

Rogelio L. SingsonPresident and CEO (July 1, 2007 to July 2010)

Herbert M. ConsunjiChief Operating Officer

Randolph T. EstrelladoChief Finance Officer

Irineo M. GonzalesHead, Technical Operations and Program Management

Christopher J. LichaucoHead, Business Area Operations

Roy Agustin K. EvalleHead, Corporate Human Capital and Organization Development

Irineo L. DimaanoHead, Central Non-Revenue Water

Atty. Lourdes Marivic P. EspirituHead, Legal and Regulatory Affairs

Eric H. DumancasHead, Corporate Logistics

Antonio F. GarciaHead, Sewerage and Sanitation

Manuel R. GalangHead, Information Technology Services


Annual Report 2010

Witnessing Progress

The Stockholders and the Board of DirectorsMaynilad Water Services, Inc.

Report on the Financial Statements

We have audited the accompanying financial statements of Maynilad Water Services, Inc. (a subsidiary of DMCI-MPIC Water Company, Inc.), which comprise the statements of financial position as at December 31, 2010 and 2009, and the 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, 2010, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of 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 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 financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the 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 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 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 financial statements present fairly, in all material respects, the financial position of Maynilad Water Services, Inc. as of December 31, 2010 and 2009, and its financial performance and its cash flows for each of the three years in the period ended December 31, 2010 in accordance with Philippine Financial Reporting Standards.

INDEPENDENT AUDITORS’ REPORT

Emphasis of Matter

Without qualifying our opinion, we draw attention to Note 11 of the financial statements. The Company has disputed claims of Metropolitan Waterworks and Sewerage System (MWSS) substantially pertaining to additional Tranche B Concession Fees and interest penalties amounting to P4.0 billion as of December 31, 2010 and P3.8 billion as of December 31, 2009. The Company has entered into a Transitional and Clarificatory Agreement with MWSS which prescribes the procedures for the resolution of these disputes. The ultimate outcome of the matter cannot be presently determined, and no provision for any liability that may result has been made in the financial statements.

Report on the Supplementary Information Required Under Revenue Regulations 15-2010

The supplementary information on taxes, duties and license fees required for purposes of filing with the Bureau of Internal Revenue is presented by the management of Maynilad Water Services, Inc. in a separate schedule. Revenue Regulations 15-2010 require the information to be presented in the notes to financial statements. Such information is not a required part of the basic financial statements. The information is also not required by Securities Regulation Code Rule 68. Our opinion on the basic financial statements is not affected by the presentation of the information in a separate schedule.

SYCIP GORRES VELAYO & CO.

Maria Vivian C. RuizPartnerCPA Certificate No. 83687SEC Accreditation No. 0073-AR-2Tax Identification No. 102-084-744BIR Accreditation No. 08-001998-47-2009, June 1, 2009, Valid until May 31, 2012PTR No. 2641560, January 3, 2011, Makati City

February 24, 2011


Annual Report 2010

Witnessing Progress

December 312010 2009

ASSETSCurrent AssetsCash and cash equivalents (Notes 4, 23 and 24) P1,306,935 P1,886,923Short-term investments (Notes 4, 23 and 24) 6,138 2,433,418Trade and other receivables (Notes 5, 23 and 24) 1,558,898 1,536,093Other current assets (Notes 6, 9, 21, 23 and 24) 1,535,033 1,442,077

Total Current Assets 4,407,004 7,298,511

Noncurrent AssetsService concession assets (Notes 8, 11, 13 and 21) 36,188,764 29,062,512Deferred tax assets - net (Notes 14 and 19) 1,659,347 1,426,630Property and equipment (Note 7) 290,865 333,824Other noncurrent assets 44,202 57,934

Total Noncurrent Assets 38,183,178 30,880,900P42,590,182 P38,179,411

LIABILITIES AND EQUITYCurrent LiabilitiesTrade and other payables (Notes 10, 13, 22, 23 and 24) P7,389,370 P5,575,612Current portion of service concession obligation

payable to MWSS (Notes 8, 11, 23 and 24) 2,334,088 2,116,063Current portion of interest-bearing loans (Notes 9, 23 and 24) 492,986 –Payables arising from rate rebasing (Note 1) – 942,279

Total Current Liabilities 10,216,444 8,633,954

Noncurrent LiabilitiesInterest-bearing loans - net of current portion

(Notes 9, 23 and 24) 15,597,930 16,305,076Service concession obligation payable to MWSS - net

of current portion (Notes 8, 11, 23 and 24) 7,403,263 8,576,461Pension liability (Note 15) 218,412 238,065Deferred credits and other noncurrent liabilities

(Notes 1, 2, 23 and 24) 1,210,395 664,161Total Noncurrent Liabilities 24,430,000 25,783,763

Equity Capital stock (Notes 1 and 12) 4,010,893 4,010,893Additional paid-in capital (Note 12) 101,815 775,796Other equity adjustments (Note 12) (348,946) (351,014)Retained earnings (deficit) (Note 12) 4,179,976 (673,981)

Net Equity 7,943,738 3,761,694P42,590,182 P38,179,411

See accompanying Notes to Financial Statements.

MAYNILAD WATER SERVICES, INC.(A Subsidiary of DMCI-MPIC Water Company, Inc.)

STATEMENTS OF FINANCIAL POSITION(Amounts in Thousands)


STATEMENTS OF INCOME(Amounts in Thousands, Except Earnings Per Share Value)

Years Ended December 312010 2009 2008

OPERATING REVENUEWater services P9,904,395 P8,575,507 P6,419,678Sewer services 1,738,898 1,623,595 1,386,955Others 406,231 419,442 438,227

12,049,524 10,618,544 8,244,860COSTS AND EXPENSESSalaries, wages and benefits (Notes 12, 13 and 15) 1,284,093 1,350,749 1,233,934Amortization of service concession assets (Note 8) 1,059,235 1,322,615 1,283,455Contracted services 598,617 461,793 488,589Utilities 565,153 417,089 373,117Materials and supplies 367,240 247,084 173,669Repairs and maintenance 320,547 220,725 175,161Rental (Notes 21 and 22) 160,382 77,215 66,721Depreciation and amortization (Note 7) 135,276 119,078 112,028Collection charges 103,217 96,143 87,431Taxes and licenses 82,529 90,318 85,262Transportation and travel 80,660 59,061 106,366Business meetings and representations 30,537 63,805 66,805Insurance 28,087 23,000 18,146Advertising and promotion 18,122 21,456 11,754Regulatory costs 13,025 97,676 81,022Provision for doubtful accounts (Note 5) – 226,266 102,410Others 85,157 79,620 66,413

4,931,877 4,973,693 4,532,283INCOME BEFORE OTHER INCOME (EXPENSES) 7,117,647 5,644,851 3,712,577OTHER INCOME (EXPENSES)Revenue from rehabilitation works (Note 8) 7,678,858 4,376,346 6,375,495Cost of rehabilitation works (7,605,554) (4,268,315) (6,236,962)Interest expense (Note 16) (2,162,845) (2,370,067) (1,544,410)Interest income (Note 16) 70,294 153,443 123,324Foreign exchange gains (losses) - net (Note 1) 1,216,711 (1,326,146) (878,495)Foreign currency differential adjustments (FCDA)

(Note 1) (1,271,411) 1,243,286 549,186Other income from rate rebasing resolutions (Note 1) – 1,404,059 –Others - net (Note 10) (478,670) (463,798) (125,066)

(2,552,617) (1,251,192) (1,736,928) INCOME BEFORE INCOME TAX 4,565,030 4,393,659 1,975,649

PROVISION FOR (BENEFIT FROM) INCOME TAX (Notes 14 and 19)

Current 17,771 – –Deferred (232,717) 1,569,033 (18,491)

(214,946) 1,569,033 (18,491)NET INCOME P4,779,976 P2,824,626 P1,994,140Earnings Per Share (Note 17) P1,191.75 P704.24 P1,112.81



Annual Report 2010

Witnessing Progress


STATEMENTS OF COMPREHENSIVE INCOME(Amounts in Thousands)


Net income for the year P4,779,976 P2,824,626 P1,994,140Other comprehensive income – – –Total comprehensive income for the year P4,779,976 P2,824,626 P1,994,140


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Annual Report 2010

Witnessing Progress


CASH FLOWS FROM OPERATING ACTIVITIESIncome before income tax P4,565,030 P4,393,659 P1,975,649Adjustments for: Interest expense (Note 16) 2,162,845 2,370,067 1,544,410 Amortization of service concession assets (Note 8) 1,059,235 1,322,615 1,283,455 Depreciation and amortization (Note 7) 135,276 119,078 112,028 Interest income (Note 16) (70,294) (153,443) (123,324) Unrealized foreign exchange losses - net 19,815 167,122 107,514 Pension cost (Note 15) 10,347 102,899 111,075 Cost of share-based payments 2,068 – – Gain on sale of property and equipment (1,920) (2,805) (1,533)

Other income from rate rebasing resolutions (Note 1) – (1,404,059) –Operating income before working capital changes 7,882,402 6,915,133 5,009,274Decrease (increase) in: Short-term investments 2,407,465 2,974,568 (4,508,150) Trade and other receivables (1,024,155) (979,663) (421,823) Other current assets (92,956) (709,440) (187,917)Increase (decrease) in trade and other payables 1,934,038 (340,096) (125,357)Cash generated from (used for) operations 11,106,794 7,860,502 (233,973)Interest received 77,528 163,156 89,148Income taxes paid (17,771) – –

Net cash provided by (used in) operating activities 11,166,551 8,023,658 (144,825)CASH FLOWS FROM INVESTING ACTIVITIESAdditions to service concession assets (Note 8) (7,844,436) (4,376,346) (6,375,495)Acquisitions of property and equipment (Note 7) (193,764) (127,331) (253,195)Proceeds from sale of property and equipment 7,223 10,502 16,589Decrease in other noncurrent assets 15,942 18,580 13,816Net contributions to pension fund (Note 15) (30,000) (195,704) –Net cash used in investing activities (8,045,035) (4,670,299) (6,598,285)CASH FLOWS FROM FINANCING ACTIVITIES

Payments of: Service concession obligation payable to MWSS (1,968,380) (1,346,983) (3,744,386) Dividends (Note 12) (600,000) – –

Interest-bearing loans – – (6,409,711) Increase (decrease) in: Deferred credits and other noncurrent liabilities 87,022 60,099 102,949

Payable to a shareholder – – (1,284,537)Interest paid (1,220,146) (1,542,792) (643,578)Proceeds from: Availment of interest-bearing loans – – 16,556,135 Issuance of common and preferred shares – – 18,751,884Redemption of preferred shares – – (16,567,005)Net cash provided by (used in) financing activities (3,701,504) (2,829,676) 6,761,751NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (579,988) 523,683 18,641CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,886,923 1,363,240 1,344,599CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 4) P1,306,935 P1,886,923 P1,363,240



STATEMENTS OF CASH FLOWS(Amounts in Thousands)

1. Corporate Information and Status of Operations

GeneralMaynilad Water Services, Inc. (the 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. The Company is a 91.90% in 2010 (94.11% in 2009) owned subsidiary of DMCI-MPIC Water Company, Inc. (DMCI-MPIC or Parent Company), a company incorporated in the Philippines. DMCI-MPIC is a subsidiary of Metro Pacific Investments Corporation (MPIC). In addition, MPIC directly owns 5.88% of the Company. MPIC effectively owns 56.80% in 2010 and 58.03% in 2009 of the Company (see Note 12).

MPIC is 55.57% owned by Metro Pacific Holdings, Inc. (MPHI). MPHI is a Philippine corporation whose stockholders are Enterprise Investments Holdings, Inc. (EIH) (60.0%), Intalink B.V. (26.7%) and First Pacific International Limited (13.3%). First Pacific Company Limited (“FPC”), a company incorporated in Bermuda and listed in Hong Kong, through its subsidiaries, hold a direct 40% equity interest in EIH and investment financing, and which under Hong Kong Generally Accepted Accounting Principles require FPC to account for the results and assets and liabilities of EIH and its subsidiaries as FPC group companies in Hong Kong. On such basis, FPC is referred to as the ultimate parent company of EIH and MPIC.

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

The accompanying financial statements were approved and authorized for issue by the Board of Directors (BOD) on February 24, 2011.

Extension of the Concession AgreementOn September 10, 2009, the MWSS Board of Trustees (BoT) approved the extension of the expiry of its Concession Agreement with the Company by an additional fifteen (15) years or from May 7, 2022 to May 6, 2037. Subsequently, on September 16, 2009, the MWSS Administrator wrote the Department of Finance (DoF) to inform them of the MWSS BoT’s decision and seek the DoF’s written consent to the extension, as well as its extension of the Letter of Undertaking covering the government’s obligation under the Concession Agreement. On April 22, 2010, the DoF (by authority from the Office of the President of the Republic of the Philippines) approved the extension of the expiry of its Concession Agreement. The significant commitments under the extension follow:

a. to mitigate tariff increases;

b. to increase the share in the current operating budget support to MWSS by 100% as part of the concession fees starting 2010 (see Notes 8 and 21); and

c. to increase total investments.

The DoF further clarified that the extension of the government’s Undertaking shall be effective only upon an increase in the Company’s Performance Bond from US$30 Million to US$90 Million for the third rate Rebasing Period. Subsequently, the Company submitted a Performance Bond in the increased amount of US$90 Million to MWSS on May 31, 2010 (see Note 21).

MWSS-Regulatory Office (RO or Regulatory Office) Resolution No. 209-069 Dated April 16, 2009 The Company’s second Rebasing Adjustment was supposed to have taken effect and implemented beginning


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


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January 1, 2009 pursuant to the Concession Agreement and the Transitional and Clarificatory Agreement (TCA) dated August 9, 2007. In a letter to MWSS and the Regulatory Office dated March 20, 2009, the Company submitted a tariff scheme proposal pending the full implementation of the rate rebasing adjustment or “R”.

On April 16, 2009, after a careful evaluation of such proposal, the Regulatory Office issued MWSS-RO Resolution No. 209-069, which recommended that the Company be authorized to implement, on a staggered basis, the “R” equivalent to 22.60% of the current basic charge or P5.02 per cubic meter in addition to the inflationary increase (“C”) equivalent to P2.42 per cubic meter, which was implemented effective February 20, 2009. The said recommendations of the Regulatory Office were approved and confirmed by the MWSS BoT. After completion of the required publication pursuant to Section 12 of the MWSS Charter, such approved tariff scheme was implemented by the Company pursuant to and in accordance with the said resolution. The new “R” took effect on May 4, 2009. In addition, the new base foreign exchange rate was changed from P51.86 to P48.04 effective May 4, 2009. As a result of the change in the base foreign exchange rate, deferred credits pertaining to remaining unrealized foreign exchange gains were derecognized in 2009.

Under this resolution, the MWSS resolved, among others, two pending issues that had an impact on the new “R” that took effect on May 4, 2009. These issues pertain to the excess collection of Accelerated Extraordinary Price Adjustment (AEPA) and realized foreign exchange gains arising from the prepayment of Standby Letters of Credit (SBLC) and Tranche B Concession fees, which were recognized as part of “Deferred credits and other noncurrent liabilities” account in the 2008 statement of financial position. These were treated as part of the opening cash position, thus, were taken into consideration when the new “R” was set. Consequently, these deferred credits will no longer be subject to the foreign currency differential adjustments (FCDA) mechanism that will be reflected in future billings.

In addition, to further mitigate the impact of the rate increase, the Regulatory Office further required the simultaneous implementation of the following: (1) the Prepayment Adjustment (PA), and (2) the Payment Incentive Adjustment (PIA) within an accelerated period of two (2) years, resulting in a downward adjustment of 8.15% or -P2.22 per cubic meter and 5.73% or -P1.56, respectively, based on the 2009 average basic charge which already includes the staggered “R” and the “C”. Payables arising from rate rebasing adjustment, which are recorded at present value, consist of PA amounting to P1.0 billion and PIA amounting to P709.7 million. As of December 31, 2009, these payables arising from rate rebasing adjustment amounted to P942.3 million. As of December 31, 2010, these payables have been fully applied against billings.

The above MWSS resolutions resulted to a derecognition of deferred credits of about P2.1 billion and a recognition of a provision for PIA of about P709.7 million, with a net effect of about P1.4 billion which was recognized as “Other income from rate rebasing resolutions” account in the 2009 statement of income.

As of December 31, 2010 and 2009, deferred credits representing the net effect of unrealized foreign exchange gain in 2010 and unrealized foreign exchange losses in 2009 on service concession obligation payable to MWSS, and unrealized foreign exchange gains arising from restatement of foreign currency-denominated interest bearing loans and related interest amounted to P685.9 million and P226.7 million, respectively. Deferred credits are calculated as the difference between the drawdown or rebased rate versus the closing rate. These were presented as part of “Deferred credits and other noncurrent liabilities” account in the statements of financial position.

Concession Agreement On February 21, 1997, the 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 Company throughout the concession period. The MWSS Regulatory Office acts as the regulatory body of the Concessionaires [the Company and the East Concessionaire - Manila Water Company, Inc. (Manila Water)].

Under the Concession Agreement, MWSS grants the 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 25 years commencing on August 1, 1997 (the Commencement Date) to May 6, 2037 (the Expiration Date) or the early termination date as the case may be.

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

Under the Concession Agreement, the Company is entitled to the following rate adjustments:

a. annual standard rate adjustment to compensate for increases in the Consumer Price Index (CPI) subject to rate adjustment limit;

b. Extraordinary Price Adjustment (EPA) to account for the financial consequences of the occurrence of certain unforeseen events subject to grounds stipulated in the Concession Agreement; and

c. rate rebasing (Rate Rebasing) mechanism to allow rates to be adjusted every five (5) years to enable the Company to recover expenditures efficiently and prudently incurred, Philippine business taxes and payments corresponding to debt service on concession fees, and Company loans incurred to finance such expenditures.

2. Summary of Significant Accounting and Financial Reporting Policies

Basis of PreparationThe financial statements of the Company have been prepared on a historical cost basis, except for available-for-sale (AFS) investments, which are measured at fair value. The financial statements are presented in Philippine peso, which is the Company’s functional and presentation currency, and all amounts are rounded to the nearest thousand (P000), except when otherwise indicated.

Statement of ComplianceThe Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the Philippines as set forth in PFRS. PFRS include statements named PFRS and Philippine Accounting Standards (PAS), including Interpretations issued by the Financial Reporting Standards Council (FRSC).

Changes in Accounting Policies and DisclosuresThe accounting policies adopted are consistent with those of the previous financial year, except for the following relevant new and amended PFRS and Philippine Interpretations which were adopted as of January 1, 2010.

Effective for annual periods beginning on or after July 1, 2009

• AmendmenttoPAS39, Financial Instruments: Recognition and Measurement – Eligible Hedged Items

• Improvement to Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives


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Effective for annual periods beginning on or after January 1, 2010

• AmendmentstoPFRS2,Share-based Payment – Group Cash-settled Share-based Payment Transactions

• ImprovementstoPFRS

a. PAS 1, Presentation of Financial Statementsb. PAS 7, Statement of Cash Flowsc. PAS 17, Leasesd. PAS 36, Impairment of Assetse. PAS 39, Financial Instruments: Recognition and Measurement

The adoption of the standards, interpretations and improvements to PFRS listed above did not have any impact on the accounting policies, financial position or performance of the Company.

Standards, Interpretations and Amendments to Existing Standards 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 of December 31, 2010. Except as otherwise indicated, the Company does not expect the adoption of these amendments and interpretations to have an impact on its financial statements.

• PAS24,Related Party Disclosures (Amended)

The amended standard is effective for annual periods beginning on or after January 1, 2011. It clarified the definition of a related party to simplify the identification of such relationships and to eliminate inconsistencies in its application. The revised standard introduces a partial exemption of disclosure requirements for government-related entities.

• PAS32,Financial Instruments: Presentation (Amendment) – Classification of Rights Issues

The amendment to PAS 32 is effective for annual periods beginning on or after February 1, 2010 and amended the definition of a financial liability to classify rights issues (and certain options or warrants) as equity instruments in cases where such rights are given pro-rata to all of the existing owners of the same class of an entity’s non-derivative equity instruments, or to acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency.

• PAS12,Income Taxes (Amendment) – Deferred Tax: Recovery of Underlying Assets

The amendment to PAS 12 is effective for annual periods beginning on or after January 1, 2012. It provides a practical solution to the problem of assessing whether recovery of an asset will be through use or sale. It introduces a presumption that recovery of the carrying amount of an asset will normally be through sale.

• PFRS7,Financial Instruments: Disclosures (Amendments) –Transfers of Financial Assets

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

• PFRS9,Financial Instruments: Classification and Measurement

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

• PhilippineInterpretationIFRIC14, Prepayments of a Minimum Funding Requirement (Amendment)

The amendment to Philippine Interpretation IFRIC 14 is effective for annual periods beginning on or after January 1, 2011, with retrospective application. The amendment provides guidance on assessing the recoverable amount of a net pension asset. The amendment permits an entity to treat the prepayment of a minimum funding requirement as an asset.

• PhilippineInterpretationIFRIC15, Agreements for the Construction of Real Estate

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

• PhilippineInterpretationIFRIC19,Extinguishing Financial Liabilities with Equity Instruments

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

Improvements to PFRS 2010

This is an omnibus of amendments to PFRS. The amendments have not been adopted as they become effective for annual periods on or after either July 1, 2010 or January 1, 2011.

• PFRS3,Business Combinations (Revised), clarifies the following:

a. that the amendments to PFRS 7, Financial Instruments: Disclosures, PAS 32, Financial Instruments: Presentation, and PAS 39, Financial Instruments: Recognition and Measurement, that eliminate the exemption for contingent consideration, do not apply to contingent consideration that arose from business combinations whose acquisition dates precede the application of PFRS 3 (as revised in 2008). The amendment is applicable for annual periods beginning on or after July 1, 2010. The amendment is applied retrospectively.

b. the amendment limits the scope of the measurement choices that only the components of non-controlling interests that are present ownership interests that entitle their holders to a proportionate share of the entity’s net assets, in the event of liquidation, shall be measured either:


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i. at fair value; or

ii. at the present ownership instruments’ proportionate share of the acquiree’s identifiable net assets. Other components of non-controlling interests are measured at their acquisition date fair value, unless another measurement basis is required by another PFRS.

The amendment is applicable for annual periods beginning on or after July 1, 2010. The amendment is applied prospectively from the date the entity applies PFRS 3.

c. the amendment requires an entity (in a business combination) to account for the replacement of the acquiree’s share-based payment transactions (whether obliged or voluntarily), i.e., split between consideration and post combination expenses. However, if the entity replaces the acquiree’s awards that expire as a consequence of the business combination, these are recognized as post-combination expenses. The amendment also specifies the accounting for share-based payment transactions that the acquirer does not exchange for its own awards: if vested - they are part of non-controlling interests and measured at their market-based measure; if unvested - they are measured at market based value as if granted at acquisition date, and allocated between non-controlling interests and post-combination expense. The amendment is applicable for annual periods beginning on or after July 1, 2010. The amendment is applied prospectively.

• PFRS 7, Financial Instruments: Disclosures, emphasizes the interaction between quantitative and qualitative disclosures and the nature and extent of risks associated with financial instruments and the amendments to quantitative and credit risk disclosures:

a. Clarify that only financial asset whose carrying amount does not reflect the maximum exposure to credit risk need to provide further disclosure of the amount that represents the maximum exposure to such risk;

b. Require, for all financial assets, disclosure of the financial effect of collateral held as security and other credit enhancements regarding the amount that best represents the maximum exposure to credit risk (e.g., a description of the extent to which collateral mitigates credit risk);

c. Remove disclosure of the collateral held as security, other credit enhancements and an estimate of their fair value for financial assets that are past due but not impaired, and financial assets that are individually determined to be impaired;

d. Remove the requirement to specifically disclose financial assets renegotiated to avoid becoming past due or impaired; and

e. Clarify that the additional disclosure required for financial assets obtained by taking possession of collateral or other credit enhancements are only applicable to assets still held at the reporting date.

• PAS1,Presentation of Financial Statements, clarifies that an entity will present an analysis of other comprehensive income for each component of equity, either in the statement of changes in equity or in the notes to the financial statements.

• PAS27,Consolidated and Separate Financial Statements, clarifies that the consequential amendments from PAS 27 made to PAS 21, The Effects of Changes in Foreign Exchange Rates, PAS 28, Investments in Associates, and PAS 31, Interests in Joint Ventures, apply prospectively for annual periods beginning on or after July 1, 2009 or earlier when PAS 27 is applied earlier. It eliminates the requirement to restate financial statements for a reporting period when significant influence or joint control is lost and the reporting entity accounts for the remaining investment under PAS 39. This includes the effect on accumulated foreign exchange differences on such investments.

• Philippine Interpretation IFRIC 13, Customer Loyalty Programmes, clarifies that when the fair value of award credits is measured based on the value of the awards for which they could be redeemed, the amount of discounts or incentives otherwise granted to customers not participating in the award credit scheme, is to be taken into account.

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 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 Liabilities

Date of Recognition. The Company recognizes a financial asset or a financial liability in the 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, is 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).

Financial instruments are classified as liability or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or a component that is a financial liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity, net of any related income tax benefits.

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

Financial Assets and Financial Liabilities at FVPL. A financial asset or financial liability is classified in this category if acquired principally for the purpose of selling or repurchasing in the near term or upon initial recognition, it is designated by the management as FVPL. Financial assets or financial liability at FVPL are designated by management on initial recognition when any of the following criteria are met:

• Thedesignationeliminatesorsignificantlyreducestheinconsistenttreatmentthatwouldotherwisearisefrommeasuring the assets or liabilities or recognizing gains or losses on them on a different basis;

• Theassetsandliabilitiesarepartofagroupoffinancialassets,financialliabilitiesorbothwhicharemanagedand their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or

• Thefinancialinstrumentcontainsanembeddedderivative,unlesstheembeddedderivativedoesnotsignificantlymodify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.

Derivatives are also categorized as held at FVPL, except those derivatives designated and considered as effective hedging instruments.

Financial assets and financial liabilities at FVPL are recorded in the statement of financial position at fair value and are classified as current assets. Changes in fair value of such assets are accounted for in the statement of income. Interest


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earned is recorded in interest income, while dividend income is recorded in other operating income according to the terms of the contract, or when the right of the payment has been established.

The Company has no financial assets or liabilities at FVPL as of December 31, 2010 and 2009.

Loans and Receivables. Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are carried at cost or amortized cost in the statement of financial position. Amortization is determined using the effective interest method and is included as part of the interest income in the statement of income. 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, and deposits, sinking fund and miscellaneous deposits shown as part of “Other noncurrent assets” account in the statement of financial position (see Notes 4, 5 and 6).

HTM Investments. HTM investments are nonderivative financial assets with fixed or determinable payments and fixed maturities wherein the Company has the positive intention and ability to hold to maturity. HTM investments are carried at cost or amortized cost in the statement of financial position. Amortization is determined by using the effective interest method. Assets under this category are classified as current assets if maturity is within twelve months from reporting date and as noncurrent assets if maturity date is more than a year from reporting date.

The Company has no HTM investments as of December 31, 2010 and 2009.

AFS Investments. Available-for-sale financial assets are nonderivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition, available-for-sale financial assets are measured at fair value with unrealized gains or losses being recognized in the 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 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 valued at cost. 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.

The Company has an unquoted AFS investment as of December 31, 2010 and 2009, shown as part of “Other noncurrent assets” account in the statements of financial position. As of December 31, 2010 and 2009, the Company has fully impaired its AFS investment with total cost and corresponding allowance for impairment of P10.5 million.

Other Financial Liabilities at Amortized Cost. This classification includes loans and borrowings which are initially recognized at fair value of the consideration received less directly attributable transaction costs (i.e. debt issuance costs).

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 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, payables arising from rate rebasing, and customers’ deposits (shown as part of “Deferred credits and other noncurrent liabilities” account in the statement of financial position (see Notes 1, 9, 10 and 11).

Determination of Fair Value. The fair value of financial instruments that are actively traded in organized financial markets is determined by reference to quoted market bid prices at the close of business at the reporting date. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For financial instruments where there is no active market, fair value is determined using valuation techniques. Such techniques include using reference to a similar instrument for which market observable prices exist, discounted cash flow analysis and other relevant valuation models.

Day 1 profit. Where the transaction price in a non-active market is different from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Company recognizes the difference between the transaction price and fair value (a Day 1 profit) in the statement of income unless it qualifies for recognition as some other type of asset. 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 statement of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Company determines the appropriate method of recognizing the “Day 1” profit amount. The Company has determined that the discounted cash flow analysis using the credit-adjusted PDEx interest rates is appropriate in determining the fair value of miscellaneous deposits.

Impairment of Financial AssetsThe Company assesses at each reporting date whether a financial asset or group of financial assets is impaired.

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 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 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.

AFS Investments. If an AFS investment is impaired, an amount comprising the difference between its cost (net of any principal payment and amortization) and its current fair value, less any impairment loss previously recognized in the


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statement of comprehensive income, is transferred from other comprehensive income to the statement of income. Reversals of impairment losses on AFS investments are reversed through statement of comprehensive income, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognized in the statement of comprehensive income.

Derecognition of Financial Assets and 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:

• therighttoreceivecashflowsfromtheassethaveexpired;or

• theCompanyhastransferreditsrighttoreceivecashflowsfromtheassetorhasassumedanobligationtopaythereceived cash flows in full without material delay to a third party under a “pass-through” arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

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 statement of income.

Offsetting Financial InstrumentsFinancial assets and financial liabilities are offset and the net amount is reported in the 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.

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 AssetsThe Company accounts for its concession arrangement with MWSS under the Intangible Asset model as it receives the right (license) to charge users of public service. Under the Concession Agreement, the 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.

The “Service Concession Assets” (SCA) 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 SCA are amortized using the straight-line method over the life of the concession.

In addition, the Company recognizes and measures revenue from rehabilitation works in accordance with PAS 11 and PAS 18 for the services it performs.

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:

Land improvements 5 yearsInstrumentation, tools and other equipment 5 yearsOffice furniture, fixtures and equipment 5 yearsTransportation equipment 5 years

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.

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 statement of income in the year the item is derecognized.

Impairment of Nonfinancial Assets (Property and Equipment and Service Concession Assets)An assessment is made at each reporting date to determine whether there is any indication of impairment of any long-lived 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 net selling price. 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.

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.

Foreign Currency-Denominated Transactions Foreign exchange differentials arising from foreign currency transactions are credited or charged to operations. As


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Witnessing Progress

approved by the MWSS Board of Trustees (BoT) under Amendment No. 1 of the Concession Agreement, the following will be recovered through billings to customers:

• Restatementofforeigncurrency-denominatedloans;

• ExcessofactualConcessionFeepaymentsovertheamountsofConcessionFeestranslatedusingthebaseexchange rate assumed in the business plan approved every rate rebasing exercise;

• Excessofactualinterestpaymentstranslatedatexchangespotratesonsettlementdatesovertheamountsofinterest translated at drawdown date rates; and

• Excessofactualpaymentsofotherfinancingchargesrelatingtoforeigncurrency-denominatedloanstranslatedat 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 Company recognized a deferred FCDA (included as part of “Other noncurrent assets” or “Deferred credits and other noncurrent liabilities” accounts in the statement of financial position) with a corresponding credit (debit) to FCDA revenues for the unrealized foreign exchange losses (net of 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 Regulatory Office during the latest Rate Rebasing exercise, unless indication of impairment of the deferred FCDA would be evident at an earlier date.

Customers’ DepositsCustomers’ deposits, presented under “Deferred credits and other noncurrent liabilities” account in the statements of financial position, 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” account in the 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 statement of income.

As of December 31, 2010 and 2009, the discount, shown as part of “Deferred credits and other noncurrent liabilities” account in the statements of financial position, amounted to P336.3 million and P294.3 million, respectively.

Assets Held in TrustAssets which are owned by MWSS but are used in the operations of the Company under the Concession Agreement are not reflected in the statement of financial position but carried as Assets Held in Trust, except for certain assets transferred to the Company as mentioned in Note 22.

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 are 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

• Basicchargesrepresentthebasictariffchargedtoconsumersfortheprovisionofwaterservices.Thebasic

tariff is subject to CPI, EPA and Rate Rebasing adjustments (see Note 1).

• CERAisonepesochargedpercubicmeterofwaterconsumed.

• FCDAisthetariffmechanismthatallowstheCompanytorecoverforeignexchangelossesortocompensateforeign exchange gains on a current basis beginning January 1, 2002 until the Expiration Date.

• Maintenanceservicechargerepresentsafixedmonthlychargeperconnection.Thechargevariesdependingon the meter size.

b. Environmental charge (included as part of revenue from sewer/sanitation services) represents 14% in 2010 and 10% in 2009 of the water charges, except for maintenance charge.

c. Sewerage charge represents 20% in 2010 and 50% in 2009 of the water charges, except for maintenance charge, for all consumers connected to the Company’s 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 in accordance with PAS 11 and PAS 18 (shown as “Revenue from rehabilitation works” and “Cost of rehabilitation works” accounts in the statement of income).

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 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


Annual Report 2010

Witnessing Progress

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.

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

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 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 of 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 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 Company has a funded, noncontributory defined benefit plan. The cost of providing benefits under the defined benefit plan is determined using the projected unit credit method. Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses for the plan at the end of the previous reporting year exceeded 10% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working lives of the employees participating in the plan.

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

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

Share-based PaymentMPIC has an Executive Stock Option Plan (ESOP) for eligible executives to receive remuneration in the form of share-based payment transactions, whereby executives render services in exchange for the share option.

Employees of the Company are granted rights to equity instruments of MPIC as consideration for the services provided to the Company.

The Company shall measure the services received from its employees in accordance with the requirements applicable to equity-settled share-based payment transactions, with a corresponding increase recognized in equity as a contribution from MPIC, provided that the share-based arrangement is accounted for as equity-settled in the consolidated financial statements of MPIC.

A parent grants rights to its equity instruments to the employees of its subsidiaries, conditional upon the completion of continuing service with the group for a specified period. An employee of one subsidiary may transfer employment to another subsidiary during the specified vesting period without the employee’s rights to equity instruments of the parent under the original share-based payment arrangement being affected. Each subsidiary shall measure the services received from the employee by reference to the fair value of the equity instruments at the date those rights to equity instruments were originally granted by the parent, and the proportion of the vesting period served by the employee with each subsidiary.

Such an employee may fail to satisfy a vesting condition other than a market condition after transferring between group entities. In this case, each subsidiary shall adjust the amount previously recognized in respect of the services received from the employee. Hence, no amount is recognized on a cumulative basis for the services received from that employee in the financial statements of any subsidiary if the rights to the equity instruments granted by the parent do not vest because of an employee’s failure to meet a vesting condition other than a market condition.


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Witnessing Progress

ContingenciesContingent liabilities are not recognized in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the financial statements but are disclosed when an inflow of economic benefits is probable. Contingent assets are not recognized unless virtually certain.

Events After the Reporting DatePost-year-end events that provide additional information about the Company’s position at the financial reporting date (adjusting events) are reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the notes to the 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. There are no dilutive potential common shares outstanding that would require disclosure of diluted EPS in the statements of income.

3. Significant Accounting Judgments, Estimates and Assumptions

The preparation of the 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 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 financial statements are based upon management’s evaluation of relevant facts and circumstances as of the date of the 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 financial statements as they become reasonably determinable.

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 financial statements:

Service Concession Assets. The Company accounts for its concession arrangement with MWSS under the Intangible Asset model as it receives the right (license) to charge users of public service. The Service Concession Asset (SCA) is amortized using the straight-line method over the life of the concession.

Transitional and Clarificatory Agreement (TCA). On August 9, 2007, the Company entered into a TCA with MWSS to prescribe the procedures for the resolution of their dispute (see Note 11). Pending resolution of the dispute, the disputed amount of P4.0 billion and P3.8 billion as of December 31, 2010 and 2009, respectively, is considered a contingent liability. In addition, the Company did not recognize the reversal of accrued interest payable to MWSS, which resulted from the Receiver’s recommendation, pending final resolution of MWSS’ disputed claims pursuant to the procedures prescribed under the TCA.

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 P160.4 million, P77.2 million and P66.7 million in 2010, 2009 and 2008, respectively (see Note 21).

Contingencies. The Company is currently involved in 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 operations could be materially affected by changes in the estimates or in the effectiveness of strategies relating to these proceedings (see Notes 10 and 18).

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.

Financial Assets and Liabilities. PFRS requires that certain financial assets and 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 liabilities would directly affect income and equity.

The fair values of financial assets and liabilities are set out in Note 24.

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 also requires determining the most appropriate inputs to the valuation model including the expected life of the option, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for share-based payments are disclosed in Note 12. The Company recognizes expenses based on the estimated number of grants that will ultimately vest and will require settlement. The Company’s average turnover rate over the past few years is used to determine the attrition rate in computing the benefit expense and the estimated liability.

Equity based compensation expense presented as part of “Salaries, wages and benefits” account in the 2010 statement of income amounted to P2.1 million (see Note 12).

Revenue and Cost Recognition. 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, and by reference to the actual costs incurred to date over the estimated total costs of the project. 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.

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 reserve. 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 reserve 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. These specific reserves are re-evaluated and adjusted as additional information received affects the amounts estimated. Second, if it is determined that no objective evidence of impairment exists for an individually assessed receivable, the


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Witnessing Progress

receivable is included in a group of receivables with similar credit risk characteristics and is collectively assessed for impairment. The provision under collective assessment is based on historical collection, write-off, experience and change in customer payment terms. Impairment assessment is performed on a continuous basis throughout the year.

The amount and timing of recorded expenses for any period would therefore differ based on the judgments or estimates made. Provision for doubtful accounts amounted to nil in 2010, P226.3 million in 2009 and P102.4 million in 2008. 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 P1.6 billion and P1.5 billion as of December 31, 2010 and 2009, respectively (see Note 5).

Estimated Useful Lives of Service Concession Assets. In accordance with PAS 38, the useful life of the service concession agreement was revised, to include the renewal period approved by the MWSS. Though the Company’s extension is still subject to a written consent from the DoF as of December 31, 2009 (see Note 1), the Company revised the estimated useful life of the SCA effective September 10, 2009 (MWSS approval date) due to the following: (1) there is evidence, based on a precedent approval of the DoF, that the term of the Concession Agreement will be extended. Management believes that a similar approval will be granted to them by the DoF as the extension of both concessions is critical to the attainment of the objectives of the extension; and (2) the cost of renewal is not significant when compared with the future economic benefits expected to flow to the Company from the renewal of the Concession Agreement. The change in the estimated useful life of the SCA relating to the extension of the concession period resulted in a decrease in amortization of service concession assets and increase in SCA amounting to P236.4 million for the year ended December 31, 2009.

Amortization of service concession assets amounted to P1.1 billion in 2010 and P1.3 billion in 2009 and 2008. Service concession assets, net of accumulated amortization, amounted to P36.2 billion and P29.1 billion as of December 31, 2010 and 2009, respectively (see Note 8).

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 2010 and 2009.

Property and equipment, net of accumulated depreciation and amortization, amounted to P290.9 million and P333.8 million as of December 31, 2010 and 2009, respectively (see Note 7).

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 until 2015. The Company did not recognize deferred tax assets on deductible temporary differences that are expected to reverse during the income tax holiday period and to items where doubt exists as to the tax benefits they will bring in the future. Net deferred tax assets recognized amounted to P1.7 billion and P1.4 billion as of December 31, 2010 and 2009, respectively. Net deferred tax assets derecognized resulting from the extension of the income tax holiday amounted to P1.7 billion in 2009 (see Notes 14 and 19). Unrecognized deferred tax assets amounted to P2.6 billion and P3.1 billion as of December 31, 2010 and 2009, respectively (see Note 14).

Deferred FCDA and Deferred Credits. Under Amendment No.1 of the Agreement, the 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 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 Company. Unrealized foreign exchange gains, however, which will be refunded to the customers, are presented as deferred credits. As a result of the second rate rebasing, deferred credits that will no longer be subject to the FCDA mechanism were derecognized and presented as “Other income from rate rebasing resolutions” in the 2009 statement of income (see Note 1). Deferred credits pertaining to foreign exchange gains that are still refundable to the customers amounted to P685.9 million and P226.7 million as of December 31, 2010 and 2009, respectively (see Note 1).

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:

• significantunderperformancerelativetoexpectedhistoricalorprojectedfutureoperatingresults;

• significantchangesinthemannerofuseoftheacquiredassetsorthestrategyforoverallbusiness;and

• significantnegativeindustryoreconomictrends.

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 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 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 subject to impairment test when certain impairment indicators are present follow:

2010 2009Service concession assets (see Note 8) P36,188,764 P29,062,512Property and equipment (see Note 7) 290,865 333,824Total P36,479,629 P29,396,336

As discussed in Note 1, the MWSS-RO issued MWSS-RO resolution No. 209-069, where certain issues were resolved that had an impact on the new rate rebasing adjustment or “R”. Management noted that said resolution may have an impact on the expected cash flows from the Company’s operations. Consequently, management performed an impairment calculation of the SCA as at December 31, 2009 using the new “R” under said resolution. Based on the impairment analysis, management believes that the recoverable amount of the SCA is higher than its carrying value.

No impairment loss was recognized in 2009.

Pension Cost. The determination of the obligation and cost for pension are dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 15 and include, among others, discount rate, salary increase rate and expected rate of return on plan assets. In accordance with PFRS, actual results that differ from the Company’s assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods. While it is believed that the Company’s assumptions are reasonable and appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the Company’s pension liability.


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Witnessing Progress

Pension liability amounted to P218.4 million and P238.1 million as of December 31, 2010 and 2009, respectively. Unrecognized actuarial gain amounted to P163.2 million and P265.1 million as of December 31, 2010 and 2009, respectively (see Note 15).

4. Cash and Cash Equivalents

This account consists of:

2010 2009Cash on hand and in banks P395,104 P198,775Cash equivalents 911,831 1,688,148

P1,306,935 P1,886,923

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 with original maturities of more than three months to one year are shown separately in the statements of financial position.

As discussed in Note 6, deposits amounting to P526.1 million (US$12.0 million) were released on January 31, 2011. Subsequently, such amount has been reclassified to cash and cash equivalents.

Interest income earned from cash in banks and short-term investments amounted to P68.1 million, P142.5 million and P113.5 million for the years ended December 31, 2010, 2009 and 2008, respectively (see Note 16).

5. Trade and Other Receivables

This account consists of receivables from:

2010 2009Customers: Residential P1,289,367 P1,388,158 Commercial 542,456 563,500 Semi-business 174,694 155,930 Industrial 98,563 152,306

2,105,080 2,259,894Employees 29,300 20,459Others 275,365 109,062

2,409,745 2,389,415Less allowance for doubtful accounts 850,847 853,322

P1,558,898 P1,536,093

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

• Residential-pertainstoreceivablesarisingfromwaterandsewerserviceusefordomesticsanitarypurposesonly.

• Commercial-pertainstoreceivablesarisingfromwaterandsewerserviceuseforcommercialpurposes.

• Semi-business-pertainstoreceivablesarisingfromwaterandsewerserviceuseforsmallbusinesses.

• Industrial-pertainstoreceivablesarisingfromwaterandsewerserviceuseforindustrialpurposes,includingservices for manufacturing.

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

2010Receivables from Customers

Residential CommercialSemi-

business IndustrialOther

Receivables TotalAt January 1 P347,680 P252,953 P79,799 P94,822 P78,068 P853,322

Write-off during the year – – – – (2,475) (P2,475)

At December 31 P347,680 P252,953 P79,799 P94,822 P75,593 P850,847

2009Receivables from Customers Other

Residential CommercialSemi-

business Industrial Receivables TotalAt January 1 P267,970 P222,146 P57,438 P73,019 P6,483 P627,056

Charge for the year 79,710 30,807 22,361 21,803 71,585 226,266At December 31 P347,680 P252,953 P79,799 P94,822 P78,068 P853,322

There were no receivables that were individually impaired in 2010 and 2009.

6. Other Current Assets

This account consists of:2010 2009

Sinking fund (see Note 9) P575,881 P526,103Deposits (see Note 21) 526,080 554,400Advances to contractors 280,224 272,026Others 152,848 89,548

P1,535,033 P1,442,077

The sinking fund represents the amount set aside to cover semi-annual interest payment of loans (see Note 9).

Deposits represent short-term pledged deposits securing the US$12.0 million performance bond in compliance with the terms of the Concession Agreement (see Note 21). With the submission of the US$90 million performance bond (see Note 1), the US$12.0 million performance bond was allowed to expire on January 31, 2011.

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


Annual Report 2010

Witnessing Progress

7. Property and Equipment

The rollforward analysis of this account follows:

December 31, 2010

Land and Land

Improvements

Instrumentation, Tools and

Other Equipment

Office Furniture,

Fixtures and Equipment

Transportation Equipment Total

CostAt January 1 P104,865 P265,656 P382,356 P190,061 P942,938Additions – 121,978 52,053 19,733 193,764Reclassification (see Note 8) (96,144) (1,230) 1,230 – (96,144)Disposals – – – (18,011) (18,011)At December 31 8,721 386,404 435,639 191,783 1,022,547Accumulated Depreciation

and Amortization At January 1 450 177,732 311,723 119,209 609,114Depreciation and amortization 144 65,889 43,360 25,883 135,276Disposals – – – (12,708) (12,708)At December 31 594 243,621 355,083 132,384 731,682Net Book Value at

December 31 P8,127 P142,783 P80,556 P59,399 P290,865

December 31, 2009

Land and Land

Improvements

Instrumentation, Tools and

Other Equipment

Office Furniture,

Fixtures and Equipment

Transportation Equipment Total

CostAt January 1 P33,075 P249,400 P343,071 P213,903 P839,449Additions 71,790 16,256 39,285 – 127,331Disposals – – – (23,842) (23,842)At December 31 104,865 265,656 382,356 190,061 942,938Accumulated Depreciation

and Amortization At January 1 342 126,875 272,972 108,992 509,181Depreciation and amortization 108 50,857 38,751 26,362 116,078Disposals – – – (16,145) (16,145)At December 31 450 177,732 311,723 119,209 609,114Net Book Value at

December 31 P104,415 P87,924 P70,633 P70,852 P333,824

Depreciation and amortization in 2009 and 2008 presented in the statements of income include amortization of software development cost, which was fully amortized as of December 31, 2009.

8. Service Concession Assets

The movements in this account are as follows:2010 2009

Cost: Balance at beginning of year P38,080,336 P29,931,882 Additions (see Note 1) 8,089,343 8,148,454 Reclassification (see Note 7) 96,144 – Balance at end of year 46,265,823 38,080,336Accumulated amortization: Balance at beginning of year 9,017,824 7,695,209 Amortization 1,059,235 1,322,615 Balance at end of year 10,077,059 9,017,824

P36,188,764 P29,062,512

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;

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 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 million (as of 1997), subject to annual CPI adjustment.

Tranche B Concession Fees are additional concession fees being charged by MWSS to the Company representing the cost of borrowings by MWSS as of December 2004. As of December 31, 2010 and 2009, the Company has recognized Tranche B Concession Fees of US$36.9 million (US$30.1 million under the DCRA and additional US$6.8 million finally recommended by the Receiver). Of that amount, US$31.9 million, equivalent to P1.6 billion, was recognized as part of “Service concession obligation payable to MWSS” account in the statements of financial position.


Annual Report 2010

Witnessing Progress

On January 16, 2008, the recognized Tranche B Concession Fees and related accrued interest thereon were fully settled by the Company pursuant to the Prepayment and Settlement Agreement (PSA) (see Note 11).

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 as indicated in the November 10, 2006 amended Consolidated Receiver’s Report is considered as contingent liability of the Company, as discussed in Note 18. The Company and MWSS had entered into a TCA to provide, among others, the procedures for the resolution of their dispute, including the dispute on Tranche B Concession Fees.

The Company recognized additional concession fees amounting to P410.5 million in 2010 and P3.8 billion in 2009 (see Note 11). The additional concession fees in 2010 pertain to the drawn portion of MWSS loans relating to new project while additional concession fees in 2009 pertain to:

a. Incremental MOE resulting from the extension of the life of the Concession Agreement to 2037 (see Note 1); and,

b. Incremental concession fees pertaining to MWSS loans from ADB 2012 and BNP Paribas amounting to P1.0 billion at present value.

9. Interest-Bearing Loans


Peso-denominated loan (Series 1) P10,954,638 P10,954,638Dollar-denominated loan (Series 2) 5,480,000 5,775,000

16,434,638 16,729,638Less unamortized debt issuance costs (see Note 16) 343,722 424,562

16,090,916 16,305,076Less current portion 492,986 –

P15,597,930 P16,305,076

Corporate NotesOn June 30, 2008, the Company entered into an Omnibus Notes Facility and Security Agreement (the Omnibus Agreement) with Banco de Oro Unibank, Inc. and Development Bank of the Philippines (Noteholders) for US$365.0 million notes (“the Notes”) for the purpose of financing the capital expenditures and payment of advances from shareholders (see Note 13). The Notes comprise of Series 1 amounting to US$240.0 million and Series 2 amounting to US$125.0 million. Series 1 is a peso-denominated loan which consists of peso equivalent of US$120.0 million fixed rate note and US$120.0 million floating rate note. Series 2 is a US$125.0 million floating rate dollar-denominated note.

Series 1 Fixed and Floating Rate Note. Bears interest of fixed benchmark rate plus 2.0% spread per annum and is payable within ten years to commence at the end of the 36th month after the initial issue date.

Series 2 Floating Rate Note. Bears interest of LIBOR and CDS rate plus 2.0% spread per annum and is payable within ten years to commence at the end of the 36th month after the initial issue date.

The Company’s existing Noteholders are secured by a first ranking mortgage over all of the Company’s mortgageable assets and an assignment of all rights, title and interest of the Company to its assigned accounts, accounts receivable, project documents and performance guarantee with Banco De Oro Unibank, Inc. as collateral agent. The Noteholders are secured further by a third party mortgage of the Company shares representing 40.9% of the outstanding shares of the Company and a voting trust over 31.0% of the outstanding shares of the Company. The third party mortgage and voting trust over the Company shares shall cease, terminate, and become void at such time that the Company’s nonrevenue water or NRW is reduced to 45%.

Debt Issuance Costs. All legal, professional and registration fees incurred in relation to the availment of the Notes, totaling P451.8 million, were capitalized starting July 2008. Debt issuance costs are amortized using the effective interest method. Amortization of debt issuance costs amounting to P80.8 million, P14.2 million and P13.0 million in 2010, 2009 and 2008, respectively, are presented as part of “Interest expense” account in the statements of income (see Note 16).

Covenants. The Omnibus Agreement contains provisions regarding the maintenance of certain financial ratios such as debt-to-equity ratio and debt service coverage ratio, and maintenance of debt service reserve account (see Note 6). As of December 31, 2010 and 2009, the Company has complied with these ratios.

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

In Original Currency

YearUS Dollar-

denominated Peso LoansTotal Peso

Equivalent*(In Millions)

2011 $1.25 P438.2 P493.02012 2.50 876.4 986.02013 2.50 876.4 986.02014 6.25 876.3 1,150.32015 onwards 112.50 7,887.3 12,819.3

$125.00 P10,954.6 P16,434.6* Translated using the December 31, 2010 exchange rate of P43.84:US$1.

10. Trade and Other Payables


Trade payables (see Note 13) P1,488,999 P1,296,607Accrued construction costs (see Note 13) 3,195,355 1,726,337Other accrued expenses 2,705,016 2,552,668

P7,389,370 P5,575,612

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 22) used in the Company’s operations amounting to P97.3 million as of December 31, 2010 and 2009.

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 are not disclosed as these may prejudice the Company’s positions in relation to the cases pending before the courts or quasi-judicial bodies.


Annual Report 2010

Witnessing Progress

11. Service Concession Obligation Payable to MWSS

This account consists of:

2010 2009Concession fees payable (see Note 8) P8,752,059 P9,707,232Accrued interest 985,292 985,292

9,737,351 10,692,524Less current portion 2,334,088 2,116,063

P7,403,263 P8,576,461

Disputes with MWSS In prior years, the 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 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 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 8, the Receiver has determined an additional amount of Tranche B Concession Fees of US$6.8 million. As of December 31, 2010 and 2009, the Company has recognized Tranche B Concession Fees of US$36.9 million (see Note 8).

The 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 Company amounted to P4.0 billion and P3.8 billion as of December 31, 2010 and 2009, respectively. The difference mainly pertains to disputed claims of MWSS consisting of additional Tranche B Concession Fees (see Note 8) and interest penalty under the Concession Agreement (prior to the DCRA). The Company’s position on these charges is consistent with the Receiver’s recommendation which was upheld by the Rehabilitation Court (see Notes 8 and 18).

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

Prior to the DCRA, the Company has accrued interest on its payable to MWSS based on the terms of the Concession Agreement, which was disputed by the Company before the Rehabilitation Court. These already amounted to P985.3 million as of December 31, 2010 and 2009 and have been charged to interest expense in prior years. The Company maintains that the accrued interest on its payable to MWSS has been adequately replaced by the Tranche B Concession Fees discussed above. The Company’s position is consistent with the Receiver’s recommendation which was upheld by the Rehabilitation Court. However, the Company did not reverse this accrued interest pending final resolution of MWSS’ disputed claims pursuant to the procedures prescribed under the TCA.

PSA and TCAIn compliance with the PSA, the Company and MWSS sought the Rehabilitation Court’s ruling on MWSS’ disputed claims in the Joint Omnibus Motion. In her report dated September 14, 2007 submitted to the Rehabilitation Court, the Receiver stated that she followed the principle of “No Gain, No Loss” when she submitted to the Rehabilitation Court her recommendation on MWSS’ cost of borrowings. The Rehabilitation Court upheld the recommendations of the Receiver on MWSS’ disputed claims and ruled in favor of the Company in its Order dated December 19, 2007, denying or disallowing the said disputed claims of MWSS.

The Company and MWSS agreed in the PSA and the TCA that any remaining dispute on MWSS’ disputed claims after the issuance of the Rehabilitation Court’s ruling on the same, shall be resolved by MWSS and the Company through mutual consultation and negotiation, as mandated under Clause 12.1 of the Concession Agreement, taking into account of, and with due regard to, the application of the “No Gain, No Loss” principle.

On January 16, 2008, Tranche A2 and recognized Tranche B Concession Fees and the related accrued interest thereon have been paid by virtue of the PSA. The remaining balance of P985.3 million, 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 life of the Concession Agreement, is as follows:

In Original Currency

Year

Foreign Currency Loans

(Translated to US$)

Peso Loans/ Project Local

SupportTotal Peso

Equivalent*(In Millions)

2011 $38.9 P399.1 P2,104.52012 20.2 397.0 1,282.62013 16.8 396.7 1,133.22014 17.2 396.8 1,150.82015-2037 65.9 9,098.1 11,987.2

$159.0 P10,687.7 P17,658.3* Translated using the December 31, 2010 exchange rate of P43.84:US$1.

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. Additional concession fees recognized relating to the extension amounted to P3.8 billion in 2009 (see Note 8).

12. Equity

a. Capital Stock (amounts in thousands, except par value per share and number of shares)

2010 2009Number

of Shares AmountNumber

of Shares AmountAuthorized - P1,000 par valueCommon: Class A 3,686,393 P3,686,393 3,686,393 P3,686,393 Class B 236,000 236,000 236,000 236,000 ESOP 88,500 88,500 88,500 88,500Preferred – – 1,867,885 1,867,885

4,010,893 P4,010,893 5,878,778 P5,878,778

2010 2009Number

of Shares AmountNumber

of Shares AmountIssued - P1,000 par value: Class A 3,868,393 P3,686,393 3,686,393 P3,686,393 Class B 236,000 236,000 236,000 236,000 ESOP 88,500 88,500 88,500 88,500

4,010,893 P4,010,893 4,010,893 P4,010,893


Annual Report 2010

Witnessing Progress

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.

On November 25, 2008, the SEC approved the amendments to the Articles of Incorporation of the Company to: (1) create redeemable preferred shares; and (2) increase the authorized capital stock of the Company from P1.5 billion divided into 1,475,000 shares of common stock with par value of 1 per share to P5.9 billion divided into 4,010,893 shares of common stock with par value of P1,000 per share and 1,867,885 shares of preferred stock with par value of P1,000 per share. All preferred shares have been issued and redeemed as of December 31, 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 as part of equity in the statements of financial position.

The increase in authorized capital stock and par value was approved by the SEC on November 25, 2008.

On December 14, 2009, the BOD approved the decrease of the Company’s authorized capital stock from 5,878,778 shares to 4,010,893 shares. On March 15, 2010, the SEC approved the Amended Articles of Incorporation effecting the reduction in authorized capital stock.

b. ESOPThe employees of the Company are allowed equity participation of up to six percent (6%) of the issued and outstanding capital stock of the Company upon the effective date of the increase in authorized capital stock of the 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 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 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 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 nonassessable 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 Company at the 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 Company (a “Conversion Notice”), together with such evidence as the 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 Company.

By virtue of the DCRA, the ESOP shares were fixed at 88,500 shares or P88.5 million and have vested. As of that date, the Company’s accrued annual stock purchase bonus has exceeded P88.5 million and such excess has been

fully settled in cash in 2008. In April 2010, the BOD approved the issuance of the 88,500 shares of the Parent Company to the employees (see Note 1). Said shares were subsequently issued on December 30, 2010.

c. Equity restructuringOn September 6, 2010, the SEC approved the Company’s equity restructuring to wipe out the deficit as of December 31, 2009 amounting to P674.0 million against the Additional Paid-in Capital amounting to P775.8 million.

d. DividendsOn October 12, 2010, during the regular meeting, the BOD set and approved the declaration of cash dividends amounting to P600.0 million. Payments were made on November 5, 2010.

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

A summary of the Company’s stock option activity received from MPIC and related information for the year ended December 31, 2010 follows:

Number of Shares Exercise Price

Outstanding at January 1, 2010 – P–Granted during the year 25,200,000 2.73Exercised during the year – –Outstanding at December 31, 2010 25,200,000 P2.73Exercisable at December 31, 2010 – P–

No stock option activity was received from MPIC in 2009.

The ESOP grants remain unvested and unexercisable as of December 31, 2010.The weighted average remaining contractual life for the share options outstanding as of December 31, 2010 is 4.5 years.

The fair value of the options granted is estimated at the date of grant using Black-Scholes-Merton formula, taking into account the terms and conditions upon which the options were granted. The following tables list the inputs to the model used for the ESOP in 2010:

Grant dated July 2, 201030%

vesting on July 2, 2011

35% vesting on

July 2, 2012

35% vesting on

July 2, 2013Grant date July 2, 2010Spot 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


Annual Report 2010

Witnessing Progress

Grant dated December 21, 201030.0%

vesting on August 1, 2011

35.0% vesting on

August 1, 2012

35.0% vesting on

August 1, 2013Grant date December 21, 2010Spot price P3.47 P3.47 P3.47 Exercise price P3.5 P3.50 P3.50Risk-free rate 1.62% 2.83% 3.73%Expected volatility* 46.62% 68.23% 72.82%Term to vesting (in days) 223 589 954

* The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may also not necessarily the actual outcome.

Carrying value of the ESOP recognized under “Other equity adjustments” in the equity section of the statements of financial position amounted to P2.1 million as of December 31, 2010.

In 2010, stock options expense recognized by the Company under “Salaries, wages and benefits” account amounted to P2.1 million.

13. Related Party Transactions

Significant transactions with related parties consist of construction contracts with DM Consunji, Inc. (DMCI), a subsidiary of DMCI Holdings, Inc. (shareholder of DMCI-MPIC), totaling P1.6 billion in 2010 and P2.2 billion in 2009, and financial assistance from DMCI-MPIC amounting to P1.4 billion in 2007. The financial assistance and the related interest expense thereon were fully settled in July 2008. Interest expense amounted to P306.8 million in 2008 (see Note 16).

Unpaid construction costs due to DMCI amounted to P358.0 million and P370.3 million as of December 31, 2010 and 2009, respectively, and are presented as part of “Trade and other payables” account in the statements of financial position (see Note 10).

Terms and Conditions of Transactions with Related PartiesThe outstanding transactions with related parties are made at normal market prices. Outstanding balances at year-end are unsecured, interest free, except for the financial assistance in 2007, and settlement occurs in cash.

Total compensation and benefits of key management personnel of the Company consist of:

2010 2009 2008Compensation P75,940 P69,529 P61,014Pension costs 5,002 4,529 4,099Short-term benefits 6,712 3,014 1,589

P87,654 P77,072 P66,702

14. Income Taxes

The Company recognized deferred taxes on deductible temporary differences expected to reverse after the income tax holiday period (see Note 19). The components of the net deferred tax assets of the Company as of December 31, 2010 and 2009 shown in the statements of financial position are as follows:

2010 2009Service concession assets - net P1,588,752 P1,375,346Pension liability 70,595 51,284

P1,659,347 P1,426,630

The Company has the following temporary differences for which no deferred tax assets have been recognized since these are expected to reverse during the income tax holiday period or management believes that it is not probable that these will be realized in the near future.

2010 2009Accretion of financial liabilities P3,323,091 P4,731,736Service concession assets 2,928,883 3,211,555Accrued expenses 1,416,140 1,117,495Allowance for doubtful accounts 850,847 853,322Unamortized past service costs 69,295 83,154Unrealized foreign exchange loss - net 19,815 167,122Pension liability – 84,023

P8,608,071 P10,248,407

For tax purposes, concession fees, presented as part of “Service concession assets” account in the statements of financial position, are amortized using units of production method as approved by the Bureau of Internal Revenue.

On December 16, 2009, the BOI released the Certificate of Registration certifying 6-year income tax holiday incentive (see Note 19). As a result, the Company derecognized deferred tax assets that will reverse during the new income tax holiday period amounting to P1.7 billion.

Provision for current income tax in 2010 represents the regular corporate income tax on miscellaneous income not covered by the income tax holiday (see Note 19).

The reconciliation of provision for income tax computed at the statutory income tax rate to provision for income (benefit from) tax as shown in the statements of income is summarized as follows:

2010 2009 2008Income tax at statutory tax rate

of 30% in 2010 and 2009 and 35% in 2008 P1,369,509 P1,318,098 P691,477

Add (deduct) the tax effects of: Net income under ITH

(see Note 19) (1,341,629) (994,202) (618,354) Change in unrecognized deferred

income tax (492,101) 2,260,160 814,362 Interest income already

subjected to final tax (21,088) (42,737) (35,050) Other nondeductible items - net 270,363 (972,286) (870,926)Provision for (benefit from) income tax (P214,946) P1,569,033 (P18,491)


Annual Report 2010

Witnessing Progress

RA No. 9337RA No. 9337 was enacted into law amending various provisions in the existing 1997 National Internal Revenue Code. Among the reforms introduced by the said RA was the reduction in the regular corporate income tax rate from 35% to 30% beginning January 1, 2009.

15. Pension Plan

The 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 Company offered a Redundancy and Right-Sizing Program in 2010. 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 P33.1 million in 2010.

The components of pension cost, included under “Salaries, wages and benefits” account in the statements of income are as follows:

2010 2009 2008Current service cost P49,433 P54,959 P66,162Interest cost 46,264 61,016 59,492Expected return on plan assets (39,662) (10,192) (14,579)Curtailment gain (33,083) – –Net actuarial gain recognized during

the year (12,605) (2,884) –Net pension cost P10,347 P102,899 P111,075

The funded status and amounts recognized in the statements of financial position for the pension plan as of December 31, 2010 and 2009 are as follows:

2010 2009Present value of pension liability P680,381 P481,414Fair value of plan assets (625,157) (508,479)Unrecognized actuarial gain 163,188 265,130Pension liability P218,412 P238,065

Changes in the present value of the defined benefit obligation as of December 31, 2010 and 2009 are as follows:

2010 2009Defined benefit obligation at beginning of year P481,414 P490,485Current service cost 49,433 54,959Interest cost 46,264 61,016Actuarial loss (gain) on obligation 154,810 (113,922)Curtailment gain (43,074) –Benefits paid* (8,466) (11,124)Defined benefit obligation at end of year P680,381 P481,414*In 2009, benefits paid include payments amounting to P4.7 million out of the Company’s operating fund. In 2010, benefits paid exclude payments for involuntary separation amounting to P20.3 million.

Changes in the fair value of plan assets as of December 31, 2010 and 2009 are as follows:

2010 2009Balance at beginning of year P508,479 P254,807Actuarial gain on plan assets 75,803 58,900Expected return on plan assets 39,662 10,192Contributions 30,000 191,000Benefits paid (28,787) (6,420)

Balance at end of year P625,157 P508,479

The allocation of the fair value of plan assets as of December 31, 2010 and 2009 is as follows:

2010 2009Investments in: Government securities 64.19% 55.84% Investment in stocks 20.10% 15.15% Unit trust funds 13.04% 18.23%Bank deposits 1.68% 9.76%Loans and notes receivables 0.89% 1.02%Others 0.10% –

100.00% 100.00%

The overall expected rate of return on assets is determined based on the market prices prevailing on that date, applicable to the period over which the obligation is to be settled.

The principal assumptions used to determine pension benefit obligations for the Company’s plan as of December 31, 2010, 2009 and 2008 are as follows:

2010 2009 2008

Discount rate 8.04% 9.61% 10.41%

Salary increase rate 7.00% 7.00% 11.00%

Expected rate of return on plan assets 15.00% 7.80% 4.00%

Amounts for the current and the previous periods are as follows:

2010 2009 2008 2007 2006Defined benefit obligation P680,381 P481,414 P490,485 P571,494 P855,737

Plan assets (625,157) (508,479) (254,897) (291,579) –

Deficiency (excess) P55,224 (P27,065) P235,588 P279,915 P855,737

Experience adjustment on plan assets P57,855 P53,597 P10,350 P183,248 (P99,107)


Annual Report 2010

Witnessing Progress

16. Interest Income and Interest Expense

2010 2009 2008Interest income: Cash in banks and short-term

investments (see Note 4) P68,084 P142,456 P113,549 Accretion on miscellaneous

deposits 2,210 10,987 9,775P70,294 P153,443 P123,324

Interest expense: Bank loans (see Note 9) P1,258,753 P1,494,840 P665,064 Accretion on service concession

obligation payable to MWSS (see Note 11) 763,262 752,826 553,675

Amortization of debt issuance costs (see Note 9) 80,840 14,242 12,967

Accretion on financial liabilities 59,990 108,159 5,895 Payable to a shareholder

(see Note 13) – – 306,809P2,162,845 P2,370,067 P1,544,410

17. Earnings Per Share

2010 2009 2008Net income (a) P4,779,976 P2,824,626 P1,994,140Weighted average number of shares

at beginning of year 4,010,893 4,010,893 1,475,000New subscriptions – – 316,988*

Weighted average number of shares at end of year (b) 4,010,893 4,010,893 1,791,988

Earnings per share (a/b) P1,191.75 P704.24 P1,112.81*Shares were issued in October and November 2008.

18. Contingent Liabilities

Following are the significant contingent liabilities of the Company as of December 31, 2010 and 2009:

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 P4.0 billion as of December 31, 2010 and P3.8 billion as of December 31, 2009. The Rehabilitation Court has resolved to deny and disallow the said disputed claims of MWSS in its December 19, 2007 Order, upholding the recommendations of the Receiver on the matter. Following the termination of the Company’s rehabilitation proceedings, the Company and MWSS are seeking to resolve this matter in accordance with the dispute resolution requirements of the TCA.

b. On October 13, 2005, the Municipality of Norzagaray, Bulacan jointly assessed the Company and Manila Water Company, Inc. (the “Concessionaires”) 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 these properties are owned by the Republic of the Philippines and that the same are exempt from taxation.

On February 2, 2007, the Concessionaires received an updated assessment of real property tax, which included real property tax purportedly due for 2006 of P35.7 million and interest of 2% per month of P93.6 million. The supposed joint liability of the Concessionaires for real property tax, including interests, as of June 30, 2007 amounted to P554.2 million.

The Local Board of Assessment Appeals (“LBAA”) ruled in favor of the Municipality of Norzagaray, Bulacan. The Concessionaires elevated the ruling of the LBAA to the Central Board of Assessment Appeals (“CBAA”) by filing separate appeals.

The CBAA has given due course to the Company’s appeal and an ocular inspection of the common purpose facilities was conducted by the CBAA on December 14, 2010.

Although the case has been set for pre-trial by the CBAA, the pre-trial of the case is put on hold pending the resolution of two (2) motions filed by the Concessionaires. The case is set for hearing on March 17, 2011.

c. Two petitions for review on certiorari filed separately by the Company and MWSS, questioning the jurisdiction of the National Water Resources Board (“NWRB”) to hear and decide a complaint with prayer for the issuance of a cease and desist order against the Company, MWSS and the MWSS-RO initiated by certain civil society groups, are pending (in two consolidated cases) before the Supreme Court. Such complaint, which is yet to be decided upon by the NWRB, depending upon the final determination by the Supreme Court on the issue of the NWRB’s jurisdiction on the matter, is contesting the approval by the MWSS BoT of the MWSS-RO resolution approving the rebased tariff of P30.19 per cubic meter (average all-in tariff) effective January 1, 2005 for the Company. The rulings of the Court of Appeals being assailed by the petitions before the Supreme Court pronounced, among others, that the NWRB is empowered to review the subject average all-in tariff rate of P30.19 per cubic meter.

d. On November 24, 2006, the Labor Arbiter issued a decision, ordering the payment of COLA to the supervisor-employees of Maynilad Water Supervisors Association (“MWSA”) “retroactive to the date when they were hired by the respondent company in 1997, with legal interest from the date of promulgation of [the] decision” until full payment of the award as computed and claimed by MWSA. On September 7, 2007, the National Labor Relations Commission (“NLRC”) reversed and set aside the decision of the Labor Arbiter.

On December 10, 2007, in pursuance of its efforts to effect an early exit from corporate rehabilitation, the Company executed a Compromise Agreement with the MWSA for the settlement of certain claims of the MWSA, wherein the Company agreed to pay MWSA residual benefits equivalent to its claim for COLA for 23 months, from August 1997 to June 1999.

Meanwhile, MWSA elevated the decision of the NLRC to the Court of Appeals and asked that the Labor Arbiter’s decision dated November 10, 2006 be affirmed in toto, but only in relation to the MWSA’s claim for COLA from July 1999 up to the present time.

In a decision dated May 31, 2010, the Court of Appeals (i) granted the Petition for Certiorari filed by MWSA and reinstated the Labor Arbiter’s Decision dated November 24, 2006; and, (ii) annulled and set aside the NLRC Decision dated September 7, 2007.


Annual Report 2010

Witnessing Progress

The Company filed its motion for reconsideration from the Court of Appeal’s decision.

On January 31, 2011, the Court of Appeals granted the motion for reconsideration filed by the Company reinstating and affirming the September 7, 2007 Decision and October 23, 2007 Resolution of the NLRC.

e. The 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.

19. Registration with the Board of Investments (BOI)

The 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 Company to incentives which include, among others, an Income Tax Holiday (ITH) for a period of six years beginning on Commencement Date or from actual start of commercial operations, whichever comes first.

On April 16, 2008, the BOI granted the request of the 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 Company filed an application for an ITH bonus year. The application was for the extension of the availment of the ITH incentive by the Company for one (1) year or for the period January 1, 2009 to December 31, 2009. The BOI approved the Company’s application on December 22, 2008.

As one of the conditions of the BOI for the ITH bonus year, the Company has undertaken Corporate Social Responsibilities (CSR) activities during the actual availment of the bonus year. CSR activities in years 2010 and 2009 included among others PGMA Patubig Projects, Partnerships with PDAM Tirtanadi Provinsi Sumatera Utara of Indonesia in coordination with USAid Environmental Cooperation Asia and the Streams of Knowledge, Samahang Tubig Maynilad and Lingkod Eskwela. Total amount spent for these CSR activities was estimated at P373.5 million in 2010 and P348.0 million in 2009.

On December 16, 2009, the Company was issued with BOI Registration Certificate Nos. 2009-188 and 2009-189 as a new operator of the 1500 million liters per day (MLD) and 900 MLD Bulk Water Supply and Distribution Projects pertaining to the La Mesa Treatment Plants 1 and 2, respectively. The registrations entitle the Company to incentives which include an ITH for six years from January 2010 or actual start of commercial operations, whichever is earlier, but in no case earlier than the date of registration. Registration as new operator of 200 MLD Bulk Water Supply and Distribution Project (Putatan, Muntinlupa) was likewise approved by the BOI. The Certificates of Registration were issued in December 2009. This also entitles the Project to a six year ITH commencing on January 2011 or actual start of commercial operations. As of December 31, 2010, commercial operations of the Project have not yet started. The ITH incentives shall be limited to the sales/revenue generated from the operation of the three plants which substantially cover the total capacity of the Company.

20. Significant Contracts with Manila Water (East Concessionaire)

In relation to the Concession Agreement, the 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 Company and the East Concessionaire may choose to delegate to the Joint Venture, subject to the approval of MWSS.

21. Commitments

Concession Agreement

Significant commitments under the Concession Agreement follow:

a. Payment of Concession Fees (see Note 8)

b. Posting of performance bond (see Note 6)

Under Section 6.9 of the Concession Agreement, the 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.

Rate Rebasing Period

Aggregate Amount Drawable Under

Performance Bond(In Millions)

First (August 1, 1997–December 31, 2002) US$120.0Second (January 1, 2003–December 31, 2007) 120.0Third (January 1, 2008–December 31, 2012) 90.0Fourth (January 1, 2013–December 31, 2017) 80.0Fifth (January 1, 2018–May 6, 2022) 60.0

Within 30 days from the commencement of each renewal date, the Company shall cause the performance bond to be reinstated to the full amount set forth above applicable for the year.

In connection with the implementation of the Selection Process by MWSS, the Company and MWSS executed the Agreement on the performance bond on December 15, 2006, incorporating the terms and conditions of MWSS BoT Resolution No. 2006-249 dated November 17, 2006 which approved certain adjustments to the obligation of the Company to post the performance bond under Section 6.9 of the Concession Agreement. These adjustments are summarized as follows:


Annual Report 2010

Witnessing Progress

• TheaggregateamountdrawableinoneormoreinstallmentsundereachperformancebondduringtheRate Rebasing Period to which it relates has been adjusted to US$30.0 million until the Expiration Date;

Based on the draft of the Letter of Consent and Undertaking to be signed by the DoF in connection with the extension of the Concession Agreement, the extension of the undertaking letter from May 7, 2022 to May 6, 2032 shall only be effective upon the increase in the present minimum level of the Performance Bond from the present level of US$30.0 million to US$90.0 million for the Third Rate Rebasing Period. The Performance Bond will be required to be posted within six (6) months from the date of the issuance of the letter. The amount of the Performance Bond for the period covering 2013 to 2037 shall be mutually agreed upon in writing by the MWSS and the Company consistent with the provisions of the Concession Agreement.

On April 22, 2010, the Company and MWSS entered into a Memorandum of Agreement and Confirmation (MOA) confirming the extension of the term of the Concession Agreement for another 15 years. On May 25, 2010, in connection with the MOA, the Company posted the Surety Bond for the amount of US$90 million issued by Prudential Guarantee and Assurance, Inc. (the Surety) in favor of MWSS, as security for the Company’s proper and timely performance of its obligations under the Concession Agreement. The liability of the Surety under this bond will expire on December 31, 2012.

c. Payment of half of MWSS and MWSS-RO’s budgeted expenditures for the subsequent years, provided the aggregate annual budgeted expenditures do not exceed P200 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 8).

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 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 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 the prior notice of MWSS.

Failure of the 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 terminated.

Operating Lease Commitments

The Company leases the office space and branches where service outlets are located, equipments 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 P160.4 million in 2010, P77.2 million in 2009 and P66.7 million in 2008.

Future minimum operating lease payments are as follows:

Period Covered Amount(In Millions)

Not later than one year P70.63More than one year and not later than five years 247.25More than 5 years 9.70

22. Assets Held in Trust

Materials and SuppliesThe 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 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 Company, such movable property shall be returned to MWSS in its then-current condition at no charge to MWSS or the Company (see Note 8).

The Concession Agreement also provides the 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 Company on Commencement Date based on MWSS’ closing audit report amounted to P7.3 billion with a sound value of P13.8 billion.

MWSS’ corporate headquarters are made available to the Company and the East Concessionaire for a one-year period beginning on the Commencement Date, subject to yearly renewal with the consent of the parties concerned. As of December 31, 2010, the lease has been renewed for another year. Rent expense amounted to P31.1 million, P29.1 million and P27.2 million in 2010, 2009 and 2008, respectively.

23. Financial Risk Management Objectives and Policies

The Company’s principal financial instruments are its debts to the local banks, per Omnibus Notes Facility and Security Agreement dated June 30, 2008, as well as Concession Fees owing to MWSS per Concession Agreement. Other financial instruments of the Company are purchase contracts, cash and cash equivalents and short-term investments.

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 financial risks. The Company monitors market price risk arising from all financial instruments and regularly reports financial management activities and the results of these activities to the BOD.


Annual Report 2010

Witnessing Progress

Interest Rate RiskThe Company’s exposure to market risk for changes in interest rates relate primarily to the Company’s interest-bearing loans.

The following table indicates the Company’s financial instruments that are exposed to interest rate risk:

Series 1 Floating Rate Notes Facility P5.5 billion Floating rate benchmark + 2% spread (3.75% July 10, 2010

to January 11, 2011)

Series 2 Corporate Notes Facility US$125.0 million LIBOR+CDS+2% spread (2.89% November 10, 2010

to May 11, 2011)

Interest on financial liabilities classified as floating rate is repriced semi-annually. Interest on financial liabilities classified as fixed rate is fixed until the maturity of the instrument.

The Company maintains a mix of floating and fixed rate interest-bearing loans, currently at a ratio of 68% floating and 32% fixed per abovementioned Omnibus Notes Facility and Security Agreement. The floating rate interest-bearing loans will increase to a higher portion over time as a greater portion of the fixed rate interest-bearing loan will mature earlier than the floating portion.

The following tables show information about the Company’s financial instruments that are exposed to cash flow and fair value interest rate risks.

2010Within 1 Year Total

Short-term cash investments: Cash and cash equivalents (1-90 days)* P1,305,100 P1,305,100 Short-term investments (91-364 days) 6,138 6,138

P1,311,238 P1,311,238* Excludes cash on hand amounting to P1,835.

2010

Within 1 Year

More than 5 Years

Total - Gross (In US$)

Total -Gross (In P)

Liabilities: Interest-bearing loans:

Interest rate 6.14%Current - foreign $1,250 – $1,250 P54,800Current - local P438,186 – – 438,186Noncurrent - foreign – $123,750 123,750 5,425,200Noncurrent - local – P10,172,730 – 10,172,730

16,090,916 Service concession obligation

payable to MWSS:Interest rate 4.28%Current - foreign $31,587 – $31,587 1,384,774Current - local P949,314 – – 949,314Noncurrent - foreign – $93,741 93,741 4,109,605Noncurrent - local – P3,293,658 – 3,293,658

9,737,351P25,828,267

2009Within 1 Year Total

Short-term cash investments: Cash and cash equivalents (1-90 days)* P1,867,888 P1,867,888 Short-term investments (91-364 days) 2,433,418 2,433,418

P4,301,306 P4,301,306* Excludes cash on hand amounting to P19,035.

2009Within 1

YearMore than

5 YearsTotal - Gross

(In US$)Total -Gross

(In P)Liabilities: Interest-bearing loans:

Interest rate 7.39%Noncurrent - foreign – $121,829 $121,829 P5,628,500Noncurrent – local – P10,676,576 – 10,676,576

16,305,076Service concession obligation

payable to MWSS: Interest rate 4.61%

Current – foreign $45,802 – $45,802 P2,116,063 Noncurrent – local – P8,576,461 – 8,576,461

10,692,524P26,997,600

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, 2010 and 2009, with all variables held constant (through the impact on floating rate borrowings). There is no impact on the Company’s equity other than those already affecting income.

2010Increase/ Decrease

in Basis Points

Effect on Income

Before Tax

Floating rate borrowings +50 P54,787-50 (P54,787)

2009Increase/ Decrease

in Basis Points

Effect on Income

Before Tax

Floating rate borrowings +50 P56,262-50 (P56,262)

Foreign Currency Risk. 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.


Annual Report 2010

Witnessing Progress

Information on the Company’s foreign currency-denominated monetary assets and liabilities and the Philippine Peso equivalent of each as of December 31, 2010 and 2009 is presented as follows:

2010 2009Original

CurrencyPeso

EquivalentOriginal

CurrencyPeso

EquivalentAssetsCash and cash equivalents and short-

term investments US$490 P21,482 US$64,120 P2,962,344Deposits 12,000 526,080 12,000 554,400

12,490 P547,562 76,120 P3,516,744LiabilitiesInterest-bearing loans US$125,000 5,480,000 US$125,000 5,775,000Service concession obligation payable

to MWSS- in USD US$75,494 3,309,649 US$82,163 3,795,962Service concession obligation payable

to MWSS- in EURO EUR1,515 87,921 EUR1,762 117,441Service concession obligation payable

to MWSS- in JPY JPY3,878,113 2,084,098 JPY5,005,821 2,532,445P10,961,668 P12,220,848

The spot exchange rates used were P43.84:US$1 and P46.20:US$1, P58.03:EUR1 and P66.66:EUR1, and P0.54:JPY1 and P0.51:JPY1as of December 31, 2010 and 2009, respectively.

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 on December 31, 2010 and 2009.

There is no impact on the Company’s equity other than those affecting earnings.

2010Increase

(Decrease) in Foreign

Exchange Rate

Effect on Income

Before TaxForeign currency-denominated financial assets and liabilities P1.00 (P237.5 million)

(P1.00) P237.5 million

2009Increase

(Decrease) in Foreign

Exchange Rate

Effect on Income Before Tax

Foreign currency-denominated financial assets and liabilities P1.00 (P63.4 million)(P1.00) P63.4 million

The Company recognized P1.2 billion net foreign exchange gain in 2010 and P1.3 billion net foreign exchange loss in 2009, 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 loss on interest-bearing loans and service concession obligation payable to MWSS is subject to foreign exchange recovery mechanisms under the Concession Agreement.

Credit Risk 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. Being a basic need service, 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 and short-term cash investments, 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 5 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 statements of financial position as of December 31, 2010 and 2009:

2010 2009Cash and cash equivalents* (see Note 4) P1,305,100 P1,867,888Short-term investments 6,138 2,433,418Trade and other receivables - net (see Note 5) 1,558,898 1,536,093Deposits and sinking fund (see Note 6) 1,101,961 1,080,503Miscellaneous deposits 44,202 57,934Total credit risk exposure P4,016,299 P6,975,836*Excludes cash on hand amounting to P1,835 and P19,035 as of December 31, 2010 and 2009, respectively.

As of December 31, 2010 and 2009, the credit quality per class of financial assets that were neither past due nor impaired are as follows:

2010Neither Past Due nor Impaired Past Due and

ImpairedHigh Grade Standard Total

Cash and cash equivalents P1,305,100 P– P– P1,305,100Short-term investments 6,138 – – 6,138Trade and other receivables 1,329,826 229,072 850,847 2,409,745Deposits and sinking fund 1,101,961 – – 1,101,961Miscellaneous deposits – 44,202 – 44,202

P3,743,025 P273,274 P850,847 P4,867,146

2009Neither Past Due nor Impaired Past Due and

ImpairedHigh Grade Standard TotalCash and cash equivalents P1,867,888 P– P– P1,867,888Short-term investments 2,433,418 – – 2,433,418Trade and other receivables 1,484,640 51,453 853,322 2,389,415Deposits and sinking fund 1,080,503 – – 1,080,503Miscellaneous deposits – 57,934 – 57,934

P6,866,449 P109,387 P853,322 P7,829,158

As of December 31, 2010 and 2009, the Company does not have financial assets that are past due but not impaired.


Annual Report 2010

Witnessing Progress

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 relate to those which are consistently collected before the maturity date, normally 7 days from bill delivery. Standard grade include receivables that are collectible beyond 7 days from bill delivery even without an effort from the Company to follow them up, or collected through salary deduction. For miscellaneous deposits, standard grade consists of meter and security deposits normally refundable upon termination of service.

Liquidity Risk 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.

The tables below summarize the maturity profile of the Company’s financial liabilities as of December 31, 2010 and 2009 based on contractual undiscounted payments.

2010

On DemandDue Within

3 Months

Due Between 3 and

12 MonthsDue after

12 Months Total

Interest-bearing loans* P– P492,986 P529,436 P15,597,930 P16,620,352

Trade and other payables** 568,389 1,223,592 3,703,681 1,645,387 7,141,049Service concession obligation payable to MWSS – – 2,334,088 7,403,263 9,737,351Customers’ deposits – – 142,326 142,326

P– P2,284,967 P6,567,205 P24,788,906 P33,641,078**Principal plus interest payment**Excludes taxes payable

2009

On DemandDue Within

3 Months

Due Between 3 and

12 MonthsDue after

12 Months Total

Interest-bearing loans* P– P490,320 P29,888 P16,305,076 P16,825,284Trade and other payables** 760,509 1,556,706 1,491,955 1,703,469 5,512,639Service concession obligation payable

to MWSS – – 2,116,063 8,576,461 10,692,524Customers’ deposits – – – 161,816 161,816

P760,509 P2,047,026 P3,637,906 P26,746,822 P33,192,263**Principal plus interest payment**Excludes taxes payable

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 achieved over the next 5 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.

2010 2009

Interest-bearing loans and service concession obligation payable to MWSS (see Notes 9 and 11) P25,828,267 P26,997,600

Trade and other payables (see Note 10) 7,389,370 5,575,612Less cash and cash equivalents, short-term investments,

deposits and sinking fund (see Notes 4 and 6) (2,415,034) (5,400,844)

Net debt (a) 30,802,603 27,172,368Net equity 7,943,738 3,761,694Net equity and debt (b) P38,746,341 P30,934,062Gearing ratio (a/b) 79% 88%

24. Financial Assets and Liabilities

The following table summarizes the carrying values and fair values of the Company’s financial assets and liabilities as of December 31, 2010 and 2009:

2010 2009Carrying Value Fair Value Carrying Value Fair Value

Financial assets:Loans and receivables:

Cash and cash equivalents P1,306,935 P1,306,935 P1,886,923 P1,886,923 Short-term investments 6,138 6,138 2,433,418 2,433,418

Trade and other receivables - net 1,558,898 1,558,898 1,536,093 1,536,093

Deposits and sinking fund (included under “Other current assets” account) 1,101,961 1,101,961 1,080,503 1,080,503

Miscellaneous deposits (included under “Other noncurrent assets” account) 44,202 46,602 57,934 61,043

Total financial assets P4,018,134 P4,020,534 P6,994,871 P6,997,980Financial liabilities: Other financial liabilities:

82

Annual Report 2010

Witnessing Progress

2010 2009Carrying Value Fair Value Carrying Value Fair Value

Interest-bearing loans P16,090,916 P16,620,352 P16,305,076 P18,436,314 Trade and other payables* 7,254,120 7,271,880 5,403,694 5,403,694

Service concession obligation payable to MWSS 9,737,351 9,490,978 10,692,524 11,375,026

Customers’ deposits (included under “Other noncurrent liabilities” account) 127,008 463,276 121,562 408,110

Total financial liabilities P33,209,395 P33,846,486 P32,522,856 P35,623,144*Trade and other payables exclude taxes payable to government agencies amounting to P135,250 and P171,918 as of December 31, 2010 and 2009, respectively.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate such value:

Cash and Cash Equivalents, 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 of the reporting date.

Interest-bearing Loans. For floating rate loans, the carrying value approximates the estimated fair value as of 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.

Fair Value HierarchyThe Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities.

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly.

Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

As of December 31, 2010 and 2009, the Company’s AFS investment is measured at fair value. There are no other financial assets and liabilities recognized at fair value as of December 31, 2010 and 2009.

25. Supplemental Disclosures of Cash Flow Information

Noncash investing activity:

2010 2009 2008Additional concession fees

(see Notes 8 and 11) P270,145 P3,772,108 P–

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