Lopez Holdings

 

Fellow Stockholders and Staff-Members, Friends and Other Stakeholders of First Philippine Holdings Corporation, Ladies and Gentlemen:

Good afternoon to all of you as I welcome you to this, our 46th Annual Stockholders’ Meeting. Has it been that long already? It has been forty seven years since the Corporation was established in 1961, and in 3 years we will be 50 years old and having our Golden 50th annual stockholders’ meeting in 2012. Although sometime this year, we will also be celebrating the eightieth anniversary of the founding of the business partnership between the Lopez brothers, Eugenio and Fernando, that eventually led to the establishment of First Holdings, ABS-CBN and many other companies in the Lopez group. But has it already been 22 years since I stood before you in 1986 after returning to the management of First Holdings from the hiatus of the martial law years? Time really flies.

Well, to the business at hand.

As your Chairman and Chief Executive, it is my duty to report to you on the important strategic considerations and actions that we have taken during the year under review, and that we continue to take today, as well as on other matters that are of importance to us. This, I will do this afternoon. Mr. Ibañez will then render a report on the key financial and operating aspects of our performance. Finally, members of your Board of Directors and management are here with me in full force to assist me in answering any questions you may have in regard to the Corporation’s financial and operating results, or to the conduct of its business. I only ask that you hold back on your questions till we have formally addressed the various items in our meeting agenda in proper sequence.

Before I make my report, however, I need not draw your attention to the fact that we are again under assault, by some who have not made a secret of their hostility and their intentions, but also by many other faceless adversaries who lurk in the shadows, not wanting to come out in the open where they can be recognized. The attacks have been vicious, both those that have come openly, and those that have come under cover of anonymity. Most have been against Meralco, but some have also been against our other corporations. Ultimately, they are against the Lopez family and our family’s ownership and management stake in our businesses. Partly in reprisal for the dogged determination shown by ABS-CBN in its crusade to expose the truth of our everyday lives, the good as well as the rotten. And partly because it is convenient to use Meralco as a diversionary scapegoat in order to deflect attention away from the many problems and issues that our people face, and on which their leaders have failed them utterly.

What is happening today is not something that is new to me, nor to the Lopez family. It happens with predictable regularity in various degrees of intensity whenever there are things that are greatly wrong in the country. It first happened in the years immediately before martial law, when Meralco was also the principal target and when we were portrayed as the oligarchic enemies of society. It is happening again today. We survived the martial law dictatorship. We will survive this one too.

I have chosen this forum to respond to a couple of these attacks because our corporations are the ones standing accused, but accused only with innuendo, and not with evidence. To our accusers, I offer our response – the truth – and I also offer evidence in support of the truth.

Attack Number One. Our accusers say that we are guilty of unfair self-dealing when Philippine Electric Corporation, our industrial and electric transformer manufacturer, sells transformers to Meralco. To them, I say:


• Philec dominates the local market for utility and industrial transformers because it offers the lowest price, the highest quality and the best value-added services that no manufacturer, domestic or foreign, can match. This is why Meralco buys from Philec. But not just Meralco. Last year, the Aboitiz group bought more than 70% of their requirements from Philec. Philec supplies more than 50% of the total domestic market outside of Meralco, selling, not just to the Aboitiz power companies, but also to other private utilities like CEPALCO, Angeles Electric and Dagupan Electric, most of the electrical cooperatives, property developers like Ayala Land, and large projects like St. Luke’s Hospital. Philec provides 100% of the transformer requirements of American Power Conversion, a manufacturer and exporter of large industrial uninterrupted power supply apparatus. Cooper, a global transformer manufacturer, purchases some transformers manufactured by Philec and sells these transformers overseas under the Cooper name.
• Does Meralco buy from other transformer manufacturers? Most certainly, yes, it does. In fact, every year, Meralco invites large global manufacturers like Cooper, Howard, General Electric and Asea Brown Boveri, as well as Philec, to submit sealed bids for Meralco’s distribution transformer requirements. But the fact is, Philec often beats these competitors on technology and value. Why technology? Because Meralco requires transformers of a higher standard than can be found off the shelf and many manufacturers cannot produce to these standards in a competitive manner. For example, Meralco has been shifting to low-loss amorphous core transformers. Cooper has no such product. Philec also offers just-in-time delivery and immediate spare parts availability for quick repair and replenishment, particularly during calamities like typhoons and earthquakes. Global manufacturers cannot maintain such inventories in the Philippines and still remain competitive.
• Philec has supplied Meralco, and the entire Philippine market, with transformers for some 40 years, including those years when Meralco was under the control of the Marcos dictatorship. Philec was established in order to produce transformers for the local market, because prior to that, the market had to rely exclusively on imported transformers for its needs. Provided it sells transformers to Meralco, or to any other utility or industrial user, in a transparent, competitive manner, I find nothing wrong with the way Philec operates. We are proud to own Philec. We are proud of the fact that Philec is a competitive manufacturer. We are proud of the fact that Philec provides employment to Filipinos. We are proud of the fact that our transformers are made by Filipinos. And we are also proud of the fact that Meralco is able to buy Filipino transformers under competitive bidding. What do our detractors want Meralco to do? Depend on imports? Like we depend on imports for our rice and most of our gasoline?

Attack Number Two. Our accusers say that First Gas, which owns and operates the Santa Rita and San Lorenzo plants, made ghost power deliveries to Meralco and charged Meralco for power that was not delivered. This was answered last Friday in ads ran by First Gas. To our accusers, I reprise portions of that reply:


• When First Gas charged Meralco for capacity fees for 1,000 megawatts during the second half of the year 2000, this was because 1,000 megawatts was available for dispatch. Did First Gas request to be dispatched higher? The answer is yes and there is official documentation to support this. Was First Gas dispatched higher? The answer is no. And why was this? Because Napocor’s transmission line projects, the ones they had committed would be ready by the time the First Gas plants were ready to operate, were in fact delayed by five years. Yes, five whole years! Was this incompetence on the part of Napocor? Or was it malice? You be the judge.
• Was it fair for Meralco to have to pay First Gas for capacity that was available but could not be dispatched through no fault of either Meralco or First Gas? Well, unfortunately, yes. This was stipulated in the take or pay agreement between the parties similar to those entered into by NPC with its IPPs and this was the basis by which the First Gas plants were financed and constructed. A default by Meralco would have led to a default by First Gas and this, in turn, could also have led to a default on the set of agreements and covenants by which the Camago-Malampaya gas fields were developed and made commercial. Incidentally, the First Gas plants are not alone in enjoying take-or-pay contracts. Most, if not all, of the independent power producers who have contracted to sell their power to Napocor also enjoy take-or-pay contracts. The only difference is, they also enjoy a government guarantee of Napocor’s take-or-pay commitment, something that First Gas cannot have from Meralco. Are take-or-pay undertakings necessary? Well, the answer is yes. Without them, no power plants can today be financed and constructed because there is no investor who would be prepared to finance the construction of a power plant purely with equity.

As I stated before I started addressing these accusations, everything I have said is based on hard documentary evidence. We are prepared to provide copies of such evidence to those who are legitimately interested in establishing the truth. I warn you, however. Plowing through evidence can be tedious and tiresome. Its sole reward is the truth. And often, the truth does not make for good sound bytes.

And now, I would like to shift gears and attend to my report proper.

2007 provided better definition to the long-term investment and business strategy that we have pursued since about 1990. This is true of the manner in which our earnings were generated. This is true of the manner in which a number of key investment decisions were made. And this is true of the manner in which our organizational structure has evolved.
Consider our earnings performance, for example. For 2007, net income attributable to equity holders of the Corporation was P4.475 Billion, of which P4.431 Billion was recurring income. This is the net income level we might now regard as “normal” or “natural” to our business and it is the income level that we shall aspire to grow with every passing year. In contrast, net income attributable to equity holders of the Corporation in 2006 was P8.754 Billion, but only P2.786 Billion of this was recurring, while the larger share of P5.968 came from one-time items, principally reversal of losses of Meralco and gain on dilution from the listing of First Gen.

Our P4.475 Billion in net income came from what we can now consider our four principal businesses in what we might also consider to be our four core competencies, namely: power generation, power distribution, infrastructure and manufacturing. Let me say a few words about our strategic intent on each of these businesses.

Power Generation
First Gen Corporation, in which we have a 66.2% ownership interest, is now the largest Filipino-owned and controlled independent power provider in the Philippines, with a total gross installed capacity of 2,582.4 megawatts, including 743.8 megawatts from its most recent acquisition, PNOC-EDC.

The acquisition of a 60% effective interest in PNOC-EDC has had a major impact on our portfolio risk and potential.

EDC mitigates the risk that we carry in regard to market, geography and fuel source. Until 2006, most of the power we generated went to Meralco. Although we have Napocor as customer for the Bauang diesel plant, this plant is predominantly on standby and is only dispatched when there is a shortfall in the grid. With the addition of Pantabangan Masiway and Agusan, both hydroelectric plants, in 2007, and with the addition of PNOC-EDC’s capacity this year, however, we now count Napocor, WESM and other distribution utilities among the markets that we serve.

In 2007, with the minor exception of Agusan’s 1.6 megawatts, all our capacity was concentrated in Luzon. The addition of PNOC-EDC’s capacity gives us a new, significant presence in the Visayas and Mindanao, but more important, provides us the potential and opportunity to develop new power plants in those regions around geothermal fields that have been proven viable, but that are still untapped. PNOC-EDC also provides us the opportunity to participate in the development of geothermal power elsewhere in the region, with Indonesia providing the most immediate possibilities. Fully 98% of First Gen’s portfolio is contracted under long-term power off-take agreements.

Our BOT agreement with Napocor for the Bauang diesel power plant expires in 2010, at which time ownership of the plant will pass to Napocor. Once this happens, all of our generating capacity will be based on what are regarded as clean or renewable fuel sources. This has great potential impact to our business. If the Clean Air Act is ever strictly enforced, and there is mounting environmental pressure for it to be strictly enforced, the cost of treating emissions will add significantly to the cost of other power producers who rely on non-environmentally friendly fuel sources. None of our plants fall into that category. And if the purchase and sale of carbon credits is tightened, and there is rapidly mounting pressure all over the world to impose a higher financial penalty on those who generate greenhouse gasses, then our generating plants will be even more competitive in the open market.

Within our resource capabilities over time, we intend to continue to grow our power generating business, most particularly in clean and renewable fuels, where opportunities present themselves, either on greenfield projects, or on plants being privatized by government.

Power Distribution
Manila Electric Company, or “Meralco”, in which we now have a 33.4% ownership stake, is our major investment in power distribution. In 2007, we doubled our stake in Meralco and this represented the largest investment made at the level of the parent company.

We continue to believe in the underlying potential of Meralco, by far the country’s largest utility, to serve its customers’ needs, and to do so as an efficiently-run, privately-owned enterprise, generating a good return on capital within the bounds permitted by law. However, Meralco as a company, because of the vital function it serves for a large base of consumers, is very politicized and is an attractive and frequent target for those wishing to acquire or embellish a populist image. Meralco is currently defending itself against another such attack, and I will come back to say a few words about this towards the end of my remarks.

Infrastructure
We hold a 50.9% ownership interest in First Philippine Infrastructure, which, in turn, houses our investments in both the concession and operating and maintenance companies of the North Luzon Expressway. The 84-kilometer NLE was, in 2007, widely recognized to be the most modern, after its reconstruction, and the most efficiently-run toll highway in the country. You only need to drive the NLE and its southern counterpart, the SLEX, to recognize the great disparity in level and quality of service offered to our motoring consumers. An average of approximately 146,600 vehicles currently use the NLEX every day, generating an average daily revenue for the concession of P15 Million.

A few weeks, ago, however, the 94-kilometer Subic-Clark-Tarlac Expressway displaced NLEX as the country’s most modern toll highway. Brand new, and built under the sponsorship of the Bases Conversion Development Authority or “BCDA”, the SCTEX in linked with the NLEX and provided seamless access, not only to the international airport at Clark, but to the revitalized growth hubs of Subic and Bataan, on the one hand, and Tarlac, on the other. Our operations and maintenance company, TMC, has been awarded the short-term concession to operate and maintain SCTEX. We are confident that, by proving that it is the only company that can operate and maintain this new toll highway to the exacting high standard established by NLEX, TMC will win the longer term operation and maintenance contract for SCTEX.

Our construction arm, First Balfour, Inc., is a major participant in a consortium called Private Infrastructure Development Corporation that has been awarded the concession to develop the Tarlac-La Union Toll Expressway Project, subject to traffic viability and project bankability tests. To be implemented as a build-transfer-operate concession for an initial period of 35 years, this 88.6-kilometer long project will extend the expressway system north from La Paz, Tarlac, where the combined NLEX and SCTEX now reaches, all the way to Rosario, La Union, where the two main roads to Baguio begin. The project is estimated to cost P15 Billion initially, and will take a total of five years to build, in stages. First Balfour and D.M. Consunji, Inc. will be the lead members of the PIDC consortium.

First Balfour, again in joint venture with D.M. Consunji, has also just recently won three of four bid packages for the contract to extend LRT 1 from its current northern terminal at Monumento, the six or so kilometers along EDSA, to link it with the MRT at the EDSA North Mall station. The joint venture is also confident that it will win the fourth bid package. This project, ultimately valued at approximately P5.0 Billion, will take two years to complete.

Understanding full well that we are one of the very few Philippine corporations with the capability and track record to design, develop, contract, and finance the construction of large-scale infrastructure projects, and thereafter operate and maintain the infrastructure, we are committed to aggressively seek out opportunities to expand this side of our business. Projects like the NLEX and Tarlac-La Union project, and even the extension of LRT 1, are complex, mammoth undertakings, so we will often be partnered with other large and capable companies whose business philosophies and values are compatible with ours. I believe that in the long run, this also represents sound business practice and we welcome such partnering opportunities.

Manufacturing
We regard manufacturing to be our fourth core competence, after power generation, power distribution and infrastructure. It is certainly one of our older businesses. Philippine Electric Corporation, our manufacturer of industrial and utility transformers, has been in operation for close to forty years. First Sumiden Circuits, Inc, our joint venture with Sumitomo Electric of Japan for the manufacture of flexible printed electronic circuitry, has been in operation for ten years now and is poised to increase its capacity to almost double of what it is today.

I, for one, do not accept the suggestion that the Philippines cannot be competitive in manufacturing. It is true that the bulwarks of Philippine manufacturing industry as we knew it in the fifties and sixties have largely fallen to overseas competition, as in the case of shoe manufacture, textiles and garments and consumer appliances. It is also true that our appalling record as a country to provide modern infrastructure to rival that of our neighboring countries has made it difficult for local manufacturers to compete on even terms. That is part of the reason why First Holdings is at the forefront of the development of better infrastructure such as reliable, clean electric power and good roads. But for certain types of manufacturing activities, we remain competitive. This is why Texas Instruments has invested heavily in expanding its Philippine operations, and this is why, quietly, many global manufacturers who already have plants in the Philippines have also been expanding capacity.

I would also admit that it has been difficult to promote manufacturing as one of our core businesses. Manufacturing, purely to satisfy local demand for a particular type of manufactured product, will very rarely provide a scale of business that will measure up to our investments in power and infrastructure. We are simply too small a market. Therefore, to grow our manufacturing to core business proportions, which I will broadly describe as P5.0 Billion in annual revenues and P1.0 Billion in annual net income, we have to look for opportunities to manufacture for a global market. Lately, we have found one such opportunity in partnership with Sun Power, a global leader in the manufacture of high-efficiency solar electric panels.

During the last quarter of 2007, we formed First Philec Solar Corporation in joint venture with Sun Power. This company will perform the delicate job of slicing the silicone wafers that Sun Power uses for the manufacture of its solar panels in its Philippine plants, as well as in other plants across the region. The company will also be able to perform the same delicate job of slicing silicone wafers for the semiconductor industry, since the processes are very similar and use the same basic machines. First Philec Solar Corporation will start up its operations in mid 2008 and will have the revenue potential of as much as US0 million annually in five years’ time.

It is our stated ambition and goal that in five years’ time, our manufacturing businesses should be able to contribute a combined P5.0 Billion in annual revenues and P1.0 Billion in annual income to our business portfolio.

Organizational Alignment
We have gradually been aligning our organizational set-up to reflect and support our four core businesses. The parent, First Philippine Holdings Corporation, will increasingly focus purely as a parent, managing its investment portfolio, setting the vision and long-term strategy that its businesses will take, and providing core support and control functions for better governance. Last year, we established First Philec Corporation as the intermediate holding company for our manufacturing businesses. In this role, it replicates what we have done with First Gen Corporation for power generation, and First Philippine Infrastructure for our infrastructure businesses. Meralco, being our sole major investment in power distribution, does not require the intervention of an intermediate holding company.

I will not go into the detail of describing the many initiatives we have taken, at Board and management level, to align our practice of corporate governance to what is considered best practice around the world. These are discussed in fair detail in our annual report. But your directors and managers are, individually and collectively, ready to answer any questions you may have in this regard.

In drawing my remarks to a close, before handing the podium over to our President, Elpidio L. Ibañez , for the operating and financial summaries, I would like to say just a few more words on the recent assaults upon our companies.

The first thing I would like to emphasize is what I have already stated in an open letter to the President, published last Wednesday in our major broadsheets. Directly and indirectly, Meralco has very little to do and to say about the high cost of power. This is not because of any desire on its part to shirk its responsibilities or to duck the issue. It is just that, as a distribution utility, that portion of the retail cost of electricity accounted for by Meralco is very small compared to the portion of the cost accounted for by the producers or generators of electric power, on the one hand, and the high voltage transmission of that power. Why has the cost of electricity gone up? Why has the cost of gasoline gone higher than P50 per liter? For the same exact reason – the global price of oil has increased from an average of about US per barrel where it stayed for quite a long time up until about the time of 9/11, to close to US0 per barrel where it is now. You can flog Meralco to death – it will not alter the high cost of power.

If Meralco were generating obscene profits, then at the very least philosophically, I would have to accept the argument that it would be wrong for a company to be allowed to profit obscenely at a time when its consumers are suffering. But Meralco has not been permitted to generate obscene profits, nor even the level of return that it is permitted to earn under the law. As it is, Meralco has not received its fair share of rate increases over the past fifteen years because it has not been popular for government regulators, or should I say the head of government, to grant it the rate increases it deserves. Contrast Meralco’s earnings over the past ten years to the earnings generated by our telecommunication oligopolies. In the capitalist system, it is also not the role of private enterprise to subsidize the consumption of the less economically privileged sector of our society. For if companies are forced to underwrite these subsidies, then the system of free enterprise will collapse. Now I ask you, are we ready and able to shift to another system? And, pray, what system would we shift to?

If the government is genuinely interested in reducing the high cost of power, then I submit that it must re-examine the royalties and taxes that have been imposed on power at every stage of the process that produces electric power from the source fuel, be that fuel gas, oil, coal or other. And it must ensure the transparency and propriety, particularly in fuel purchases, of government owned and controlled power generators that still account for the large majority of the country’s power supply.

The second thing I would like to emphasize is that you can flog Meralco to death, but it will not reduce the price of gasoline, LPG and other essential fuels that people rely on for their everyday lives, and it certainly will not reduce the price and increase the supply of foodstuffs, most particularly rice. Creating a circus as a diversion and making Meralco its star performer will not solve the many other more serious problems that confront the country today.

Meralco is probably the most widely scrutinized private corporation in the country today. It is certainly one of the very few private companies that is made to submit itself to audit by the Commission on Audit or “COA”. On top of this, its every moved is scrutinized by the Energy Regulatory Commission, by public and consumer watchdog organizations, by the SEC and the Philippine Stock Exchanges, in addition to its own external auditors. Representatives of government financial institutions sit on its board. Could all of these watchdogs have been asleep on the job, as the current detractors of Meralco would suggest? I leave you to make your own conclusions.

On that note, I end my remarks. Thank you.

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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