Fellow shareholders and staff members,
Although 2003 could be considered another tough year for your corporation, it brought us hope that many of the festering problems we have been wrestling with in recent years will finally find resolution in the next few months.
For one, our core investments in power and in media have again performed excellently, proving the expertise and resilience of their respective management teams in the face of quite formidable challenges.
For another, our investees that are under financial restructuring or rehabilitation are nearing the completion of their respective exercises, some with the assistance and guidance of the courts.
Nonetheless, Benpres Holdings posted a net loss of P1.9 Billion in 2003, out of revenues of P5.2 Billion. Our chief operating officer Angel Ong will report to you the details of these financial results in a short while. He will also give us an update on the debt restructuring discussions between Benpres and its creditors.
But let me say a few things about our major operating companies.
First Philippine Holdings Corporation
Benpress investments in power generation and power distribution are consolidated under First Philippine Holdings Corporation. Largely by virtue of its 88.44% ownership of First Generation Holdings Corporation or First Gen, First Holdings registered consolidated revenues of P38.4 Billion, and a net income of P3.82 Billion. First Gen accounted for more than 90% of First Holdings revenues and net income. This reflects the positive impact of the combined and full operation of our two Batangas-based natural gas-fired power plants, the 1,000-megawatt Santa Rita and the 500-MW San Lorenzo power plants, and our 225-MW bunker oil-fired plant in Bauang, La Union, which we believe can be all sustained in the coming years. More important, the knowledge and experience we have gained in seeing these projects through in the last decade establishes us firmly as the premier Filipino energy company, comparable with those elsewhere in the world.
We also saw a marked improvement in Meralcos performance, even as it paid out refunds to customers in beginning last year. Meralco returned to a book net profit of P907 million in 2003, following a re-stated net loss of P28.18 billion in 2002.
ABS-CBN Broadcasting Corporation weathered the fierce challenge of a broadcast competitor in 2003. Such strong competition can be expected to continue, and even become more severe, in the coming years. But ABS-CBN has stepped up and has differentiated itself as a total content provider, rather than as simply a broadcast station. Consolidated gross airtime and other broadcasting related revenues increased by 12% to P11.1 Billion and net income from continuing operations amounted to P1.0 Billion, which was 131% higher than in the previous year.
As for FPIDC and MNTC, you may have read in the newspapers that work on the modernization of the North Luzon Expressway is ahead of schedule. As of March 2004, it is 65% complete. It is likely that we will start full commercial operations of the modern and rehabilitated toll way before the end of this year, possibly by October or November.
These are some salient features of the North Luzon Tollway Project:
This is a modernization and expansion program to reconstruct 84 kilometers from Balintawak to Sta. Ines in Mabalacat, Pampanga.
The road will be widened from 3 to 4 lanes in each direction from Balintawak to Burol, and from 2 to3 lanes from Burol to Sta. Rita, adding a total of 110 lane kilometers to the existing 300 lane kilometers, or 36% more road space for the cars to travel in both directions. Of course, there will be a complete resurfacing of the entire 84 kilometers of road.
We will also construct new toll plazas in Balintawak, Bocaue, Tabang and Dau in Pampanga. We will also construct 3 new interchanges in Marilao, Angeles and Mexico and 2 big flyovers at Balintawak-Novaliches and Dau.
This road is being done at very high performance standards, employing world-class contractor Leighton of Australia for civil works and Egis Projects of France for toll operation equipment and systems, and supervised and checked by international engineering firms Parson Brinkerhoff representing MNTC, Norconsult International for the government Toll Regulatory Board, and Babtie for the syndicate of creditors.
The MNTC project is by far the biggest toll road project in the country, at a total cost of US1 Million, or roughly P20 Billion at the current exchange rate.
In October 2003, Beyond Cable and its creditors signed a Memorandum of Agreement providing the terms of the restructuring. With the additional equity infusion of US million from ABS-CBN, the combined company can now focus on achieving the synergies of consolidation.
First, the full integration of Sky Cable and Home Cable results in higher efficiencies. By using one instead of two networks, Beyond Cable will enjoy savings in manpower, network costs and other plant-related expenses. EBITDA margins can improve to as much as three times current levels.
Second, the fresh funds will enable Beyond Cable to implement its capex plan. Key to this plan is the deployment of set-top boxes which will combat the number one problem of this industry: piracy. Data show that today, 50% of cable viewers are illegal. This problem persists due to the limited technical and legal remedies available today. With the set-top boxes, however, this problem will be largely eliminated and majority of these illegal connections can be converted into paying subscribers.
Meanwhile, the three-year debt restructuring negotiations between BayanTel and its creditors was derailed in August 2003 when certain bondholders, through the Bank of New York, filed a petition for corporate rehabilitation with the Pasig Regional Trial Court. BayanTel continues to seek creditor approval for the rehabilitation plan it filed in January of this year and hopes to conclude the process within the period prescribed by law or by January 2005.
On November 7, 2003, the Arbitration Panel delivered an inconclusive decision on the Termination case filed by Maynilad. The Panel did not find either party at fault, ruled that there is no cause for termination and therefore, the concession has to continue. To resolve what is obviously an internal problem in the relationship between MWSS and Maynilad, the Panel ordered the parties to seek an extra-judicial solution. However, the Panel permitted the draw on the US0 million Performance Bond and this forced Maynilad to file a petition for corporate rehabilitation.
Maynilads difficulties have been well publicized. It is public knowledge that the IFC or International Finance Corporation was the Financial Advisor for the water service privatization conducted in 1996. In an article written by Mr. Vipul Bhagat and published on May 17, 2004, the IFC acknowledged that two factors exacerbated and caused severe difficulties for Maynilad:
(1) the uneven distribution of debt where Maynilad assumed 90% of the MWSS debt or US0 million while Manila Water assumed only 10% or US million, and
(2) the subsequent peso devaluation of more than 100% which IFC did not anticipate and did not provide for, resulting in an insufficient mechanism for tariff adjustments.
MWSS and its counsel, in the April briefing conducted for the Senate Committee on Government Corporations and Public Enterprises chaired by Senator John Osmena, acknowledged these factors as unfair to Maynilad. In the words of Senator Osmena, it is unfair to the poor customers of Maynilad in Tondo, who because of this unfair debt burden, are made to subsidize the rich Makati customers of Manila Water.
The Arbitration Panels recommendation for the parties to seek an extra-judicial settlement is a welcome opportunity for the government to correct the flaw in Maynilads concession contract and save the water privatization.
The Compromise Plan entered into on March 17, 2004 and contained in Amendment No. 2 to the Concession Agreement, aims to address these issues. The Plan was agreed to by Maynilad, its shareholders, MWSS and majority of the Maynilad creditors. It has been submitted to the Regional Trial Court of Quezon City as the revised Rehabilitation Plan of Maynilad. All the stakeholders share in the pain, the only objective being to ensure uninterrupted water service to Maynilad customers. Key points of the Plan are as follows:
First, Benpres will write off all of its US million equity in Maynilad and gives up management control. In exchange, Benpres will be relieved of all its guarantees. Second, MWSS converts approximately 71% of the unpaid concession fees into 63% of equity. The balance will be paid upfront. Third, there will be a partial draw of US million on the performance bond and all bank loans will be restructured.
The Quezon City RTC is handling the rehabilitation case and creditors will have to officially approve the Plan. On the governments part, certain government agencies are now reviewing the Plan for the needed approvals. We trust we will find resolution of this issue within the next two or three months.
At this juncture, I would like to talk briefly about the corporate initiatives we are implementing in the Lopez Group.
In the mid-90s, the attainment of ISO certification was identified as a means of meeting international standards, thereby enhancing competitiveness. ISO or the International Organization for Standardization is the worlds largest developer of quality standards. These standards contribute to making the development, manufacture, and supply of products and services more efficient, safer and cleaner.
In 2003, your corporation, Benpres, obtained ISO 9000 certification for its quality management system. This means that processes are now in place to ensure that Benpres is on the road to continuous improvement, in terms of meeting the requirements of its stakeholders and eventually to profitability.
Benpres became only the second Filipino-owned holding company to have itself certified against the ISO 9000 standards. The first one was affiliate First Holdings, which obtained its ISO certificate in 2002. Likewise, all the subsidiaries of First Holdings, about 10 in number, are also ISO-certified. In the pipeline for the ISO challenge are BayanTel and ABS-CBN.
In addition to the ISO effort, under an innovative and comprehensive program being implemented group-wide, Benpres has implemented an ESH or environmental safety and health program to improve the working environment of its staff and ensure compliance with occupational safety and health standards.
I am also happy to report the incorporation of the Lopez Group Foundation to formally coordinate the multitude of CSR or corporate social responsibility projects being undertaken by our operating companies. Through the years since my fathers time, each company in the Lopez Group has pursued CSR programs of their own without regard what the other companies in the group were doing. It is only now when we see them put together for the first time that even I am impressed, if not awed, at the size, wide diversity and scope of these programs, some of which date back to my fathers time because it was his pronounced business philosophy articulated in the early 1960s that made the Lopez Group take the high road to corporate social responsibility in a big way. Thus today, we are involved in education and culture, environment, health, the child, community development, microfinance, workplace concerns, and networking.
Mere enumeration of the CSR sectors will not impress on you the varied undertakings being pursued at different levels of the group. Let me, therefore, mention a few CSR pursuits - the Meralco Cotton Hospital and cultural theater in which we are having this meeting, the AIM School of Management, the donation of the Ateneo Rockwell lot, the priceless Filipiniana book and painting collections at the Lopez Museum which my father put together and which is today open to the public for viewing; the La Mesa watershed reforestation, Clean Air Act advocacy, Bantay Bata and Childrens Villageall of the ABS-CBN Foundation, Knowledge Channel on SKYCable, biodiversity conservation in cooperation with Conservation International, the Meralco electrification program of depressed urban and also rural areas, the Maynilad Bayan Tubig program, billion-peso cumulative microfinance lending through ABS-CBN Bayan Foundation, and the Lopez and MMLDC training centers in Antipolo, and active participation and yearly donations to Philippine Business for Social Progress or PBSP by First Holdings.
Yet, despite this wide range of CSR activities, the Group is still being accused by some segments of media as well as politicians and even one Catholic bishop who is now retired, of corporate greed. It is time that we work to make sure the impact of our CSR activities is felt in the communities we serve and known to all our shareholders and friends and foes alike,
This is why, and also guided by the recommendations of the Tuck Business School of Dartmouth College, which studied the Lopez Group CSR program two years ago, we have organized the Lopez Group Foundation. The whole idea is effective coordination and better identification of our collective CSR work with the Lopez Group of Companies.
Aside from this, it is going to be our thrust to make sure that social responsibility is made central to our business and not just an add-on to be managed by the public relations staff. In other words, our line managers will think of CSR in terms of a more strategic framework by looking at our companies' overall impacts and relationships with different customers in the communities within which we operate.
It is important to note that we are undertaking these corporate initiatives amid continuing financial difficulties. But we believe that the march to excellence and corporate social responsibility should not be delayed. I cannot over-emphasize the relentless need for improving productivity, innovation and motivation and good corporate citizenship as prerequisites for continued competitiveness.
We cannot wait for the good times, or we may find ourselves surviving the bad times only to face more ill fortune in the future. It is imperative to start now as the global economy dictates the need for greater competitiveness in the search for both customers and investment funds.
Overall, I must say, there is still a much work to be done before we can achieve the turnaround we set out to do four years ago. Our major and immediate strategic focus is on the resolution of the Maynilad issue and the completion of Benpress debt restructuring.
Together with you, our shareholders and staff members, your board and management remain committed to see this project through.
We trust that the essential services we provide our customers will be rewarded with patronage and loyalty. More than that, we believe that the work we do for the development and progress of our country is the kind of work any Filipino can be proud of. Thank you and a good morning to all of you.