Dear Fellow Shareholders, Directors, Officers, Staff, Friends, Ladies and Gentlemen.
I would like to welcome all of you today on this the Ninth Annual Stockholders Meeting of Benpres Holdings Corporation. Last March 13, we gathered in a special stockholders' meeting to address an urgent matter with regard to our on going efforts towards financial restructuring. After my brief introductory remarks here this morning, Angel Ong, our chief financial officer and a representative from Credit Suisse First Boston or CSFB, our financial advisers, will give us a report on the progress in the implementation of our Balance Sheet Management Plan. They will also be ready to respond to questions from you after their report. While you have been given advanced copies of our financial statements, Mr. Ong will also provide further explanations on the company's financial performance for 2002.
I wish we were meeting today on a more celebratory spirit, this being our tenth year, having been incorporated in June 1993 and our successful initial public offering in November of the same year. A decade is always a milestone in the life of a corporation such as ours. But as we all know, a combination of factors both outside and within our company and our control have caused us serious problems that we are now addressing with a strong resolve. With the expert assistance of our financial advisers, we now have a plan of action that should enable your company to get back on track. But recent events, notably the difficulties faced by Meralco before both the judicial and regulatory authorities have made the situation more difficult than it already is. The tough economic environment both here and abroad have also affected the market demand for the services offered by our subsidiaries, including broadcast market leader ABS-CBN.
To begin with, the Philippine economy last year was greatly influenced by the mood of international business. We were lucky to eke out the 4.6% growth in our GDP for the year, the strongest growth rate since 1997, but still not nearly enough to excite investors and generate significant market demand. Fears of impending war in Iraq, continuing increase in the unemployment rate gave rise to extreme caution among market players and specially the consumers.
Indeed, 2002 was marked by large-scale anxiety. And it isn't over yet. Looking forward to 2003 and even with the end of American war in Iraq, the only prediction I am prepared to hazard, is that the year is still going to be just as interesting and challenging, not just for our company but for our country and the world as well.
Proof that our economy was less than robust in 2002 is the lower level of power consumption. Economists often use this indicator as a measure of economic health. Power demand in the Luzon Power Grid declined 28 % from a year ago, aggravating the surplus supply situation in the country's major grid. However, tightness in supply is starting to be felt in smaller island grids like Panay.
Nevertheless, on the power generation side, both our major projects, The 1000 MW Sta. Rita and 500 MW San Lorenzo, have now been completed and are in commercial operation in 2002. The San Lorenzo power plant was formally inaugurated on January 28, 2003, with President Gloria Macapagal-Arroyo presiding over the ceremonies.
On the power distribution side, Meralco had to labor through yet another year without a rate increase and, as a result, its bottom line took a beating. Meralco must also now contend with the adverse Supreme Court decision regarding the rollback of Meralco's 1994 rate increase and the consequent refund that will have to be made by Meralco to its consumers.
Nevertheless, First Philippine Holdings Corporation (FPHC) posted a consolidated net income for 2002 of P1.96 billion, contributing P893 million to Benpres revenues on its 47% share of FPHC. FPHC's 2002 net income represents a 49% decline from the previous year's level. This is largely attributable to the income performance of Meralco, which reported a loss of P2.015 Billion for 2002, compared to a P1.481 Billion net income in 2001.
On November 15, 2002, the Supreme Court ruled adversely on a long-standing power rate dispute and ordered Meralco to pay a refund to its customers. The decision was reaffirmed last April 10, 2003.
Hence, during the first quarter of 2003, Meralco recognized a charge of P27.8 billion against its retained earnings and stockholders' equity. Under the equity accounting method, FPHC had to mirror this by taking a similar charge, relative to its 17.7% ownership interest in Meralco. Thus, during the first quarter of this year, FPHC booked a P5.0 Billion charge against retained earnings to reflect the impact of the Supreme Court decision on Meralco. Benpres adjusted accordingly and registered a P2.4 billion reduction in retained earnings for the same period.
The other major contributor to Benpres bottom line, ABS-CBN Broadcasting Corporation, also faced the trials of a continuing economic slowdown and a more competitive business environment. But it emerged from 2002's challenges, a transformed organization, better prepared to face the future's many changes and trials.
For ABS-CBN, 2002 began with a global slowdown in advertising spending, an aftermath of the World Trade Center tragedy, that lingered until the first half of the year. Major advertisers, reacting to a weak market for their products, were forced to cut their advertising expenditures as a quick means of meeting bottom line objectives. Additionally, ABS-CBN also had to cope with the leading competitor's copycat strategy to gain market share. That forced ABS-CBN to compete in new and more innovative ways, but at the price of driving up costs.
This combination of factors put pressure on ABS-CBN's operating margins. Faced with such a demanding environment in 2002, ABS-CBN chose to (a) focus on its core operations, (b) strengthen its balance sheet, and (c) increase its free cash flow. By yearend, ABS-CBN had successfully managed to accomplish all three objectives and had become a leaner, stronger, and more resilient organization.
For the other major operating companies of the group, 2002 meant having to deal with soft markets, heavy competition and severely limited access to new funds and resources. Each company had to live within its means, keep tight control over costs and the use of scarce resources, enhance productivity and meet the requirements of its customers in the most efficient and effective way possible.
At holding company level, the erosion in Meralco's net income and the stringent accounting conventions that now apply to foreign currency translation losses meant that the profitability of First Holdings will be affected. The impact of the Supreme Court ordered Meralco rollback and refund will have an adverse effect for FPHC, as earlier detailed. As a major contributor to the Benpres bottom line, this turn of events at First Holdings couldn't have come at the worst possible time.
We also had to devote attention last year to the restructuring efforts of two of our subsidiaries, BayanTel and SkyCable. While it seems that our negotiations with creditors of these two subsidiaries are going well, there are still some important details being ironed out before a final agreement could be signed. In the case of Maynilad, we are proceeding with international arbitration in relation with our decision to terminate the concession agreement on several valid grounds. We however, continue to operate the concession in the interest of public service until such time as the arbitration issues shall have been resolved.
This brings us to the major focus of activities for Benpres in 2002: its financial restructuring. Last June 4, 2002, the Board of Directors announced the Benpres Balance Sheet Management Plan ("Plan") designed to rehabilitate and strengthen the long-term financial position of the Group. Since that time, as I had forewarned in my 2002 address, markets continue to be extremely challenging. Our problems at Maynilad and Meralco continue, with rate increases still pending after years of waiting. Planned asset sales have not materialized and capital raisings for Benpres and the Group remain difficult in general.
On the other hand, there has been some good news. Financial close and drawdown on the MNTC tollways project was achieved on February 7, 2003. Construction is now actually and finally in full swing. The project is expected to reach completion by early 2005. Importantly, we are also confident of achieving a resolution to our restructuring Plan by the end of this year. Discussions with our creditors have been ongoing since March 2002, and there have been a number of creditors meetings in Hong Kong, Manila and Singapore with the help of our advisors, Credit Suisse First Boston.
The Board sought and received in a special stockholders' meeting last March 13, 2003, the stockholders' pre-approval to implement any agreement and/or undertake any action that will serve to protect the interests of shareholders in respect of Benpres' debts. Benpres also sought and received a shareholder mandate, which will delegate to the Board the authority to take all actions necessary and desirable for the restructuring.
The Benpres board would seek further approval of the restructuring plan from the stockholders if required under the Corporation Code.
At this stage, creditors have formed an informal overall committee, and have appointed an independent accountant to assist in independently verifying Benpres' financial projections. The independent accountants have already completed the process, and creditors have also appointed their lawyers to give advice on the Plan. These initiatives, originally recommended by Benpres, and adopted by creditors will serve to ensure that the debt restructuring reached with creditors is equitable, credible, supported by the majority of Benpres' creditors and protects the interests of Benpres' shareholders. I am pleased to report that the independent accountants hired by our creditors to review our business plan agreed with our assumptions in that plan.
As Chairman, I remain committed to ensuring that the Plan is one which is expeditiously and equitably completed, and which will ultimately preserve and strengthen the Group for the future. We may be under a legendary Chinese curse to live through interesting times. But we will emerge from these times a better organization, more attuned to take full advantage of the opportunities that today's crises bring.
Thank you again for your support and understanding.