My dear fellow shareholders,
As you all probably already know, Benpres is in the process of settling its debt problem with its creditors but unfortunately we are not in a position to comment on the progress of its negotiation until it is all over. So please be patient. We shall inform all of you the soonest after we have signed on the dotted line.
In the meantime, the Lopez Group is in the process of a major reassessment of its investment strategies. What happened at Meralco is part of that reassessment that had been made necessary by our economic and political environment. And with the strong possibility that the prevailing economic crisis may soon ease, there will be plenty of opportunities that a newly focused and revitalized Lopez Group can take advantage of.
And we are ready to take on the new challenges that would bring a new era to Benpres. We used the past years while we were restructuring to strengthen our management and staff to attune ourselves to world class standards of governance. I am happy to report to you that Benpres has received, not one, but two international corporate governance awards this year (2009). In January, Benpres was honored as "One of the Best in Corporate Governance, Philippines" at The Asset Asian Awards in Hong Kong. Benpres was recognized alongside PLDT and Ayala Land. The Asset found corporate governance practices in Benpres at par with the best companies--only eight of them from the Philippines--after comparing our corporate governance practices with international best standards.
The second award is from Corporate Governance Asia, which found Benpres to be among "The Best in Asia" in its 5th Recognition Awards 2009. Nine companies from the Philippines will receive the award on June 26th. These two international awards are truly a source of pride. It tells us that through harsh economic conditions and tough business challenges, we have been doing the right things right.
This is significant because we find ourselves today in the middle of a worldwide economic downturn, believed to be the worst since the Great Depression. Then as now, we see weak international trade, net job losses, and declines in personal income and corporate profits.
I must say that in all the years I have been in business, and in my 79 years, I truly have not seen anything quite like what we have today. The crisis that began in 2007 and continued into 2008 challenged the very foundations of the economic and financial philosophy on which free trade and commerce depended for over half a century. Even more worrisome are the extensive social repercussions as destroyed wealth and falling incomes force families to face financial difficulties, diminish confidence in their own future, and reduce their consumption of goods and services.
For this reason, Benpres has chosen to focus on doing what it must to ensure that the future return of prosperity will find its operating units in perfect position to reap the fruits of current toil. Investments made must be shepherded to yield the desired gains for both customers and shareholders.
As you know, there was a very public battle for management control of Meralco in 2008. With your support and the confidence vested in us by the investment community, the Lopez Group, to which Benpres belongs, prevailed. However, the business environment in which Meralco operated became substantially different from our expectations.
When we practically doubled our equity in the country's largest electric utility in 2007, it was in anticipation of the implementation of Performance Based Regulation (PBR). PBR would have allowed Meralco to adjust rates according to its performance both in system-wide operations and individual customer service. We believed that PBR would allow a fair return on investment, given the exceptional performance of Meralco. As it happened, PBR implementation was deferred and Meralco continued to operate under capricious regulatory environment. The financial condition under which we had to operate was simply irrational, characterized by under recoveries as Meralco was forced to advance payments to power suppliers and the transmission company, while being disallowed from recovering such cost from customers.
At least P2.6 billion in "disallowed recovery of generation costs" for 2008 alone gave FPHC 2.6 billion reasons to rethink its long-term involvement in a highly politicized business like electricity distribution. Meralco's history has long been intertwined with the Lopez family due to the ground-breaking work began there by my late father, Eugenio H. Lopez, Sr. However, beyond merely just being a family matter, we viewed the future of our investment in the context of the prevailing business environment.
Given the political environment, we realized that reducing our stake in Meralco to its pre-2007 level would be for the best. It would be good for FPHC, Benpres and the Lopez Group because it would allow us to bring down consolidated debt to quite manageable levels. At the same time, we maintain significant shareholder rights over Meralco through an investment and cooperation agreement with PLDT.
The move we took would also be good for Meralco. It strengthens the utility as a company, and gives it an opportunity to work for PBR without the political noise attendant to the Lopez Group's participation in its business. With the entry of new strategic partners, we believe there is ample opportunity to enhance the value of our investment, while continuously improving the service we provide to customers.
Our decision seems to have been proven right once again because in April 2009, after we sold out a significant portion of our shares to PLDT, the Energy Regulatory Commission finally allowed the implementation Meralco's long approved PBR application. This resulted in a long-overdue rate adjustment which the regulator had suspended or deferred in November 2008.
Today, Meralco is majority owned by three of the oldest corporations in the country, all with a rich heritage of entrepreneurship and customer focus. We see many potential synergies in service provision, and even more areas for significant business cooperation among the shareholder groups.
Meanwhile, First Gen has chosen to go the clean and renewable route, and the purchase of EDC has boosted its journey in this direction. The rationale for this choice is quite sound. The world marches on toward a carbon-constrained future. We saw crude peak near US0 per barrel in July 2008, while bituminous coal was trading at US5 per ton in the same period. At that time, prices represented year-on-year increases of 114 percent and 172 percent, respectively. This has given economic incentives for the development of alternative and renewable energy sources.
With the expertise of EDC in geothermal and steam technology, and First Gen's track record in power asset management, investments in clean and renewable energy will lead to growth and leadership in this exciting field. The financial market recognized this compelling potential when First Gas Power Corporation, a First Gen subsidiary, obtained a US4 million loan package from eight banks in November 2008. The confidence accorded to our group of companies was exceptional as it was given during a period when there was general difficulty in refinancing maturing obligations. That difficulty persists this year but the First Gas loan was anchored on the recognition of its excellent operating assets. First Gas operates the Santa Rita natural gas-fired plant which has been consistently among the most efficient in the country.
In the communications sector, ABS-CBN Corporation (ABS-CBN) earned P1.4 billion and continued to invest in delivery platforms that will reach Filipino audiences anywhere in the world. Its entry into the social networking arena through a 5 percent stake in Multiply, Inc. underscores its thrust to be where its young, tech-savvy audiences are, even as it innovates in developing content that would appeal to an increasingly segmented market.
Sky Cable Corporation (SKYCable) now wholly owns Pilipino Cable Corporation (PCC), owner of SKY-branded cable TV systems in the provinces, after acquiring last year the 47 percent stake of the Lorenzo group for P900 million, signaling a greater interest in cable TV, and in providing the kind of digital services that are currently being enjoyed in the developed world.
SKYCable as well as Bayan Telecommunications, Inc. have continued to invest in their respective networks to give subscribers both affordable and high quality services, which competitors are finding hard to match. Rockwell Land also marked a milestone in 2008 by entering the mid-market in the property sector, thereby offering its quality residences to more customers.
Benpres reported a consolidated net income of P2.9 billion in 2008, 45 percent lower than 2007 profits. This result takes into account a net foreign exchange loss of P2.3 billion due to the 15 percent depreciation of the peso against the dollar.
Looking at the media group, advertising spend has not grown in the last several years. But ABS-CBN has been able to perform creditably by focusing on the essentials: obtaining the loyalty of its kapamilyas and expanding its audience reach via multiple distribution platforms. Thus, last week, ABS-CBN reported it has chalked up record-high revenues of P1.4 billion from flagship Channel 2 for the month of May, indicating robust second-quarter advertising spending after a lackluster first-quarter turnout. It must continue to creatively balance its approach, in order to strengthen its national television ratings advantage and build on its momentum in Metro Manila.
We also look forward to gains in our cable, telecom and property investments. SKYCable remains the leading brand in its franchise and attempts to sustain a financial turnaround that began in 2007. Bayan must build on its wireless landline achievement and strong customer service suit. The fact that its revenues grew by 15 percent in 2008 when its industry grew by only 4 percent is telling us that it is doing the right things.
As for Rockwell Land, despite a softening of the real estate market, it still benefits from the flight to quality as property buyers seek developers with a track record. Rockwell Land has built a sterling reputation for reliability and customer service. Its brand is among the most respected in the real estate sector, which is expected to find support from the low interest rates offered for housing loans.
Although we have not been able to provide financial support for the investments our operating units have been making to delight their customers, we continue to exercise our parenting function by providing enterprise-wide corporate services to improve overall performance through business excellence, social responsibility and other initiatives. All these are intended to enable each business unit to thrive in a competitive environment for the long haul. We are building companies to last well into a time perhaps only our grandchildren's grandchildren will see. We want the gains on our investments to outlive us and benefit future generations, leading them always to a better way of life.
Our family, the Lopez family, has been in business for almost 200 years and we have grown our investments, with the help of professional managers, always with the mind to uplift the lives of our countrymen. Political administrations have come and gone but the Lopez group of companies have continuously served fellow Filipinos and promoted the national interest. Through periods of economic want or plenty, we have chosen to invest primarily in the Philippines and to serve the Filipino wherever he may be in the world.
The current economic turmoil is a challenge I am confident our businesses and our staff are equal to. We have been through so many crises and weathered them all, guided by our values of nationalism, integrity, entrepreneurship and innovation, teamwork, and a strong work ethic.
Going forward, we see the Philippine government implementing monetary, fiscal, and governance measures to ease the effects of the global financial crisis on our people. A stimulus program has been launched to speed up infrastructure spending on high impact projects, retraining returning overseas workers, providing funding for micro-enterprises and livelihood, and focusing on the outsource industry that is expected to benefit from cost-cutting in the industrialized nations.
Thus far, it is our export sector that has been adversely by the declining consumer demand in our markets. This leads us to expect further drops in industrial sector electricity consumption as manufacturers lower output, if not stop production altogether. Hence our mandate for the power and energy group is to ensure continued and increasing efficiency in operations so as to pass on all savings to our customers and aid local manufacturers weather the tough business environment.
Much work remains for both our country and our company. Seeing how much more development our country needs, envisioning the kind of services our fellow Filipinos desire, knowing there is so much more we can offer to improve all our lives--”these thoughts urge us to go to work every day.
I once again thank you for your faith in your board and in your management team. It is indeed via stakeholders working together that Benpres can prevail.