FELLOW STOCKHOLDERS AND STAFF-MEMBERS,
FRIENDS OF FIRST PHILIPPINE HOLDINGS CORPORATION,
LADIES AND GENTLEMEN:
Good afternoon and welcome to our 40th annual stockholders' meeting.
As we have become accustomed to doing these past few years, I shall provide a brief summary of the highlights of our operating year, and address issues that I think are important to the continuing prosperity and success of our Corporation. Our President and Chief Operating Officer, Elpidio L. Ibanez, shall then provide you with a more complete summary of our operating and financial results for the year ended December 31, 2001.
In 1991, First Holdings celebrated its 30th anniversary. It was a triumphant occasion, marked by the recovery of part of the shares in Meralco that had been taken from us, under duress, during martial law. And while First Holdings only recovered a fraction of what had been lost, it was enough to ensure the company's survival after several years of teetering on the verge of bankruptcy. I remember saying then, and I quote:
"We had been to the mountain top, before martial law, but we have also been laid low in the valley of economic devastation during the Marcos dictatorship years, and we are starting to climb up once more. But this time we are aiming for a higher peak."
Eleven years later, I believe that we are well on our way to making a reality of those words. Last year, First Holdings celebrated its 40th or "Ruby" anniversary in a manner every bit as triumphant as its 30th. For the year, the company registered record revenues and net income of P18.3 Billion and P3.5 Billion, respectively. Moreover, we have created a business base that can sustain that performance. The 1,000-megawatt Sta. Rita gas turbine plant entered into commercial operation, fueled by natural gas from the Malampaya field which began landing in Batangas last October. Construction of the second 500- megawatt San Lorenzo plant has been tracking just about on schedule towards a target completion date at the end of this month. PHILEC recorded excellent income results in what we had expected to be a down year, principally by winning market share in the non-Meralco market.
It could have been an even better year. Unfortunately, Meralco's income performance was adversely affected by its inability to win government approval for a rate increase. The continuing slump in the property and construction markets also contributed to losses for our property affiliate, Rockwell Land Corporation, and for our construction subsidiary, First Balfour.
Looking forward to 2002 and beyond, we expect earnings from our power generating subsidiaries to improve upon their 2001 levels, as the San Lorenzo plant enters operation. Earnings will improve significantly if the National Power Corporation's transmission system is finally able to dispatch power from both Sta. Rita, and the soon-to-be-completed San Lorenzo, plants at higher levels. It is our expectation that our recurring revenues and earnings will continue to grow briskly until 2004, driven by our power generating business. And while we do not expect a resolution of Meralco's rate adjustment petition to have a positive impact in 2002, we do hope that this matter reaches a satisfactory resolution by early 2003.
Beyond 2004, we had anticipated that new business development and growth might come from the long-awaited privatization of National Power Corporation's baseload generating assets, and from the downstream development of the country's natural gas. Both of these, however, have been delayed, and in the context of the present controversies regarding the supply and pricing of electricity, it remains to be seen how long it will actually take for developments in the country's energy sector to move forward again.
In the meantime, we do not have the luxury of standing still at zero growth, and so, we have begun to look elsewhere for good investment opportunities. The tollroad project of First Philippine Infrastructure Development Corporation, or "FPIDC" is one such prospect. You may recall that about eight years ago, negotiations began with the government and with Philippine National Construction Corporation over the modernization and expansion of the North Luzon Expressway. At the time, FPIDC was formed as a subsidiary of Benpres Corporation to take on 60% of the project, and it was further agreed that ownership in FPIDC would be shared 50:50 between First Holdings and Benpres Holdings Corporation. However, as our shorter-gestation power generation projects took center stage, they assumed priority in the allocation of capital. Consequently, we reduced our stake in FPIDC to 30%.
Today, after what have seemed endless twists and turns in the project development process, the modernization and expansion of the North Luzon Expressway is poised to commence. The first phase, covering the rehabilitation and widening of the existing tollroad, will take two years to complete a cost of 1 M. Some of the worlds leading multilateral lending agencies, including the Asian Development Bank, the International Finance Corporation, COFACE and EFIC have committed the requisite long term-lending for the project amounting to 3.5 M, with political risk cover from MIGA or Multilateral Investment Guarantee Assurance (the political risk arm of the World Bank). There is one problem, however. Benpres Holdings Corporation has more than it can handle with its ongoing projects and does not currently have the capacity to support yet another large undertaking.
Thus, early this year, we engaged a team of top financial and legal experts to render an objective and independent evaluation of the tollroad project for FPHC, as an investment opportunity. JP Morgan Chase did a valuation of the project and of what had already been spent developing the project. Price Waterhouse vetted the project accounting books and commercial agreements for tax and accounting compliance and transparency. U.S. legal adviser Troutman Sanders as well as Puno & Puno scrutinized the international and local legal parameters. After three months' review, their conclusions were presented at a specially-convened meeting of the full Board of First Holdings, namely:
- That the project is robust and attractive from an investment viewpoint.
- That there are no fatal flaws incipient in its development and subsequent operation.
As a result, two actions were authorized by the Board. First, that management could commence negotiations with Benpres Holdings Corporation for the acquisition of a controlling stake in FPIDC of between 70% and 100%. Second, that management could commence discussions with the committed project lenders for the possible change in principal project sponsor. These discussions are currently under way.
I believe that the North Luzon Expressway project represents a considerable opportunity for both Central and Northern Luzon, as well as for First Holdings. While there have been pockets of development in the region, Subic, Clark and Luisita, for example, the overall progress of the country north of Metro Manila has lagged behind due first of all, to the Mt. Pinatubo eruption on June 12, 1991 and the lahar flow aftermath which affected many Central Luzon provinces many years, and to the absence of linking infrastructure, principally new expressways and new secondary highways. In the sixties, you could comfortably drive to Baguio in four hours. Today, that same trip takes up to 6 to 7 hours. Not surprising, considering that over some 35 years of operation, the NLE has undergone major repairs only once, in 1991.
The modernization of the North Luzon Expressway will add 33 - 35% of new throughput capacity. Its subsequent expansion should provide high-speed access to Subic to the west, and to Tarlac and points beyond to the north. Over 5,000 individuals will be employed and trained in new skills during the initial two-year construction period. We have engaged one of the world's most experienced tollroad operator, Egis of France, to be our equity and technical partner in this venture. The main point of modernizing our highways is added efficiency. People should be able to live outside Metro Manila, where living costs are significantly lower, yet commute to jobs in Metro Manila without punishing their bodies. Goods, most particularly food staples, should be brought into Metro Manila more efficiently, and therefore, more cheaply. It is also projected that when modernization of the North Luzon Expressway is completed in 2004, it will still carry a lower toll rate than its Southern Luzon counterparts.
For us, this project carries the promise of a new stream of revenues and earnings, beginning in 2004 when revenues and earnings from our power generating assets level off. It will also provide more balance to our portfolio risk which is currently very heavy on power generation. Suffice to say, we will keep you, our stockholders, well informed on our progress in this matter.
It is with particular pleasure that I now report to you the advances we have made towards becoming a truly world class organization. About 3 years ago in 1999, I became acutely aware of the need for our companies to become world-class when I joined an FPHC team of executives who visited a dozen world-class power companies in the U.S., Europe and Asia for the purpose of looking for a strategic partner for our newly organized First Generation Corporation.
What struck me during that roadshow was the extent to which all these power companies were involved in big power projects all over the world, and what was once said of the British empire, that the sun never sets on that empire, is equally applicable to many of these world-class power companies we visited.
It also became apparent to me then that the same process of globalization would soon overtake the Philippines, especially the power industry after the passing of the omnibus electricity law, and that it became a matter of survival for our group to become world-class ourselves if we were to survive in a deregulated electricity environment.
Just for the record, we were unable to find the right strategic partner for First Gas at that time, but a few months later on June 1999, FPHC held its annual budget review conference in Bangkok, Thailand, and it was there that I articulated a new rallying cry for First Holdings and its subsidiaries. I said, " Let's go for world-class".
I told all the 64 executives and managers gathered in the Bangkok Shangri-La Hotel that I would like all of them to acquire eventually the mindset of world-class executives who aspire to excellence and whose standard of performance and management skills can equal the best in the world.
I also asked them to read a book entitled "World Class" by Rosabeth Moss Kanter, a Harvard Business School Professor, who defines world-class as the need to meet the highest standards anywhere in the world in order to compete and that one of these standards is ISO 9000, which is a European process quality assurance standard from the International organization for standardization and is considered as worldwide in the international visa for quality. I therefore asked all our executives to go for ISO 9000 certification as part of the process of becoming world-class. I am happy to report that since 1998 all our 11 subsidiaries with the exception of our newest entity First Gen, have all now acquired ISO-9000 accreditation. These subsidiaries are : First Sumiden - April 16, 1998
- FPIC - March 31, 1999
- Philec - Feb. 1999
- Bauang Private Power - Aug. 27, 1999
- Fedcor - July 28, 2000
- FPIP - Nov. 29, 2000
- Panay Power - Jan. 23, 2001
- FPEC - Feb. 2, 2001
- FGPC Siemens Sta. Rita - Oct. 1, 2001
- STSI - Dec. 3, 2001
- First Balfour - Feb. 6, 2002
Last Tuesday, I was advised that First Holdings itself had successfully passed its final certification audit and is being recommended for accreditation. We expect confirmation of this within a fortnight. In winning its ISO 9000 certification, First Holdings will have become the first large-scale conglomerate in the Philippines to achieve this signal honor.
In a related area, we have not lagged behind in environment, safety and occupational health standards. Our MARS or Management Assessment Rating System program is well imbedded in our daily corporate lives and has been exported to the other companies within the wider Lopez Group. Building on this foundation, our operating subsidiaries have begun to apply for ISO 14000 and ISO 18000 accreditation, with two companies, First Sumiden and Bauang Private Power already successful in obtaining their ISO 14000 certificates. Others will follow.
As the next step in our quest for performance excellence and world-class status, we have adopted the US government's Malcolm Baldrige National Quality Awards framework as a means to both recognize good performers annually, and to drive performance through systematic continuous improvement. Briefly, the Baldridge framework motivates companies to undertake critical self-assessment as part of completing and submitting an application for the annual performance award. These applications are carefully reviewed on the basis of seven criteria and scored on a scale of zero to a thousand points, with business results counting for 45% of the total score.
In our case, the award has been christened the Oscar M. Lopez Performance Excellence Award in my honor. But for short, we are just calling it the Oscar Award. Awardees will be selected annually and suitably recognized along four award levels depending on how they score. The Baldrige framework is very, very rigorous. Winners of the Baldrige award in the US sometimes take up between six and eight years of trying to finally win it. Naturally, we do not expect most of our companies to make the highest award level the first year. But we do expect them to improve on their scores with each passing year. In this way, we hope to systematically monitor, measure and drive ourselves to world class excellence.
Today, with the progressive dismantling of trade barriers, we are already meeting global competition head-on in our own market, in power generation, transformer, manufacture, industrial park development, and engineering and construction. An excellent example is Philec. We are more than holding our own; we have become the standard against whom all comers must compete. Tomorrow - someday - we intend to carry this competition into the global markets.
I would now like to touch on one sensitive issue that has appeared prominently in the press recently, and this concerns the vicious attacks upon the Lopez businesses, the Lopez Group of Companies, and at times, even upon the Lopez Family.
Critics allege that, in contracting to purchase power from the Sta. Rita and San Lorenzo plants, Meralco has granted one of its shareholder, specifically First Holdings and its subsidiaries, a "sweetheart" deal. Here are the facts and you be the judge if there was a "sweetheart" deal.
- First, after the discovery of the Camago-Malampaya natural gas field in Northern Palawan, there were doubts regarding the accelerated development of these indigenous energy reserves because there was no established market for the gas. A commitment had to be made by the Philippine Government through the Dept. of Energy for the creation of 3,000 megawatts of electric power generating capacity to consume the natural gas and, thereby, create a viable market to justify the investment in offshore and onshore gas production facilities by Shell company and its partners in the gas venture. Meralco responded to the government's challenge by agreeing to Energy Secretary Francisco Viray's request that Meralco and its affiliates take up 1,500 megawatts of generating capacity, from Malampaya. It was only natural for Meralco at this point to turn to its biggest private shareholder, FPHC, to help it develop the gas power project. FPHC in turn formed First Gas Power Corp. in as much as First Holdings had already won a BOT contract from NPC for the supply of a 225 MW power plant in the province of La Union. Since First Holdings did not know much about natural gas , we decided to invite British Gas to take a 40% equity stake in this project. British Gas turned out to be the perfect partner for us because they knew everything about natural gas. They are involved in exploration and operation of gas fields all over the world. They also run pipelines that brought the gas to market and they run power plants on natural gas.
- But before the project could move further we had to negotiate the price of natural gas to be used in our power plant with Shell company and then, an Independent Power Producer contract was entered into between First Gas and Meralco, a contract that had to be approved by the Department of Energy, evaluated and scrutinized by the Energy Regulatory Board, then submitted to public hearing to assure the competitiveness of the agreed power purchase price. In this particular case, notices were posted in each of the 11 municipalities and cities covered by Meralco's concession area, inviting all concerned parties to attend the public hearings.
- Having cleared this gauntlet of scrutiny and authorization, the project was initiated in 1997 after we secured the project financing at the height of the Asian financial crisis, with the full commitment from government that other essential components of the program, such as transmission lines, would likewise be implemented. The 1,000 MW Sta. Rita plant was completed close to schedule and on budget and is now in full operation. By the end of this month, the 500 MW San Lorenzo plant will have been completed on schedule and on budget. Within this year, both will be capable of producing at full capacity utilizing a fully indigenous fuel. Unfortunately, it will not happen, at least not this year. Why? Because National Power Corporation, which has a monopoly on transmission as well as most of the generation facility in the country, is unable or unwilling to dispatch our plants at full capacity. But who pays the penalty? Well, Meralco for one, because it is unable to enjoy the scale economies that come with full deployment of its IPPs. And the consumers for another, because cheaper and cleaner power is denied them as a consequence.
- But let's get back to the sweetheart deal allegation. How can there even remotely be such a possibility when it is Napocor and not Meralco who controls what power is to be dispatched. Also, as the biggest stockholder of Meralco, the government has 4 members sitting in the Meralco board. Dispatched fully, the Sta. Rita and San Lorenzo plants can deliver power to Meralco at a price cheaper by One Peso than Napocor currently charges Meralco. If the consumer's interest, defined in terms of lower electricity prices, is truly the priority of government, which owns and controls Napocor, then it stands to reason that priority would be given to the dispatch of these plants. Napocor, however, has not acted according to this logic and has not been able to satisfactorily explain its conduct in public. There is clearly a conflict of interest in NPC as transmission company and NPC as owner of most of the generation facilities in the country. The conclusion is inescapable that the sooner NPC privatizes itself, the better it will be for the power industry, which would allow the industry to rationalize itself, become more efficient and eventually bring down electricity rates to the general public.
Finally, some people have gone so far as to insinuate that we have "milked" Meralco in order to channel resources to other Lopez-controlled businesses that are currently having difficulty. To this insinuation, I have the following response:
- First, while we are by no means perfect as business leaders, we hold ourselves fully accountable for any business decisions that do not deliver the desired outcomes. But in whatever we think or do, we do so to the highest standards of integrity and honor.
- Second, we are a major stockholder in Meralco, but we are by no means the only major stockholder, nor perhaps even the largest one. Combined, government financial institutions probably own more Meralco shares than we do. Accordingly, like any other stockholder, the only transfers of cash that we have received from Meralco since we recovered our Meralco shares are the cash dividends that Meralco has, from time to time, paid out.
- Third, Meralco's own covenants with its lenders clearly and strictly prohibit transfers of resources, or the issuance of guarantees or contingent undertakings to affiliated companies.
- Finally, Meralco operates in today's most highly regulated industry, where it is heavily scrutinized by regulators, legislators and consumer welfare organizations. I doubt that any transaction of dubious justification could pass such careful and incessant scrutiny.
- On that note, I end my remarks. After Mr. Ibanez presents the highlights of First Holdings' operating and financial results, he and I, and any of the members of the Board present here before you, will be only too happy to answer any questions you may have for us.
Thank you and good afternoon to all of you.