Lopez Holdings

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2015 Management’s Discussion and Analysis of Operations

The following management’s discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the accompanying audited consolidated financial statements and the related notes as at December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015.

PFRS 10 -- Consolidated Financial Statements replaces the portion of PAS 27 -- Consolidated and Separate Financial Statements which addresses the accounting for consolidated financial statements. A reassessment of control was performed by the Group on all its subsidiaries and associates in accordance with the provisions of PFRS 10. Following the reassessment and based on the new definition of control under PFRS 10, the Group determined that it does not control ABS-CBN (accounted for as a subsidiary in 2012 and prior years) but it controls First Philippine Holdings Corporation (FPH) (accounted for as an associate in 2012 and prior years).

As a result, starting January 1, 2013, the Group deconsolidated ABS-CBN and consolidated FPH retrospectively. The audited consolidated financial statements for the year 2012 was restated to consolidate subsidiary (FPH) accounts into Lopez Holdings, and to deconsolidate accounts of ABS-CBN.

Results of Operations for the year ended December 31, 2015 compared with December 31, 2014

Lopez Holdings posted P6.191 billion in net income attributable to equity holders of the Parent for the year 2015. This is 65% higher than the P3.760 billion in net income attributable to equity holders of the Parent reported in 2014. This was primarily due to the partial recovery of impairment losses related to its erstwhile telecom unit.

Lopez Holdings and Bayan Telecommunications Holdings Corporation (BTHC) sold all their equity in Bayan Telecommunications, Inc. (Bayan) in July 2015. The sale followed the conversion of Bayan debt into equity provided under the resolution of Bayan’s Rehabilitation Court (Regional Trial Court Branch 158 Pasig City) in SE C Case 03-25 dated August 27, 2013, and approved by the National Telecommunications Commission on July 2, 2015. The sale involved up to 70,763,707 Bayan shares and increased the buyer’s equity interest in Bayan from 56.87% to 98.57% of outstanding capital stock. Prior to the sale, Lopez Holdings held 717,335 shares in Bayan.

The Lopez Holdings board approved the sale on July 9, 2015. It allowed the unlocking of the intrinsic value of Bayan as a duly enfranchised entity whose performance was hindered by its significant debt load, and allowed Lopez Holdings to recover a portion of its investment in Bayan. Partial recovery of impairment losses related to BTHC/Bayan as a result of the sale amounted to P1.8 billion, net of related expenses.

Consolidated revenues decreased by 3% to P96.510 billion from P99.191 billion. This resulted from decreases in the sale of electricity (-1%), real estate (-3%) and contracts and services (-27%), from units of FPH. Revenues from contracts and services declined due to the lower value of project completion of FPH unit First Balfour, Inc. Sale of merchandise, representing the manufacturing business of FPH, rose by 10% while the stellar performance of ABS-CBN Corporation lifted equity in net earnings of associates/PD Rs and joint venture by 22%.

Consolidated costs and expenses decreased by 4% to P74.333 billion from P77.093 billion. Cost of sale of electricity (-1%), real estate costs and expenses (-5%), contracts and services costs and expenses

(-49%), and costs and expenses for merchandise sold (+8%) reflect the movement in revenues for the respective accounts.

Recovery of impairment loss-net (+26%) reflects primarily Parent accounts covering partial recoveries from the sale of equity in Bayan, the exercise of options in BTHC and assignment of SKY Cable Corporation options, net of provision for impairment loss at the FPH level. Excess of carrying value over buy-back price (-97%) represents minimal amount of debt (Perpetual Convertible Bonds) bought back by the Parent during the year.

All other items represent primarily FPH accounts, as follows: finance costs (+3%), finance income (-1%), dividend income (+21%), foreign exchange loss (P1.526 billion in 2015 versus P75 million in 2014), mark-to-market gain on derivatives (-81%), and other income-net (+32%). The peso depreciated and closed the year 2015 at P47.060 against the US dollar compared to P44.720 per US dollar at the end of 2014.

Subsidiaries, Associates, PDRs and joint venture

FPH reported a 4% decrease in net income attributable to equity holders of the Parent to P5.406 billion in the year 2015, from P5.632 billion in 2014. FPH consolidated revenues eased by 3% to P96.643 billion from P99.307 billion. Sale of electricity accounted for 86% of consolidated revenues in 2015 and 85% in 2014. The improvements in the FPH Group’s margins were reversed by the impact of foreign exchange losses and the absence of non-recurring gains (booked in 2014 for the recovery of impairment related to the Northern Negros Geothermal Plant of Energy Development Corporation, a unit of First Gen Corporation). On a recurring net income basis, FPH’s earnings improved by 11% to P5.2 billion from P4.7 billion, driven by the strong performance of the power generation, manufacturing and geothermal well drilling businesses, together with lower operating expenses for FPH Parent.

ABS-CBN reported a 25% increase in net income for 2015 to P2.545 billion, driven by solid advertising revenues (+13%) and consumer sales (+16%). Revenues reached P38.278 billion, 14% higher than P33.544 billion in 2014. Ad sales accounted for 56% of ABS-CBN revenues during the period, the same level as in 2014.

Subsidiaries, Associates, PDRs and joint venture

FPH reported a 4% decrease in net income attributable to equity holders of the Parent to P5.406 billion in the year 2015, from P5.632 billion in 2014. FPH consolidated revenues eased by 3% to P96.643 billion from P99.307 billion. Sale of electricity accounted for 86% of consolidated revenues in 2015 and 85% in 2014. The improvements in the FPH Group’s margins were reversed by the impact of foreign exchange losses and the absence of non-recurring gains (booked in 2014 for the recovery of impairment related to the Northern Negros Geothermal Plant of Energy Development Corporation, a unit of First Gen Corporation). On a recurring net income basis, FPH’s earnings improved by 11% to P5.2 billion from P4.7 billion, driven by the strong performance of the power generation, manufacturing and geothermal well drilling businesses, together with lower operating expenses for FPH Parent.

ABS-CBN reported a 25% increase in net income for 2015 to P2.545 billion, driven by solid advertising revenues (+13%) and consumer sales (+16%). Revenues reached P38.278 billion, 14% higher than P33.544 billion in 2014. Ad sales accounted for 56% of ABS-CBN revenues during the period, the same level as in 2014.

Key Performance Indicators

As a holding company, Lopez Holdings receives revenues from asset sales and dividends from investees. Hence, the key performance indicator (KPI ) with the most direct impact on Lopez Holdings is the net income of investees. Any dividend received by Lopez Holdings is based on the investees’ net income in the previous year. For the period in review, the financial performance of investees was within expectations.

Return on average equity decreased from 7.65% in 2014 to 6.75% this year due to the drop in net income attributable to Parent by P226 million or 4% (from P5.63 billion to P5.41 billion).

Interest coverage ratio declined from 3.24:1 in 2014 to 2.84:1 this year due to the P273 million or 3% jump in interest expense (from P8.7 billion to P9.0 billion) aggravated by the lower consolidated earnings before interest and taxes by P2.7 billion or 10% (from P28.28 billion to P25.59 billion).

Earnings per common share (diluted) decreased from P10.095 to P9.581 or 5% as the decrease in consolidated net income attributable to equity holders of the Parent resulted into lower net earnings available to common shareholders for the current year.

The ratio of total assets to total equity decreased from 2.77:1 in 2014 to 2.67:1 this year despite the increase in total assets by P17.6 billion or 5% mainly due to the P10.8 billion or 9% increase in stockholder’s equity (from P116.7 billion in December 2014 to P127.5 billion in December 2015). The P17.6 billion growth in total assets from (from P323.3 billion to P340.9 billion) was primarily due to the P14.1 billion or 12% increase in Property, Plant and Equipment (from P118.9 billion to P133.0 billion) which represents the recognition of capitalized construction costs of First Gen’s San Gabriel and Avion power plants as well as EDC’s plant improvement and drilling activities in Southern Negros and Unified Leyte.

The debt to equity ratio decreased from 1.38:1 in 2014 to 1.33:1 in 2015 despite the increase of total debt by P8.1 billion or 5% (from P161.2 billion in December 2014 to P169.3 billion in December 2015) due to the P10.8 billion or 9% increase in stockholder’s equity. The P8.1 billion increase is mainly due to higher longterm debt balances following the $200 million 10year term loan obtained by First Gen in September 2015, BGI ’s P5.0 billion termloan secured on September 9, 2015, FNPC’s additional drawdown on its Export Credit Facility amounting to $99.2 million for 2015 and EDC’s P291.2 million loan for its solar project.

Current ratio showed an upward movement from 1.95:1 in 2014 to 2.04:1 this year primarily due to the P3.9 million decline in balance of current liabilities (from P54.3 billion in December 2014 to P50.4 billion in December 2015). Decline in current liabilities was driven by (a) lower accrued project costs and current portion of customers’ deposits of Rockwell (b) lower expense accruals of FBI and First Philec (3) lower payables to SPE X of First Gen and (4) decline in current portion of longterm debt.

Quick ratio declined from 1.53:1 in 2014 to 1.45:1 this year as a result of the P11.2 billion combined decrease in cash and shortterm investments and trade and other receivables. The lower cash balances were mainly attributable to Rockwell’s payment of property acquisitions and other capital expenditures for ongoing projects, First Balfour’s equipment purchases during the period, and scheduled principal and interest payments made by the Group for various loans. Trade and other receivables declined primarily on account of the lower trade receivable balances of First Gen’s FGP and FGP C, EDC, and Rockwell.

Book value per common share grew from P135.45 in 2014 to P147.43 this year. The increase was brought about by the P6.7 billion or 9% increase (from P75.0 billion* in December 2014 to P81.7 billion* December 2015) in equity attributable to equity holders of the parent for the current period, which mostly reflects the net income generated during the period.

Financial Condition

In 2015, Lopez Holdings paid a total of P463 million in cash dividends and received P800 million in cash dividends from FPH (P511 million) and ABS-CBN (P289 million). Proceeds from the sale of Bayan shares held by the Parent were used to settle a short-term loan in the amount of P1.1 billion, redeem US $13.1 million in restructured notes, redeem all outstanding Perpetual Convertible Bonds at 100% of the principal amount of US$193,700, purchase FPH common shares from the market, and fund a special separation package that reduced the workforce by a quarter.

Investments in and advances to associates/PD Rs increased by 3% as the solid performance of ABS-CBN in 2015 increased its net carrying value in the Parent’s books.

Movements in: Cash and cash equivalents (13%), short-term investments (+23%), trade and other receivables (-16%), inventories (+10%), other current assets (+87%), assets of discontinued operations held for sale (-29%), investments in equity and debt securities (+29%), property, plant and equipment (+12%), investment properties (+6%), goodwill and intangible assets (-2%), deferred tax assets (+15%), other noncurrent assets (+28%), trade payables and other current liabilities (-7%), loans payable (-43%), income tax payable (-44%), current portion of long-term debts (-7%), liabilities related to assets of discontinued operations held for sale (+2%), long-term debts-net of current portion (+6%), derivative liabilities (-16%), deferred tax liabilities (+3%), retirement and other long-term employee benefits liability (+14%), asset retirement and preservation obligations (+28%), and other noncurrent liabilities (+43%) are FPH accounts.

Changes in common stock of P5 million, capital in excess of par value (+54%), and share-based payment plans (-14%) represent the exercise of Employee Stock Option and full payment of Employee Stock Purchase Plans. Unrealized fair value gains on investment in equity securities (+96%), cumulative translation adjustments (+44%), and equity reserve (-3%) represent the Parent’s equitized share in the equivalent accounts of both FPH and ABS-CBN. The increase in retained earnings (+9%) represents the company’s net income attributable to Parent in 2015, net of dividends paid.

There are no known trends, demands, commitments, events or uncertainties that will have material impact on the company’s liquidity other than those disclosed above and in the notes to financial statements herein attached. Lopez Holdings has no material commitments for capital expenditures and for new investments.

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CONTACT US

Lopez Holdings Corporation (formerly Benpres Holdings Corporation)
4/F Benpres Building, Exchange Road, 1605 Pasig City, Philippines

  • Trunkline: (632) 449-2345
  • Fax: (632) 634-3009