Fellow Stockholders and Staff-members, Friends and Other Stakeholders of First Philippine Holdings Corporation, Ladies and Gentlemen:
Good Afternoon and welcome to this, our 43nd Annual Stockholders' Meeting. I trust that all of you have received a copy of our Annual Report for the operating year ended December 31, 2004. The report will provide in depth support to the aspects of our corporation's performance that your President, Elpidio L. Ibanez, and I will be discussing this afternoon. I do realize, however, that with every passing year, annual reports make heavier and heavier reading as their complexity tracks that of the evolving accounting and corporate governance standards. Don't let that worry you. Your Directors, your executive officers, many of whom are here with us, and I will gladly answer any questions you might have on any aspect of our business conduct or performance once we have dispensed with the formal remarks and rituals of our annual meeting.
Permit me, then, to go straight into the meat of my report to you by describing the highlights of our operating year 2004:
1. The first highlight has to do with our income performance. We recorded the highest consolidated operating results in our 43-year history. Consolidated revenues reached P39.9 Billion, slightly higher than the P38.4 Billion result recorded in 2003, while Income From Operations reached P9.73 Billion, again slightly higher than the previous year's result of P9.57 Billion. For these record aggregates, we continued to lean heavily on the performance of our power generating business, which contributed over 90% of the revenues and operating income captured from our subsidiaries.
Net Income fell to P3.3 Billion from P3.84 Billion the previous year for one simple reason. Meralco, whom we account for as an associated company, opted, for reasons of accounting conservatism, to provide for potential losses that might arise from the Court of Appeal's decision to set aside the Energy Regulatory Commission's approval of its unbundled rates last May 30, 2003. The Court of Appeals decision is currently on appeal with the Supreme Court, and as indicated in the footnotes to our audited financials, Meralco's external counsels opine that both Meralco and the Energy Regulatory Commission have raised valid and compelling arguments that could justify the setting aside of the Court of Appeals decision. We shall see. Pending that decision, however, Meralco has provided for a possible loss of P9.8 Billion and a related tax effect of P3.1 Billion. For our part, we have provided for our share of the potential losses, net of tax effect and minority interests, in the amount of P1.18 Billion. If the final decision goes Meralco's way, then we will restore this provision to our net income. Without this provision, our net income for 2004 would have reached P4.5 billion.
2. The second highlight was the P1.00 per common share cash dividend that we paid to stockholders of record as of December 3, 2004. This dividend represents a quantum jump over what we have been able to pay out in the past and it is a dividend we feel we can sustain. Nevertheless, future dividend policy will always seek a balance between your corporation's twin objectives of providing adequate internally-generated funds for its growth, as well as meeting reasonable dividend yields expected by its stockholders. In this light, we aim to attract the right kind of stockholders who will stay and profit with us over the long haul.
3. Third, we completed repayment of the remaining balance of our peso-denominated long-term commercial paper and refinanced the Million balance of our debt for a longer grace and repayment period.More recently, we successfully arranged a new, Million term facility with the Standard Bank. This facility will augment our funding resources for any upcoming investment opportunities or contingencies.
4. Fourth, early into 2005, we completed the modernization of the North Luzon Expressway, and assumed control from PNCC and started its commercial operation on February 10, 2005.This is for a concession period of 25 years with a new toll rate structure. The expressway project represents what we can accomplish as we leverage on the many synergies and capabilities build up from our other core businesses like power. The development and management of tollways in the Philippines is emerging as another solid contributor to your company's future growth.
As we have done in the past, I will now concentrate my report on our principal business intentions moving forward, while Mr. Ibanez will provide you more detail on the operating and financial results of our businesses for the period under review.
As I mentioned just a while ago, our power generation business continues to be our principal contributor of revenues and profit. Our power plants, principally Sta. Rita and San Lorenzo, have performed efficiently, reliably and at higher output rates as they are more regularly dispatched at or even higher than the Minimum Economic Quantity or MEQ rate of 83%. In the past few months, our 2 power plants have been averaging 85 dispatched rate. According to the Department of Energy, demand will progressively rise and there are no significant additions currently contemplated to the Luzon grid's generating capacity. Then again, National Power Corporation is now selling power to utilities like Meralco at closer to its true cost of generating power, as opposed to the highly subsidized rates prevailing up to November 2004. Hence, Meralco now visibly sources power from its independent power producers at cheaper than it can source from Napocor. The Sta. Rita and San Lorenzo plants, with their combined capacity of 1,500 megawatts, are IPP's of Meralco.
The false economies of relying on taxpayers' money to subsidize electricity rates has brought the country to the brink of fiscal crisis and we are now paying the price in the form of higher taxes. I trust that this lesson is not lost on our policy-makers so that we cease relying on populist mechanisms that ultimately boomerang against public interest.
The debate continues to rage on when, precisely, we are likely to hit our next power crisis. As the DOE has indicated, if no new capacity is built soon, and it takes four to five years to build new capacity, we will reach a crisis point sometime in the next few years. Of course, we would prefer not to get into a crisis at all, and First Gen is prepared to play its part in ensuring that this does not happen.
We have started to participate in the privatization of the National Power Corporation's more attractive generating assets and have also looked at opportunities to acquire other privately-owned capacity, as well as invest in new greenfield capacity. It is for this reason that First Gen has obtained a pre-effective clearance from the SEC for a P3.0 Billion peso bond issue.
The power industry requires substantial new investment. Problems persist, however, with regards to the investment climate prevailing in our country, particularly for the power industry. If the country is to attract private capital into the power sector, it must be ready to expose the true cost of providing a basic service like electricity, to consumers. True, higher prices are painful, but they also send reliable signals to conserve and to invest more. When market pricing mechanisms are interfered with, and subsidies and cross-subsidies created, without regard to their sustainability or to their detrimental effect on the country's fiscal health and on the business and investment climate, we often pay a heavier price. You cannot ignore the law of supply and demand without risking dire consequences. For more than two years, the price of electricity was subsidized by caps imposed on how much Napocor could charge for producing it. We are now paying for those subsidies with an increase in the rate of value added taxes we pay for anything we purchase and consume. I wonder, however, if those who benefited most from the artificially cheaper electricity will now bear a proportionate burden of the increase in taxation. I think not.
Which brings me to the subject of Meralco. The various adverse rulings on its rate increase issues means that Meralco has not been granted a meaningful rate increase since 1990. If you recall, that was when the peso-dollar exchange rate was still in the twenties and the price of a liter of gasoline in the teens. Maintenance and operating costs have obviously increased significantly over the past fifteen years, and to earn a decent return on its operations, Meralco should be entitled to pass the added costs of doing business to its consumers. Well, it has not been allowed to and, as a result, Meralco today operates in serious financial difficulty and has had to undergo financial restructuring with its creditors last year. Yet, despite its many handicaps, Meralco continues to perform admirably. It continues to break its own system efficiency and reliability records, defined in terms of the number and duration of outages. I congratulate Meralco's employees for performing so admirably under what I would consider a deplorable regulatory state of affairs.
If there is a positive side to the current situation, it is that First Holdings continues to generate a relatively high net income in spite of the problems that have beset Meralco. As in most things in life, a market condition swings in a pendulum manner. I believe that a weak Meralco serves no one's best interests. If Napocor's privatization is to be successful, existing and future generators will require the support of offtake agreements from strong distributors. At the risk of oversimplifying the state of the power industry, a weak Meralco will almost guarantee that a power crisis will occur. A strong Meralco may help us avert one. A strong Meralco, in which we have an effective 17.7% ownership interest, will also contribute significantly to higher revenues and profits for us, as it once did.
Although power generation will continue to be the focus of our business, over the past few years, we have successfully parlayed our strengths and capabilities in the power business into what is emerging as a second core contributor of revenues and income, namely, tollroad development and operation. Last February 10, our affiliate company, the Manila North Tollways Corporation, completed a two-year rehabilitation and modernization of the North Luzon Expressway, or NLE, at an investment of $ 371 Million. This was the country's most significant investment in transport infrastructure in past decades.
Today, the NLE is a world-class, 83.7 kilometer multilane expressway designed and rebuilt to provide the safest, most efficient and most comfortable motoring experience in the country. End to end, it takes an hour, often less, to traverse. It was completed on budget, and within the deadline set by government. We started operating it in February, and thus far, we have met all our usage expectations. Initially, some traffic diverted to alternative roads such as MacArthur Highway because of the increase in toll rates. However, over the past two months, traffic volumes have gradually recovered .
The condition of the NLE today represents such an improvement over its prior state that we have had to launch a safety campaign to prevent users from over-speeding and meeting accidents. This campaign includes the distribution of handbooks on proper and safe driving habits, and we have also tightened up the enforcement of regulations against over-speeding, overweight vehicles and improperly maintained and equipped vehicles.
More significantly, the revised toll rate structure has held, although as expected, there has been muted complaint about the significant increase in the toll rate structure and the fact that it comes when all other costs are rising. It should be emphasized, however, that for the better part of thirty years, tolls for the NLE hardly moved from the opening rates set in the 1960's. Today, at approximately P2.46 per kilometer for light or Class 1 vehicles, we have a toll rate that enables us to successfully modernize the NLE, operate it to the highest international standards of safety and driving comfort, and equally important, maintain it in virtually brand-new condition over the next 20 years so that there is no deterioration in the standard of service. Yet, kilometer for kilometer, this toll rate is significantly lower than that charged for the at-grade segments of the South Luzon Expressway. South Luzon charges P4.00 per kilometer as against our P2.46 for class 1 vehicles.
Looking forward, as the NLE reaches traffic saturation levels, we would have to figure out how to build new capacity within the constraints imposed by available rights of way. This may mean a second alignment east of the present expressway. It would also be logical to explore its extension northward into Tarlac and Pangasinan. More immediately, however, we have expressed interest, and are prepared to bid, for the operation and maintenance contract for the Subic-Clark Expressway that the BCDA is poised to construct with the aid of bilateral funding. You may recall that we built an 8-kilometer segment running from Tipo to inside the Subic special economic zone some eight years ago and we continue to operate and maintain that tollroad.
Again, our intent will be to leverage on the strengths built from our involvement in the North Luzon Expressway and to parlay these into a wider, seamless first-rate motoring experience for the riding public, providing them superior levels of service and a value proposition they have long deserved.
Beyond power generation and tollroads which have become the core segments of our business by sheer virtue of their size, we continue to run our other businesses for profit and growth, and we continue to aspire for their evolution into core businesses. On the whole, they continue to be successful and they continue to be valuable contributors to our revenues and profits.
In 2004, we gladly opted to increase dividend payout to P1.00 and our records indicate that it was the first time the Corporation was able to pay an annual dividend of as much as P1.00 per share since the year 1982. Your Directors felt that it was appropriate to begin rewarding you, our stockholders, for your faith and support of our business and investment programs. This is a dividend rate that we feel our operating results and cash flows can currently sustain. As our core businesses are able to repay their project debts, then it may be possible to enhance the dividend. In any event, as I mentioned at the start of my address, dividend policy will always consider what we regard to be a proper balance between stockholder expectations, on the one hand, and the prudent stewardship of the business and its financial condition, on the other. We would like to be able to attract loyal stockholders who will stay with us over the long term, and it is the expectations of this type of stockholder that we will strive to meet, in terms of enhancing value through dividends, as well as through the appreciation of the market value of their investment.
I believe that, today, it is in the best interests of everyone -- of you, our stockholders; of the Lopez Family, also a major and controlling stockholder; of our employees and other stakeholders; and of the other Lopez businesses and their stakeholders -- that First Holdings remain a strong, dynamic, growing and profitable enterprise, managed prudently for stable, long-term growth, able to compete in any market, local or international. This company cannot stand still and dwell on its present success. Like everything else in life, it must change and, therefore, my job and that of your Directors and executives is to ensure that it changes always for the better.
As I have earlier discussed, part of our challenge will consist in leveraging on the strengths of our core businesses to further expand those businesses to dominant market positions. Another part of our challenge will be to ensure that our business development pipeline is populated with businesses that have the potential to become our core businesses of the future. Those choices will rest on a careful examination of our own key strengths and capabilities. As I have also noted, a third part of our challenge will be to meet stakeholder expectations so that they stay loyal and supportive of the Corporation. And finally, the fourth part of our challenge is to ensure that our businesses are efficient, competitive and responsive to the needs of the markets and societies they serve.
In this regard, as I have emphasized in our previous annual meetings, we have placed great importance in training and strengthening ourselves for long-term viability and competitiveness, much like a champion athlete trains for major competitions. One of the demands of competing with other companies is the ability to measure oneself against the best in the world. This is the rationale for selecting standards that are globally recognized and accepted.
One such standard is the ISO. By 2002, First Holdings had the distinction of being the first Filipino-owned conglomerate to have its parent company and all its subsidiaries and affiliates certified against the ISO 9000 standards. We have also adopted the ISO 14000 and OHSAS 18000 standards on Environment and Occupational Health and Safety Management, eventually achieving certification against these as well. To date, 11 First Holdings companies have achieved triple ISO certification, better known as the IMS certification.
The second global standard we have implemented is the Environment, Safety & Health System adopted from the multinational business association, the Conference Board. Today, our ESH experts are fielded to various companies under a Network Assistance Program. Four of our experts have been presentors in international fora and one from First Gas has received the Labor Secretary's Award for Gawad Kalusugan at Kaligtasan. Two of our companies First Balfour and First Sumiden have surpassed 15 million and 10 million man-hours respectively with no lost time accidents mark and continue to maintain that spotless record.
The fact that we are into manufacturing, oil pipeline transport and energy businesses, we are very keen in insuring that the Group's ESH systems are up to international standards.
While ISO and ESH seem an ideal entry point to performance excellence, we do not stop there. We have pursued other programs that can accelerate our progress toward business excellence. These additional programs are Six Sigma and Malcolm Baldrige National Quality Awards in the U.S. The latter is the dominant reference model for national business excellence awards worldwide. The award was quickly coined our Oscar Award by our Business Excellence Team. No company has yet won this ultimate award, but striving for it imposes on us the disciplined, systematic approach to improvement; one that allows us to compare ourselves directly with the best performing companies in the world.
The closest we have to an Oscar awardee is First Sumiden Circuits, Inc. who was conferred the Level II Recognition of the Philippine Quality Award for Proficiency in Quality Management by the Dept. of Trade & Industry in February of this year at ceremonies held in Malacanang. First Sumiden has set its sights on winning the top PQA Award, which is the Philippine equivalent to the Malcolm Baldrige Award, two years from now.
Before I end my remarks, I would like to thank all of you for joining us today for our annual meeting and for being faithful, loyal and supportive stockholders. Although we do not have the opportunity to get together often, this forum at least provides me and my colleagues at the head table with the chance to reaffirm our commitment to serve you as the managers and custodians of your investment in the best way we are capable of. Our best reward is your abiding faith and support.
Again, thank you and good afternoon.