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PROSPECTUS IS ACCURATE OR COMPLETE.

ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE AND


THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE SECURITIES OR DETERMINED IF THIS

Lopez Building, Ortigas Avenue


Pasig City 1605, Philippines
Telephone Number (632) 1622-2450
SHOULD BE REPORTED IMMEDIATELY TO THE SECURITIES AND EXCHANGE COMMISSION.

4.375% p.a. Fixed Rate Bonds Due 2020 and 4.875% p.a. Fixed Rate Bonds Due 2025
The Manila Electric Company (“Meralco” or the “Issuer” or the “Company”) is offering fixed rate bonds (the “Bonds”) with
an aggregate principal amount of up to Fifteen Billion Pesos (P15,000,000,000.00), with an overallotment option of up to
Five Billion Pesos (P5,000,000,000.00) (the “Offer”). The Bonds, with an aggregate principal amount of up to Fifteen Billion
Pesos (P 15,000,000,000.00), with an overallotment option of up to Five Billion Pesos (P5,000,000,000.00) will be
comprised of 4.375% Fixed Rate Bonds due 2020 (the “7-Year Bonds”) and 4.875% Fixed Rated Bonds due 2025, (the “12-
Year Bonds”), and shall be issued on December 12, 2013 (the “Issue Date”) or such other date as may be agreed upon by
the Issuer and the Joint Lead Underwriters.

The 7-Year Bonds shall have a term of seven (7) years from the Issue Date, with a fixed interest rate equivalent to 4.375%
p.a. Interest on the Bonds shall be payable quarterly in arrears on March, June, September and December of each year
(each of which is an “Interest Payment Date”) commencing on March 12, 2014 or the subsequent Business Day without
adjustment if such Interest Payment Date is not a Business Day. The last interest payment date shall fall on the Maturity
Date while the Bonds are outstanding (see “Description of the Bonds” – “Interest”).

The 12-Year Bonds shall have a term of twelve (12) years from the Issue Date, with a fixed interest rate equivalent to
4.875% p.a. Interest on the Bonds shall be payable quarterly in arrears on March, June, September and December of each
year (each of which is an “Interest Payment Date”) commencing on March 12, 2014 or the subsequent Business Day
without adjustment if such Interest Payment Date is not a Business Day. The last interest payment date shall fall on the
Maturity Date while the Bonds are outstanding (see “Description of the Bonds” – “Interest”).

The Bondholders of the 7-Year Bonds and the 12-Year Bonds shall each have a one-time Put Option (see “Description of
the Bonds” – “Put Options”) given on the first Interest Payment Date after the fifth (5th) year from Issue Date (the “Fifth
Year Put Option”) for the 7-Year Bonds and ten (10) years from Issue Date (the “Tenth Year Put Option”) for the 12-Year
Bonds. Unless previously purchased or cancelled, the Bonds will be redeemed at par (or 100% of face value) on their
respective Maturity Dates or as otherwise set out in “Description of the Bonds” – “Redemption and Purchase” and
“Payment in the Event of Default” sections of this Prospectus unless the Bondholders exercise the Put Options.

The date of this Prospectus is November 28, 2013.

Joint Issue Managers


BPI CAPITAL CORPORATION
FIRST METRO INVESTMENT CORPORATION

Joint Lead Underwriters


BPI CAPITAL CORPORATION
FIRST METRO INVESTMENT CORPORATION

Participating Underwriters
PHILIPPINE COMMERCIAL CAPITAL INC.
RCBC CAPITAL CORPORATION
The Bonds shall constitute the direct, unconditional, unsubordinated, and unsecured obligations of
Meralco and shall at all times rank pari passu and rateably without any preference or priority amongst
themselves and at least pari passu with all other present and future unsubordinated and unsecured
obligations of Meralco, other than obligations preferred by law. The Bonds will effectively be
subordinated in right of payment to all of Meralco’s secured debts to the extent of the value of the
assets securing such debt and all of its debt that is evidenced by a public instrument under Article
2244(14) of the Civil Code of the Philippines.

The Bonds have been rated PRS Aaa by the Philippine Rating Services Corporation (“PhilRatings”) on
November 13, 2013. The rating denotes Meralco’s strong capacity to meet its financial commitment on
the obligations. The rating is not a recommendation to buy, sell, or hold securities and may be subject to
revision, suspension, or withdrawal at any time by the rating agency concerned.

The Bonds shall be offered to the public at face value through the Joint Lead Underwriters. The
Philippine Depository & Trust Corp. (“PDTC”) will act as the Registrar and Paying Agent of the Bonds. On
the Issue Date, the Bonds will be issued in scripless form and in denominations of =P50,000 each, as a
minimum, and in integral multiples of P =10,000 thereafter, and shall be traded in denominations of
P10,000 in the secondary market. (See “Description of the Bonds” – “Transfer of Bonds”)

Meralco intends to cause the listing of the Bonds on a securities exchange licensed with the SEC and has
initiated discussions with the Philippine Dealing & Exchange Corp. ("PDEx") for this purpose. However,
there can be no assurance that such a listing will actually be achieved either before or after the Issue
Date or whether such a listing will materially affect the liquidity of the Bond on the secondary market.
Such a listing would be subject to the Company's execution of a listing agreement with PDEx that may
require the Company to make certain disclosures, undertakings and payments on an ongoing basis.

The net proceeds from the issue of the Bonds, without the overallotment option (after deduction of
fees, commissions, and expenses) are approximately P14,864,789,778.00. Assuming the overallotment
option of up to Five Billion Pesos (P5,000,000,000.00) is fully exercised, Meralco expects total net
proceeds of approximately P19,823,660,746.00 after fees, commissions, and expenses. Proceeds of the
Offer will be used by Meralco for the refinancing of a portion of its existing debt obligations, the
proceeds of which were used for capital expenditures (see “Use of Proceeds”). The Joint Lead
Underwriters will receive a fee of up to 0.30% on the underwritten principal amount of the Bonds
issued. Such fee shall be inclusive of underwriting and participation commissions (see “Plan of
Distribution”).

Unless otherwise stated, the information contained in this Prospectus relating to Meralco and its
operations have been supplied by Meralco, which hereby accepts full responsibility for the accuracy of
the same, and confirms that, having made all reasonable inquiries, to the best of its knowledge and
belief, there are no other material facts, the omission of which would make any statement in this
Prospectus misleading in any material respect. As to any other information which is made on the basis
of, or in connection with, information, data or analyses which was either provided to Meralco by its
advisers and consultants or otherwise available in the market and from any public source, Meralco
confirms that it has made all reasonable inquiries in respect of the same and have used or adopted such
information, data or analyses in good faith. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstance, create any implication that the information contained herein
is correct as of any time subsequent to the date hereof. The Joint Issue Managers and the Joint Lead
Underwriters do not make any representation, express or implied, as to the accuracy or completeness of
the materials contained herein.

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No dealer, salesperson or other person has been authorized by Meralco, the Joint Issue Managers or the
Joint Lead Underwriters to issue any advertisement or to give any information or make any
representation in connection with the Offer or sale of the Bonds other than those contained in this
Prospectus and, if issued, given or made, such advertisement, information or representation must not
be relied upon as having been authorized by Meralco, the Joint Issue Managers or the Joint Lead
Underwriters.

The contents of this Prospectus are not to be considered as legal, business, or tax advice. The Joint Issue
Managers and the Joint Lead Underwriters do not make any representation or warranty, express or
implied, as to the accuracy or completeness of the information in this Prospectus. Each person receiving
this Prospectus acknowledges that such person has not relied on the Joint Issue Managers, the Joint
Lead Underwriters or any other person in his investigation of the accuracy of such information or his
investment decision.

Each person contemplating an investment in the Bonds must make his own investigation and analysis of
the creditworthiness of Meralco and his own determination of the suitability of any such investment.
Investing in the Bonds involves certain risks. For a discussion of certain factors to be considered in
respect of an investment in the Bonds, see the section entitled “Risk Factors”.

Meralco is incorporated under the laws of the Philippines. Its principal executive offices is at the Lopez
Building, Ortigas Avenue, Pasig City, 1605, Philippines with telephone number at that address is (+632)
1622 2450.

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TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS .............................................................................................................. 2


DEFINITION OF TERMS .................................................................................................................................. 4
EXECUTIVE SUMMARY ................................................................................................................................ 19
SUMMARY OF FINANCIAL INFORMATION .................................................................................................. 21
SUMMARY OF THE OFFERING ..................................................................................................................... 23
RISK FACTORS AND OTHER CONSIDERATIONS ........................................................................................... 26
PHILIPPINE TAXATION ................................................................................................................................. 49
USE OF PROCEEDS....................................................................................................................................... 54
DETERMINATION OF OFFER PRICE.............................................................................................................. 56
PLAN OF DISTRIBUTION .............................................................................................................................. 57
DESCRIPTION OF THE BONDS ..................................................................................................................... 61
INDEPENDENT AUDITORS AND COUNSEL ................................................................................................... 86
DESCRIPTION OF BUSINESS......................................................................................................................... 87
DESCRIPTION OF PROPERTIES ................................................................................................................... 134
CERTAIN LEGAL PROCEEDINGS ................................................................................................................. 136
MARKET PRICE OF AND DIVIDENDS ON MERALCO ’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS ................................................................................................................................................... 143
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND FINANCIAL PERFORMANCE
.................................................................................................................................................................. 145
DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS .................................................................. 177
EXECUTIVE COMPENSATION ..................................................................................................................... 188
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN RECORD AND BENEFICIAL OWNERS .............. 190
DESCRIPTION OF DEBT .............................................................................................................................. 194
CORPORATE GOVERNANCE ...................................................................................................................... 196
FINANCIAL INFORMATION ........................................................................................................................ 198

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FORWARD-LOOKING STATEMENTS

This Prospectus contains forward-looking statements that are, by their nature, subject to significant
risks and uncertainties. These forward-looking statements include, without limitation, statements
relating to:
 The Company’s business and investment strategy;
 The Company’s capital expenditure plans;
 The Company’s dividend policy;
 The Company’s financial position and financial performance;
 The anticipated availability of bank and other forms of financing; and
 The industry outlook, in general.

The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “seek,” “plan,” “may,” “will,”
“would,” “could” and similar expressions, as they relate to the Company, are intended to identify a
number of these forward-looking statements. These forward-looking statements are subject to risks,
uncertainties, and assumptions, some of which are beyond the Company’s control. In addition, these
forward-looking statements reflect current views of the Company with respect to future events and
are not a guarantee of future performance. Actual results may differ materially from information
contained in the forward-looking statements as a result of a number of factors, including:
 The general economic, political and other conditions in the Philippines;
 The Company’s management’s expectations and estimates concerning its future financial
performance;
 The Company’s level of indebtedness;
 The Company’s capital expenditure program and other liquidity and capital resources
requirements;
 The size and growth of the Company’s customer base;
 Inflation in the Philippines and any devaluation of the Peso;
 Existing and future governmental regulation; and
 The risk factors discussed in this Prospectus as well as other factors beyond the Company’s
control.

The Company does not intend to update or otherwise revise the forward -looking statements in this
Prospectus, whether as a result of new information, future events or otherwise, unless material
within the purview of the Securities Regulation Code (SRC) and other applicable laws, the mandate of
which is to enforce investor protection. Because of these risks, uncertainties and assumptions, the
forward-looking events and circumstances discussed in this Prospectus might not occur in the way
the Company expects, or at all. Investors should not place undue reliance on any forward -looking
information.

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Definition of Terms

DEFINITION OF TERMS

As used in this Prospectus, the following terms shall have the meanings ascribed to them:

AAGR…………………………………………….... Average annual growth rate

Affiliate .......................................... any corporation, where Meralco has significant influence,


whether by way of ownership of at least twenty percent
(20%) of the total issued and outstanding capital stock of
such corporation, or the right to elect at least twenty
percent (20%) of the number of directors in such
corporation, or the right to influence the operation and
management of such corporation by reason of contract or
authority granted by said corporation to Meralco

AGRA .............................................. Automatic Generation Rate Adjustment

Application to Purchase .................. the document to be executed by any Person or entity


qualified to become a Bondholder

Associate ........................................ an entity, including an unincorporated entity such as a


partnership over which the investor has significant
influence and that is neither a subsidiary nor an interest
in a joint venture

Banking Day or Business Day ......... shall be used interchangeably to refer to any day other
than Saturday, Sunday, and public holiday, on which
commercial banks in Metro Manila are generally open for
business transactions

Bankruptcy .................................... with respect to a Person, (a) that such Person has (i)
made an assignment for the benefit of creditors; (ii) filed
a voluntary petition in bankruptcy; (iii) been adjudged
bankrupt, or insolvent; or had entered against such
Person an order of relief in any bankruptcy or insolvency
proceeding; (iv) filed a petition or an answer seeking for
such Person any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or
similar relief under any statute, law or regulation or filed
an answer or other pleading admitting or failing to
contest the material allegations of a petition filed against
such Person in any proceeding of such nature; or (v)
sought, consented to, or acquiesced in the appointment
of a trustee, receiver or liquidator of such Person or of all
or any substantial part of such Person’s properties; (b)
60 days have elapsed after the commencement of any
proceeding against such Person seeking reorganization,
arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any statute, law or

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Definition of Terms

regulation and such proceeding has not been dismissed;


or (c) 60 days have elapsed since the appointment
without such Person’s consent or acquiescence of a
trustee, receiver or liquidator of such Person or of all or
any substantial part of such Person’s properties and such
appointment has not been vacated or stayed or the
appointment is not vacated within 60 days after the
expiration of such stay

Beneficial Owner ........................... any person (and “Beneficial Ownership” shall mean
ownership by any person) who, directly or indirectly,
through any contract, arrangement, understanding,
relationship or otherwise, has or shares voting power,
which includes the power to vote or to direct the voting
of such security; and/or investment returns or power in
respect of any security, which includes the power to
dispose of, or to direct the disposition of, such security;
provided, however, that a person shall be deemed to
have an indirect beneficial ownership interest in any
security which is held by:

i. members of his immediate family sharing the same


household;
ii. a partnership in which he is a general partner;
iii. a corporation of which he is a controlling
shareholder; or
iv. subject to any contract, arrangement or
understanding, which gives him voting power or
investment power with respect to such securities;
provided, however, that the following persons or
institutions shall not be deemed to be beneficial
owners of securities held by them for the benefit of
third parties or in customer or fiduciary accounts in
the ordinary course of business, so long as such
securities were acquired by such persons or
institutions without the purpose or effect of
changing or influencing control of the issuer:

a. A broker dealer;
b. An investment house registered under the
Investment Houses Law;
c. A bank authorized to operate as such by the BSP;
d. An insurance company subject to the supervision
of the Office of the Insurance Commission;
e. An investment company registered under the
Investment Company Act;
f. A pension plan subject to regulation and
supervision by the BIR and/or the Securities and
Exchange Commission or relevant authority; and

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Definition of Terms

g. A group in which all of the members are persons


specified above

BIR ................................................ The Bureau of Internal Revenue

Board ............................................. The Board of Directors of the Company

Bonds ............................................ collectively, the 4.375% 7-Year Bonds in the aggregate


principal amount of up to P = 8,000,000,000.00 and the
4.875% 12-Year Bonds in the aggregate principal amount
of up to P= 7,000,000,000.00 to be issued by Meralco and
which shall mature on December 12, 2020 and December
12, 2025, respectively

Bond Agreements .......................... The Trust Indenture between the Issuer and the Trustee,
the Master Certificates of Indebtedness, the Registry and
Paying Agency Agreement between the Issuer, the
Registrar, and the Paying Agent, and any other
document, certificate, or writing contemplated thereby

Bondholder .................................... A Person whose name appears, at any time, as a holder


of the Bonds in the Register of Bondholders

BPI Capital ..................................... BPI Capital Corporation, a corporation duly licensed and
authorized to operate in the Philippines, with address at
the 8th Floor, BPI Building, Ayala Avenue corner Paseo de
Roxas, Makati City

BSP ................................................. Bangko Sentral ng Pilipinas, the central bank of the


Philippines

By-Laws .......................................... The Company’s by-laws, as amended

CAGR .............................................. Compound annual growth rate

CAIDI .............................................. Customer Average Interruption Duration Index, a


reliability indicator representing the average duration of
interruptions experienced by customers who have
experienced at least one interruption.
Cash Settlement Account ................ means an account designated by a Bondholder into which
shall be credited the interests, principal, and other
payments on the Bonds

CDC ............................................... Clark Development Corporation

CEDC .............................................. Clark Electric Distribution Corporation, a 65%-owned


subsidiary of Meralco

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Definition of Terms

CIS ................................................. Corporate Information Solutions, Inc., a wholly owned


subsidiary of Meralco

ckt-km ............................................ circuit-kilometer

Company ........................................ Manila Electric Company

Contestable Customer .................... Electricity end-users comprising the Contestable Market

Contestable Market ........................ Per Section 4 of Rule 12 on Retail Competition and


Open Access under the EPIRA Implementing Rules and
Regulations, refers to electricity end-users with monthly
average peak demand of at least 1MW for the 12 months
preceding the initial implementation of Open Access,
which shall be reduced to 750 KW two years thereafter

Core EBITDA . ................................. refers to Meralco’s core net income excluding


depreciation and amortization, interest and other
financial charges, interest and other financial income,
equity in net earnings of associates and joint ventures,
and provision for income tax

Core Net Income………………………….. .. Net income attributable to equity holders of the parent,
as adjusted for foreign exchange gain or loss, mark-to-
market gain or loss, impairment of noncurrent assets and
other non-recurring gain or loss, net of tax effect of the
foregoing adjustments

CSEZ ............................................... Clark Special Economic Zone

Customer Preferred Stock……………… means (a) Meralco’s 10% Series B, P10.00 par value
redeemable preferred shares of stock, and (b) any other
series of Meralco’s redeemable preferred shares of stock
or notes or debt instruments which are issued to
customers of Meralco in connection with the provision by
the Borrower of additional facilities required to be
installed by Meralco to fulfill such customers’ application
for the provision of electricity services

Debt ............................................... with respect to Meralco, all financial obligations or other


obligations of the Meralco for borrowed money
evidenced by a promissory note or other instrument
evidencing actual and outstanding indebtedness,
including the deferred purchase price of property or
services, but excluding the Customer Preferred Stock. As
used herein, the term “financial obligation” shall be
construed so as to include any obligation (whether
incurred as principal, surety or guarantor) for the
payment or repayment of money, whether present or
future, actual or contingent, evidenced by a promissory

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Definition of Terms

note or other instrument evidencing actual and


outstanding indebtedness, including the deferred
purchase price of property or services.

Debt Service Coverage Ratio ........... as of any date of determination:

(a) the sum of (i) EBITDA utilizing Meralco’s parent


company financial statements as of the last day of
the immediately preceding fiscal quarter and (ii)
Meralco’s cash and cash equivalents (including short
term cash investments and cash customer deposits)
and “quoted available for sale securities” (as
determined in accordance with PFRS as in effect of
the date of the Trust Indenture) at the beginning of
the immediately preceding fiscal quarter;

divided by

(b) the amount of all principal, interest and other


financial charges in respect of borrowed money
payable by the Issuer for the quarter when the
determination is made.

Dispatch ......................................... Instructions issued by or on behalf of the offtaker, or in


the event of operation of the WESM, the WESM operator
or the system operator, in accordance with a relevant
agreement with the seller or the WESM operator, to
schedule and control the generation of electricity by the
plant in order to increase or decrease the electric energy
delivered to the grid

DOE ................................................ Department of Energy

DU .................................................. Distribution Utility

EBITDA .......................................... in relation to any relevant period, the net income of the
Issuer excluding depreciation and amortization,
impairment of noncurrent assets, interest and other
financial charges, interest and other financial income,
foreign exchange gain or loss, mark-to-market gain or
loss and provision for income tax

EPIRA ............................................. Republic Act No. 9136, also known as the “Electric Power
Industry Reform Act of 2001,” as amended from time to
time, and including the rules and regulations issued
thereunder

ERB ................................................. Energy Regulatory Board, the predecessor of the ERC

8
Definition of Terms

ERC ................................................ Energy Regulatory Commission, an independent, quasi


judicial regulatory body, which was created under the
EPIRA and is responsible for regulating the electric power
industry including electric distribution utilities,
promoting competition, encouraging market
development, ensuring customer choice, and penalizing
abuse of market power, which is Meralco’s primary
regulator

e-MVI ............................................ e-Meralco Ventures Inc., a wholly owned subsidiary of


Meralco

Fifth Year Put Option ...................... for the 7-Year Bonds, the Bondholder’s right but not the
obligation, to require the Issuer to redeem up to 100% of
the outstanding Bonds registered in such Bondholder’s
name on the Fifth Year Put Option Date

Fifth Year Put Option Date ............. March 12, 2019, or the immediately succeeding Business
Day if such date is not a Business Day

Finserve ......................................... Meralco Financial Services Corporation, a wholly owned


subsidiary of Meralco

First Metro……………………………………… First Metro Investment Corporation

GOCC .............................................. Government-owned and/or controlled corporation,


where the Government’s ownership thereof is, directly or
indirectly, more than 50%
Government ................................... The Government of the Republic of the Philippines

GRAM ............................................ Generation Rate Adjustment Mechanism

Grid ................................................ The Philippines’ high voltage backbone system of


interconnected power transmission lines, substations and
related facilities

GSL ................................................. Guaranteed Service Level

GW ................................................. Gigawatt, or one billion watts, or one million kilowatts,


or one thousand megawatts

GWh ............................................... Gigawatt-hour, or one million kilowatt-hours, or one


thousand megawatt-hours

Interest Payment Date .................... shall mean the relevant date set out in the scheduled
Interest Payment Schedule set out in Annex C of the Trust
Indenture

9
Definition of Terms

Interest Rate .................................. shall mean, with respect to the (i) the 7-Year Bonds,
4.375% per annum, and (ii) the 12-Year Bonds, 4.875%
per annum

Issue Date ...................................... December 12, 2013

IPP.................................................. Independent Power Producer

IPP Administrator ........................... As defined in the EPIRA, qualified independent entities


appointed by PSALM who shall administer, conserve and
manage the contracted energy output of NPC IPP
contracts

IRR ................................................ Implementing Rules and Regulations

Issue Date ...................................... December 12, 2013 or such other date as may be agreed
upon between the Issuer and the Joint Lead Underwriters

Joint Issue Managers…………………… .. shall refer to BPI Capital and First Metro

Joint Lead Underwriters ................. shall refer to BPI Capital and First Metro, the entities
appointed as joint lead managers and joint lead
underwriters for the Bonds pursuant to the Underwriting
Agreement

kV................................................... Kilovolt, or one thousand volts, or 0.001 megavolts, or


0.000001 gigavolts

kW ................................................. Kilowatt, or one thousand watts, or 0.001 megawatts, or


0.000001 gigawatts

kWh ............................................... Kilowatt-hour, the standard unit of energy used in the


electric power industry. One kilowatt-hour is the amount
of energy that would be produced by a generator
producing one thousand watts for one hour. One
kilowatt-hour is 0.001 megawatt-hours, or 0.000001
gigawatt-hours

Lien ................................................ shall mean, with respect to any person, any lien, pledge,
mortgage, charge, hypothecation, encumbrance or any
other preferential agreement having the effect of
conferring security on or with respect to any asset or
revenue of such Person

LOIL ............................................... Lighthouse Overseas Insurance Limited, a wholly-owned


subsidiary of Meralco

Majority Bondholders ..................... shall mean, at any time, the Bondholder or Bondholders
who hold, per the Register of Bondholders, more than
50% of the aggregate outstanding principal amount of

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Definition of Terms

the relevant Bonds, provided that, in respect of any


matter presented for resolution at any meeting of
Bondholders that affect the rights and interests of only
the holders of the 7-Year Bonds, holders of 7-Year Bonds,
exclusively, will be considered for quorum and approval
purposes; and in respect of any matter presented for
resolution at any meeting of Bondholders that affect the
rights and interests of only the holders of the 12 -Year
Bonds, holders of 12-Year Bonds, exclusively, will be
considered for quorum and approval purposes

MAP ............................................... Maximum Average Price

Master Certificate of Indebtedness the certificate to be issued by the Issuer to the Trustee
evidencing and covering such amount corresponding to
the Bonds

Material Adverse Effect .................. a material adverse effect on (a) the business, operations
or financial condition of the Issuer, taken as a whole, (b)
the ability of Meralco to perform its obligations under
the Trust Indenture and the Bonds; or (c) the validity,
legality or enforceability of the Trust Indenture or the
Bonds

Maturity Date ................................ for the 7-Year Bonds shall mean December 12, 2020
which is seven years from Issue date and for the 12 -Year
Bonds, unless previously redeemed or cancelled, shall
mean December 12, 2025 which is twelve years from the
Issue Date; provided that, in the event that any of the
Maturity Dates falls on a day that is not a Business Day,
the Maturity Date shall be automatically extended to the
immediately succeeding Business Day

Maximum Average Price ................. The maximum average price per kWh that Meralco or
CEDC may charge for distribution, supply and metering
services determined by the ERC under PBR

Meralco Group .............................. refers collectively to Meralco, Miescor, CIS, MEI, e-MVI,
Finserve, CEDC, RSIC, LOIL, and MGen

MEI ................................................ Meralco Energy, Inc., a wholly-owned subsidiary of


Meralco

Miescor ......................................... Meralco Industrial Engineering Services Corporation, a


99%-owned subsidiary of Meralco

MGen ............................................ Meralco PowerGen Corporation, a wholly-owned


subsidiary of Meralco

MVA ............................................... Megavolt Ampere

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Definition of Terms

MW ................................................ Megawatt, or one million watts, or one thousand


kilowatts, or 0.001 gigawatts. The installed capacity of
power plants is generally expressed in terms of MW

MWh .............................................. Megawatt-hour, or one thousand kilowatt-hours, or


0.001 gigawatt-hours

NEA ................................................ National Electrification Administration

NEDA .............................................. National Economic Development Authority

NGCP .............................................. National Grid Corporation of the Philippines

NPC ................................................ National Power Corporation

O&M .............................................. Operations and Maintenance

Offer .............................................. the offering of the Bonds by the Issuer under the
conditions as contained in the Trust Indenture and the
Terms and Conditions of the Bonds.

Offer Period ................................... the period, commencing within two Business Days from
the date of the issuance of the SEC Permit To Sell
Securities, during which the Bonds shall be offered to the
public, or on such other date as the Issuer and the Joint
Lead Underwriters may agree upon.

OFW ............................................... Overseas Filipino Workers

Open Access ................................... As defined in the implementing rules of the EPIRA, the
system of allowing any qualified person the use of
electric power transmission, and/or distribution systems,
and associated facilities subject to the payment of
transmission and/or distribution retail wheeling rates
duly approved by the ERC

OTMS ............................................. Operating Trouble Management System

PAS ................................................. Philippine Accounting Standards

Paying Agent .................................. PDTC, the party which shall receive the funds from the
Issuer for payment of principal, interest and other
amounts due on the Bonds and remit the same to the
Bondholders based on the records shown in the Register
of Bondholders

Payment Account ........................... the account to be opened and maintained by the Paying
Agent designated by the Issuer and solely managed by
the Paying Agent, in trust and for the irrevocable benefit

12
Definition of Terms

of the Bondholders, into which the Issuer shall deposit


the amount of the interest payments, principal payments,
and all other payments due on the Bonds on a relevant
Payment Date and exclusively used for such purpose, the
beneficial ownership of which shall always remain with
the Bondholders

Payment Date ................................. the Interest Payment Date and/or the Maturity Date
and/or the date of early redemption when interest on
and/or the redemption amount of the Bonds is due and
payable to the relevant Bodholders

PBR ............................................... Performance-Based Regulation

PDEx ............................................... Philippine Dealing & Exchange Corp.

PDTC .............................................. Philippine Depository & Trust Corp., the central


depository and clearing agency of the Philippines which
provides the infrastructure for handling the lodgment of
the scripless Bonds and the electronic book-entry
transfers of the lodged Bonds in accordance with the
PDTC Rules, and its successor-in-interest

PDTC Participant ............................ a participant in good standing qualified to participate in


the PDTC system of scripless trading

PDTC Rules .................................... SEC-approved rules of the PDTC, including the PDTC
Operating Procedures and PDTC Operating Manual, as
may be amended, supplemented, or modified from time
to time

PEMC .............................................. Philippine Electricity Market Corporation, the market


operator that governs the WESM

Peso, Pesos or “P” .......................... lawful and official currency of the Republic of the
Philippines

Philippines ..................................... Republic of the Philippines

PhilRatings ..................................... Philippine Rating Services Corporation

PFRS .............................................. Philippine Financial Reporting Standards

PPA ................................................ Power Purchase Agreement

Project Finance Borrowings. . . . . . . any indebtedness incurred by a special purpose company


which in relation to any project or asset for the purposes
of financing the whole or any part of the acquisition,
creation, construction, improvement, development or
operation of such project or asset where the primary

13
Definition of Terms

recourse of the creditors to whom such indebtedness is


owed is against the project or assets, distributions from
the project company are restricted by the financing
documents and where those creditors do not have any
material monetary recourse to the Issuer other than the
special purpose company provided that such project or
asset has not been acquired or is not in existence as of
the Issue Date of the Bonds and that such indebtedness
or recourse does not impair, in any material respect, the
project or asset involved

PSA ................................................. Power Supply Agreement

PSALM ............................................ Power Sector Assets and Liabilities Management


Corporation

PSE ................................................ Philippine Stock Exchange

PSRE ............................................... Philippine Standards on Review Engagements

RA .................................................. Republic Act

Radius ............................................ Radius Telecoms, Inc., an indirectly wholly owned


subsidiary, through another subsidiary of Meralco

RCOA .............................................. Retail Competition and Open Access

RDWR ............................................. Rules for the Setting of Distribution Wheeling Rates

Record Date .................................... two (2) Business Days prior to the relevant Payment
Date, which shall be the reckoning day in determining the
Bondholders entitled to receive interest, principal or any
other amount due under the Bonds

Register of Bondholders ................. shall mean the electronic record of the issuances, sales
and transfers of the Bonds to be maintained by the
Registrar pursuant to and under the terms of the Paying
Agency and Registry Agreement

Registrar ........................................ PDTC, being the registrar appointed by the Issuer to


maintain the Register of Bondholders pursuant to the
Paying Agency and Registry Agreement

Registry Confirmation .................... The written advice to be sent by the Registrar to the
Bondholders

Regulatory Period ........................... A period consisting of four Regulatory Years, in which the
ERC approves the MAP and the related capital, operating
and other expenditures for regulated businesses

14
Definition of Terms

Regulatory Year .............................. The 12-month period from July to June for which
Meralco’s MAP is set, or the 12-month period from
October to September for which CEDC’s MAP is set

Reliability ....................................... The ability of power system components to deliver


electricity to all points of consumption, in the quantity
and of the quality demanded by the customer

RES ................................................. Retail Electricity Supplier

Retail Competition ......................... As defined in the implementing rules of the EPIRA, the
provision of electricity to a Contestable Market by
persons licensed by the ERC to sell, broker, market or
aggregate electricity to end-users through Open Access

Rockwell Land ................................ Rockwell Land Corporation

RORB .............................................. Return on Rate Base

RP .................................................. Regulatory Period

RP Energy ....................................... Redondo Peninsula Energy, Inc., a 47%-owned affiliate of


MGen

RSIC ................................................ Republic Surety and Insurance Company, Inc., a wholly


owned subsidiary of Meralco

SAIDI .............................................. System Average Interruption Duration Index, a reliability


indicator representing the average outage duration for
each customer served

SAIFI ............................................... System Average Interruption Frequency Index, a


reliability indicator representing the average number of
interruptions experienced by a customer

SCADA ............................................ Supervisory Control and Data Acquisition System, a type


of industrial control system that is used specifically to
cover multiple sites and large distances

SEC ................................................. Securities and Exchange Commission of the Philippines

SEC Permit ...................................... Permit to Sell Securities issued by the SEC in connection
with the Offer

Security .......................................... any mortgage, pledge, lien or encumbrance constituted


on any of Meralco’s properties, for the purpose of
securing its or its Affiliates’ obligation

Security Interest ............................. mortgage, pledge, lien, charge, assignment,


hypothecation or security interest or any other

15
Definition of Terms

agreement or arrangement having the effect of


conferring security howsoever and wherever created or
arising and whether consensual or nonconsensual

SRC ................................................. Securities Regulation Code

7-Year Bonds .................................. the 4.375% fixed rate bonds due 2020 with an aggregate
principal amount of P8,000,000,000.00 which shall be
issued in connection with the Offer on the Issue Date

7-Year Bonds Interest Payment Date March 12, 2014 for the first Interest Payment Date, and
March 12, June 12, September 12 and December 12 of
each year for each subsequent Interest Payment Date at
which the Bonds are outstanding, or the subsequent
Business Day if such Interest Payment Date is not a
Business Day

7-Year Bonds Interest Rate ............. 4.375% per annum. The 7-Year Bond Interest Rate shall
be applied to compute for the interest due on a relevant
7-Year Bond Interest Payment Date; provided that, the
interest accruing on the 7-Year Bonds as of a 7-Year Bond
Interest Payment Date shall be calculated on the basis of
a month of 30/360 days.

SL ................................................... System Loss

SRC ................................................. RA No. 8799, otherwise known as “The Securities


Regulation Code of the Philippines,” including its
Implementing Rules and Regulations as amended from
time to time

Stranded Costs ............................... As defined in the EPIRA, the excess of the contracted
costs of electricity under eligible contracts over the
actual sales revenues from the contracted energy output
under such contracts. Eligible contracts are those
approved by the ERB (the predecessor-in-interest of ERC)
on or before December 31, 2000

Subsidiary ...................................... with respect to Meralco, any corporation directly or


indirectly controlled by it, whether by way of ownership
of at least 50% plus 1 share of the total issued and
outstanding capital stock of such corporation, or the right
to elect at least 50% plus 1 share of the number of
directors in such corporation, or the right to control the
operation and management of such corporation by
reason of management, contract or authority granted by
said corporation to Meralco

16
Definition of Terms

Sub-transmission Assets ................. As defined in the implementing rules of the EPIRA,


the facilities related to power delivery service below
specified transmission voltages and based on the
functional assignment of assets including, but not limited
to, step-down transformers used solely by load
customers, associated switchyard/substation, control and
protective equipment, reactive compensation equipment
to improve customer power factor, overhead lines, and
the land on which such facilities/ equipment are located.
These include NPC assets linking the transmission system
and the distribution system, which are neither classified
as generation nor transmission assets

Tax Code ........................................ Tax Reform Act of 1997, as amended

Taxes .............................................. any present or future taxes, including, but not limited to,
documentary stamp tax, levies, imposts, filing and other
fees or charges imposed by the Republic of the
Philippines or any political subdivision or taxing authority
thereof, including surcharges, penalties and interests on
said taxes, but excluding final withholding tax, gross
receipts tax, taxes on the overall income of the
underwriter or of the Bondholders, value-added tax, and
taxes on any gains realized from the sale of the Bonds

Tenth Year Put Option .................... means, for the 12-Year Bonds, the Bondholder’s right,
but not the obligation, to require the Issuer to redeem up
to 100% of the outstanding Bonds registered in such
Bondholder’s name on the Tenth Year Put Option Date

Tenth Year Put Option Date ............ December 12, 2023, or the immediately succeeding
Business Day if such date is not a Business Day

TransCo .......................................... National Transmission Corporation

Trustee ........................................... Metropolitan Bank and Trust Company - Trust Banking


Group, the entity appointed by the Issuer which shall act
as the legal title holder of the Bonds and shall monitor
compliance and observance of all covenants of and
performance by the Issuer of its obligations under the
Bonds and enforce all possible remedies pursuant to such
mandate

TSC ................................................. Transition Supply Contract for electricity supply from NPC

12-Year Bonds ................................ the 4.875% fixed rate bonds due 2025 with an aggregate
principal amount of P7,000,000,000.00 which shall be
issued in connection with the Offer on the Issue Date

17
Definition of Terms

12-Year Bonds Interest Payment Date March 12, 2014 for the first Interest Payment Date, and
March 12, June 12, September 12 and December 12 of
each year for each subsequent Interest Payment Date at
which the Bonds are outstanding, or the subsequent
Business Day if such Interest Payment Date is not a
Business Day

12-Year Bonds Interest Rate ........... 4.875% per annum. The 12-Year Bond Interest Rate shall
be applied to compute for the interest due on a relevant
12-Year Bond Interest Payment Date; provided that, the
interest accruing on the 12-Year Bonds as of a 12-Year
Bond Interest Payment Date shall be calculated on the
basis of a month of 30/360 days.

TWh ............................................... Terawatt-hour, or one thousand Gigawatt-hours

Underwriters .................................. shall refer to the Joint Lead Underwriters

Universal Charge ............................ The mandatory charge, which is collected from all
electricity end-users on a monthly basis by the power
DUs for the recovery of stranded costs, equalization of
the taxes and royalties applied to indigenous or
renewable sources of energy vis-à-vis imported energy
fuels, to account for all forms of cross-subsidies, and
other purposes pursuant to Section 34 of the EPIRA

VAT ................................................ Value-added Tax

WESM ............................................. Wholesale Electricity Spot Market

WESM Rules ................................... The rules promulgated pursuant to the EPIRA that govern
the administration and operation of the WESM

Wheeling Charges ........................... The cost or charge for use of a distribution system and/or
the availment of related services

$ or US$.......................................... shall refer to United States Dollars, being the currency of


the United States of America

Titles of sections, subsections and clauses in this Prospectus are used for convenience of reference
only and do not limit or affect the interpretation of the sections, subsections and clauses hereof. In
case of conflict between the provisions of this Prospectus and the Bond Agreements, the provisions
of the Bond Agreements shall prevail.

18
EXECUTIVE SUMMARY

The following summary is qualified in its entirety by the more detailed information, including the
Company’s consolidated financial statements and the notes relating thereto, appearing elsewhere in
this Prospectus. Prospective purchasers of the Bonds must read the entire Prospectus carefully,
including the section on “Risk Factors.” Capitalized terms not defined in this summary are defined in
the section “Definition of Terms.”

Overview

Meralco is the Philippines’ largest electric power distribution company, with a franchise area
covering 9,337 square kilometers. It provides power to over five (5) million residential, commercial
and industrial customers in 34 cities and 77 municipalities, including Metro Manila, the provinces of
Rizal, Cavite and Bulacan, and parts of the provinces of Pampanga, Batangas, Laguna and Quezon.
Turnover of business establishments in the franchise area accounted for approximately 50% of the
country’s 2011 gross domestic product, based on data from the National Statistical Coordination
Board.

CEDC, a 65%-owned subsidiary of Meralco, holds the power distribution franchise for the Clark
Special Economic Zone in Clark, Pampanga. CEDC’s franchise area covers 320 square kilometers. CEDC
services over 1,700 customers.

Meralco’s business is divided into two segments: (1) power, and (2) other services. The power
segment, primarily power distribution, contributed 99% of Meralco’s revenues in 2012 and consists
of operations of Meralco and CEDC. The other services segment contributed 1% of Meralco’s
revenues in 2012.

Power

The power segment of Meralco’s business consists of (a) electricity distribution, (b) power generation
and (c) retail electricity supply. Electricity distribution principally pertains to electricity distribution
and supply of power on a pass-through basis covering the Meralco franchise area and the CEDC
franchise area in the Luzon grid. According to data from the DOE, as of 2011, electricity distribution
within the Meralco franchise area accounts for approximately 55% of the electricity sales of the
country and approximately 75% of the electricity sales in Luzon. Meralco is also seeking opportunities
to grow its distribution service in other areas of the Philippines that are underserved due to the lack
of reliable or reasonably priced power.

In 2010, Meralco made a strategic decision to re-enter the power generation business through MGen.
Presence in power generation is intended to enable Meralco to (i) enhance the provision of
adequate, reliable and reasonably-priced power to its millions of customers, (ii) compete profitably in
the retail electricity supply market as RCOA is ramped up in phases, and (iii) generate positive returns
and cash flows from power generation.

On July 22, 2011, MGen acquired a 47% interest in RP Energy, which is developing a 2 x 300MW, coal -
fired circulating fluidized bed (“CFB”) power generation plant in the Subic Freeport Zone. MGen is
also in various stages of pursuing the potential joint development of other power generation
projects. On August 29, 2013, MGen and New Growth B.V., a wholly -owned subsidiary of the
Electricity Generating Public Company Ltd. (“EGCO”) Group of Thailand, signed a Joint De velopment
Agreement for the 460 MW, supercritical coal-fired power plant project in Mauban, Quezon. Under
19
Executive Summary

the Joint Development Agreement, MGen shall have a 51% stake in the project company, including
rights to assign up to 2% to an approved assignee, with New Growth B .V. holding the remaining 49%.
The project’s cost is yet to be determined and will depend largely on final design, specifications and
other terms determined during the engineering, procurement and constructi on tender process.

Meralco serves as a local RES within its franchise area only under the brand MPower. Starting on June 25,
2013, certain qualified contestable customers sourced their electricity supply from MPower.

Other Services

The other services segment is involved principally in electricity-related services such as electro-
mechanical engineering, construction, consulting and related manpower, light rail -related
maintenance, bill payments collection and e-transaction, insurance and reinsurance, data
telecommunications carrier and energy efficiency and systems management.

Corporate Information

Meralco is incorporated under the laws of the Republic of the Philippines. It maintains its principal
executive offices at Lopez Building, Ortigas Avenue, Pasig City, 1605, Philippines. Its telephone
number at that address is +632 1622 2450. Its website is at www.meralco.com.ph. Information on its
website(s) referred to in its website(s) is not incorporated by reference into this Prospectus and
should not be relied on for the purposes of the Offering.

20
SUMMARY OF FINANCIAL INFORMATION

The summary historical consolidated statements of financial position data as at December 31, 2011
and 2012 and summary historical consolidated statements of income and cash flows data for the years
ended December 31, 2010, 2011 and 2012 set forth below hav e been derived from the audited
consolidated financial statements, including the Notes thereto, included elsewhere in this Prospectus.
The audited consolidated financial statements have not been revised to reflect Meralco’s adoption of
the amendments to Philippine Accounting Standard (“PAS”) 19, Employee Benefits, effective January 1,
2013 with retrospective application.

The summary historical consolidated statement of financial position data as at September 30, 2013
and the summary historical consolidated statements of income and cash flows for the nine-month
period ended September 30, 2012 and 2013 have been derived from Meralco’s unaudited interim
consolidated financial statements, as reviewed by SGV in accordance with Philippine Standard on
Review Engagements 2410 and included elsewhere in this Prospectus. Unless otherwise stated,
Meralco has presented its consolidated financial statements for the annual and interim periods
prepared in accordance with Philippine Financial Reporting Standards (“PFRS”).

Potential investors should read the following data together with the financial statements and related
Notes included elsewhere in this Prospectus. The following data is qualified in its entirety by reference
to all of that information.

Audited Unaudited
Years ended December 31 Nine Months ended September 30
2010 2011 2012 2012 2013
(in P millions; except per share data)
Consolidated Statements of Income
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . 240,933 256,808 285,270 214,749 208,097
Costs and expenses. . . . . . . . . . . . . . . . . . . 228,640 239,016 266,307 199,302 188,673
Other income, net of expenses. . . . . . . . . . 1,025 907 2,914 2,705 152
Income before income tax from continuing
operations. . . . . . . . . . . . . . . . . . . . . . . 13,318 18,699 21,877 18,152 19,576
Income from discontinued operations, net of
income tax. . . . . . . . . . . . . . . . . . . . . . . 822 966 978 967 --
Net income. . . . . . . . . . . . . . . . . . . . . . . . . 10,117 13,726 17,158 13,853 13,691
Net income attributable to equity holders of
the parent. . . . . . . . . . . . . . . . . . . . . . . 9,685 13,227 17,016 13,722 13,644
Earning per share:
Basic and diluted-attributable to equity
holders of the parent. . . . . . . . . . . . . . . 8.59 11.73 15.10 12.17 12.11
Basic and diluted-attributable to equity
holders of parent from continuing operations.
.... 8.21 11.28 15.01 11.40 12.11

21
Summary of Financial Information

Audited Unaudited
As at December 31 As at September 30
2010 2011 2012 2013
(in P millions)
Consolidated Statements of Financial Position
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178,968 210,388 217,073 223,437
Current assets
Continuing operations. . . . . . . . . . . . . . . . . . . . . . 60,003 77,424 92,243 89,724
Discontinued operations. . . . . . . . . . . . . . . . . . . . . - 18,349 - -
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . 24,370 44,141 60,500 58,795
Equity attributable to equity holders of the parent. . 58,969 63,788 67,479 70,088
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,221 24,443 24,613 24,207
Current liabilities
Continuing operations. . . . . . . . . . . . . .. .. . . . . . . 45,146 53,042 59,518 60,279
Discontinued operations. . . . . . . . . . . . . . . . . . . . . - 9,113 - -

Audited Unaudited
Years ended December 31 Nine Months ended September 30
2010 2011 2012 2012 2013
(in P millions, except ratios and percentage info)
Consolidated Statements of Cash Flows
Net cash flows from operating 20,358 31,934 36,244 27,372 29,743
activities. . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities. . . . (6,292) (6,816) (9,549) (5,881) (14,503)
Net cash used in financing activities. . . . (6,764) (4,578) (10,336) (9,825) (16,945)
Other Financial Data (unaudited)
Consolidated EBITDA. . . . . . . . . . . . . . . . . . 18,841 24,602 27,545 22,548 24,403
Total Debt 1 /EBITDA. . . . . . . . . . . . . . . . . . . . . 1.1x 1.0x 0.9x 0.9x 0.7x
Net Debt 2 /EBITDA. . . . . . . . . . . . . . . . . . . . (0.2x) (0.8x) (1.3x) (1.1x) (1.1x)
Total Debt 1 /Equity 3 . . . . . . . . . . . . . . . . . . . . . 36% 38% 36% 39% 35%
EBITDA/Interest 4 . . . . . . . . . . . . . . . . . . . . . . 34x 17x 18x 19x 23x
Core EBITDA. . . . . . . . . . . . . . . . . . . . . . . 25,089 26,824 26,845 21,740 24,566
Consolidated Core Net Income. . . . . . . . 12,155 14,887 16,265 12,892 13,558
Operational Data
Electricity Sales volume (in GWh) 30,247 30,592 32,771 24,448 25,616
Systems loss rate 5
(in percentage)
Meralco……………………………………. 7.94% 7.35% 7.04% 7.19% 6.71%
CEDC……………………………………………. 3.81% 3.96% 3.75% 3.67% 4.09%
1
Total Debt includes interest-bearing long-term financial liabilities (current and non-current portion) and notes payable.
2
Net debt is total debt less cash and cash equivalents
3
Equity is equity attributable to equity holders of the parent
4
Interest represents interest and other financial charges
5
Based on a 12-month moving average

22
SUMMARY OF THE OFFERING

Issuer Manila Electric Company

Instrument 7-Year and 12-Year fixed rate corporate bonds (the “Bonds”)
in the aggregate principal amount of up to
P15,000,000,000.00, with an overallotment option of up to
P5,000,000,000.00.

Use of Proceeds The Net Proceeds of the Issue shall be used to partially
refinance the Company’s existing debt, the proceeds of
which were used for capital expenditures.

Form and Denomination of the The Bonds shall be issued in scripless form in minimum
Bonds denominations of P50,000.00 each, and in integral multiples
of P10,000.00 thereafter

Offer Price 100% of face value

Offering The Bonds shall be offered to the public by Meralco through


the Joint Lead Underwriters

Offer Period The Offer shall commence at 9 am of December 2, 2013 and


ends at 12 pm of December 6, 2013

Issue Date December 12, 2013

Early Redemption Option Prior to final maturity, the Company may redeem (in whole
but not in part only) the outstanding 12-Year Bonds on the
7th Year from Issue Date at the Early Redemption Price of
101.0%.

The Company shall give no less than ten (10) nor more than
twenty (20) days prior written notice of its intention to
redeem the Bonds, which notice shall be irrevocable and
binding upon the Company to effect such early redemption
of the Bonds at the Interest Payment Date stated in such
notice.

The amount payable to the Bondholders in respect of any


such redemption shall be calculated as the sum of (i) the
relevant Early Redemption Price applied to the principal
amount of the then outstanding Bonds being redeemed an
(ii) all accrued interest on the Bonds as of the relevant
Optional Redemption Date.

23
Summary of the Offering

Bondholder Put Option Prior to final maturity, the Bondholders shall have a one-
time option to require the Issuer to redeem in whole or in
part the outstanding Bonds on the following Put Option
Dates:

7-Year Bonds: First Interest Payment Date after the 5th year
from Issue Date

12-Year Bonds: on the tenth 10 th anniversary from Issue


Date

Maturity Date Unless Meralco shall redeem the Bonds or the Bondholders
exercise their Put Option, the Bonds shall mature on the
following dates (each, a “Maturity Date”):

7-Year Bonds: December 12, 2020

12-Year Bonds: December 12, 2025

Interest Rate 7-Year Bonds: Fixed interest rate of 4.375% p.a.

12-Year Bonds: Fixed interest rate of 4.875% p.a.

Interest Payment Interest on the 7-Year Bonds shall be calculated on a 30/360-


day count basis and shall be paid quarterly in arrears starting
on March 12, 2014 for the First Interest Payment Date, and
March 12, June 12, September 12 and December 12 of each
year thereafter, for as long as the Bonds remain outstanding.

Interest on the 12-Year Bonds shall be calculated on a


30/360-day count basis and shall be paid quarterly in arrears
starting on March 12, 2014 for the First Interest Payment
Date, and March 12, June 12, September 12 and December
12 of each year thereafter, for as long as the Bonds remain
outstanding.

Final Redemption Unless Meralco shall redeem the Bonds or the Bondholders
exercise their Put Option, the Bonds shall be redeemed at
100% of face value on their respective Maturity Dates

Negative Pledge The Bonds shall have the benefit of a negative pledge on all
existing and future assets of the Issuer, subject to certain
permitted liens.

24
Summary of the Offering

Purchase and Cancellation The Issuer may at any time purchase any of the Bonds at any
price in the open market or by tender or by contract at any
price, without any obligation to purchase (and the
Bondholders shall not be obliged to sell) the Bonds pro-rata
from all Bondholders. Any Bonds so purchased shall be
redeemed and cancelled and may not be re-issued. Upon
listing of the Bonds on the PDEx, the Issuer shall disclose any
such transactions in accordance with the applicable PDEx
disclosure rules.

Status of the Bonds The Bonds shall constitute the direct, unconditional,
unsubordinated, and unsecured obligations of Meralco and
shall at all times rank pari passu and rateably without any
preference or priority amongst themselves and at least pari
passu with all other present and future unsubordinated and
unsecured obligations of Meralco, other than obligations
preferred by law.

Listing The Issuer intends to list the Bonds on the PDEx on Issue
Date.

25
RISK FACTORS AND OTHER CONSIDERATIONS

GENERAL RISK WARNING

The price of securities can and does fluctuate, and any individual security may experience upward or
downward movements, and may even become valueless. There is an inherent risk that losses may be
incurred rather than profit may be realized as a result of buying and selling securities. Past
performance is not a guide to future performance. There is an extra risk of losing money when
securities are bought from smaller companies. There may be a big difference between the buying
price and the selling price of these securities. An investor deals with a range of investments each of
which investments may carry a different level of risk.

PRUDENCE REQUIRED

The declaration of risks in this Section disclosure does not purport to disclose all the risks and other
significant aspects of investing in these securities. An investor must undertake its, his or her own
research and study on the value and worth of securities subject of this Prospectus before
commencing any trading activity. Investors may request information both on the securities and
Issuer thereof from the SEC which are available to the public for a fee.

PROFESSIONAL ADVICE

An investor should seek professional advice if he or she is uncertain of, or has not understood, any
aspect of the securities to invest in or the nature of risks involved in trading securities especially
those considered to be high risk.

RISK FACTORS

An investment in the Bonds described in this Prospectus involves a certain degree of risk. A
prospective purchaser of the Bonds should carefully consider the following factors, in addition to the
other information contained in this Prospectus, in making decisions whether or not to invest in the
Bonds. This Prospectus contains forward-looking statements that involve risks and uncertainties.
Meralco adopts what it considers conservative financial and operational controls and policies to
manage its business risks. Meralco’s actual results may differ significantly from the results discussed
in the forward-looking statements. See section “Forward-Looking Statements” of this Prospectus.
Factors that might cause such differences, thereby making the offering sp eculative or risky, may be
summarized into those that pertain to the business and operations of Meralco, in particular, and
those that pertain to the over-all political, economic, and business environment, in general. These
risk factors and the manner by which these risks shall be managed are presented below.

Investors should carefully consider all the information contained in this Prospectus including the risk
factors described below in the order of their importance, before making a decision to invest in the
Bonds. The Company's business, financial position and financial performance could be materially
adversely affected by any of these risk factors. The market price of the Bonds could decline due to
any one of these risks.

26
Risk Factors and Other Considerations

RISKS RELATING TO MERALCO AND ITS BUSINESS

Meralco is unable to determine the future prices for Meralco’s services. Meralco’s profitability
may be reduced or it may incur losses if its costs increase without the Energy Regulatory
Commission (“ERC”) authorizing a corresponding increase in Meralco’s tariffs or if the ERC sets
future Maximum Average Prices lower than their current level.

Currently, Meralco’s tariff level and the volume of electricity it distributes are the two main factors
that determine its distribution revenues. Meralco’s tariff levels are subject to price setting by the
ERC. The ERC sets Meralco’s price cap on a 4-year Regulatory Period (“RP”) basis, with annual
adjustments for various over- or under-recoveries and performance rewards or penalties, based on
Meralco’s projected operating expenditures, depreciation and , allowable return on its regulatory
asset base. The factors the ERC evaluates when calculating Meralco’s revenue requirements are
operating and maintenance costs, regulatory depreciation, return on ca pital, corporate income tax
(which is currently set to zero), other taxes, levies and duties and any over - or under-recoveries
from the prior RP. As Meralco’s price cap is set on a 4-year basis, increases in Meralco’s operating
and maintenance costs may not result in timely corresponding tariff adjustments. If Meralco does
not meet sales projections or Meralco’s tariffs are set too low, Meralco’s actual costs may exceed
its revenues permitted to be collected pursuant to Meralco’s prevailing tariff levels, or, even if
revenues exceed such costs, may not provide Meralco with a reasonable margin, any of which may
have a material adverse effect on its financial performance.
Further, in some cases, distribution charges approved by the ERC have been successfully challenged
in court, including the ability of Meralco to include income taxes as part of expenses recoverable
from distribution charges collected from customers. Distribution utilities have also been required
to provide refunds to customers in certain cases. There can therefore be no assurance that any
distribution charges approved by the ERC will not be contested in and overturned by Philippine
courts or that Meralco will not be required to refund amounts to customers if any increased
distribution charges are overturned. Any of the foregoing events could materially and adversely
affect Meralco’s business, financial position and financial performance.

Meralco’s revenues are highly dependent on the strength of the Philippine economy.

Substantially all of Meralco’s businesses and assets are located in the Philippines. Meralco
currently derives all of its operating revenues from within the Philippines and its performance will
depend to a substantial degree on the performance of the Phili ppine economy. The demand for
electricity is closely linked to economic growth and the overall levels of business activity in the
Philippines. The Philippines has experienced periods of slow or negative growth, high inflation,
significant depreciation of the Peso and the imposition of exchange controls. The Philippine
economy experienced a sharp downturn in the late 1990s during the Asian financial crisis and, later
on, economic growth was adversely affected by the political crisis surrounding the impeachment
proceedings against the then President of the Philippines. Southeast Asian economies were also
affected by the global economic crisis in 2008 and 2009.
There is no assurance that the Philippines will not experience future economic downturns. The
Philippine economy may be adversely affected by various factors, including:

27
Risk Factors and Other Considerations

• decreases in business, industrial, manufacturing or financial activity in the Philippines, in Asia


or globally;
• lower demand for products and services provided by companies in the Philip pines or in the
Asian or global markets resulting from scarcity of credit or other financing or regional or global
geopolitical or economic developments;

• exchange rate and interest rate fluctuations or a prolonged period of inflation or increase in
interest rates;

• changes to Philippine economic, social or tax policies;

• natural disasters, including earthquakes, typhoons and volcanic eruptions;

• sovereign disputes; and

• other regulatory, political or economic developments in or affecting the Philippines and other
Asian countries. See “—Risks relating to the Philippines.”

Any deterioration in economic and political conditions in the Philippines could materially and
adversely affect Meralco’s business, prospects, financial position and financial performance.

Meralco’s business performance may be impacted by various operational challenges typical of


companies in its industry.

Meralco faces a number of operating risks applicable to electricity distribution companies,


including:
• service disruptions and variations in power quality in Meralco’s network, which may result in
revenue loss and potential liabilities to third parties;

• disruption or congestion in transmission networks in the Philippines;

• lack of generating capacity or the inability of power generation companies to supply electricity
for transmission to Meralco;

• failure of information technology systems or projects, which could result in loss of critical
data;

• undetermined environmental costs and liabilities arising from Meralco’s operations and its
network infrastructure, which could increase Meralco’s costs;

• injuries to employees, contractors or third parties, which may result in fines, claims, higher
insurance costs for it or denial of coverage;

• damage to customer electrical appliances and equipment due to power surges or


interruptions, which may result in complaints and lawsuits; and

28
Risk Factors and Other Considerations

• failure to successfully negotiate and enter into future collective barg aining agreements with its
employees, which may result in work stoppages.

As substantially all of Meralco’s annual revenues were derived from its electricity distribution
business based on an average taken from the past three fiscal years, Meralco’s financial
performance may also be exposed to a greater degree of fluctuation in comparison with companies
that have more diversified operations.

Meralco operates in a highly regulated industry, which is undergoing significant change.

Meralco is subject to significant regulation, including the Electric Power Industry Reform Act
(“EPIRA”), and therefore is also subject to changes in regulations, or in their interpretations. Energy
regulation is currently undergoing significant changes, and may continue to be subject to
challenges, modifications, the imposition of additional requirements, and restructuring proposals.
Meralco may not be able to obtain or maintain all regulatory approvals that may be required in the
future, or secure any necessary modifications to existing regulatory approvals. Any such changes
could affect certain aspects of Meralco’s operations or increase its compliance expenses , which
could materially and adversely affect its business, financial position and financial performance.

In recent years, the Government has sought to implement measures designed to establish a
competitive energy market. These measures include the successful privatization of certain power
generation facilities and the grant of a concession to manage, operate and maintain the
transmission assets of National Transmission Corporation (“TransCo”), as well as the establishment
of a wholesale spot market for electricity and RCOA. The move towards a more competitive
electricity industry could result in the emergence of new, significant and numerous competitors in
the retail electricity supply market, which may affect Meralco’s generation and supply business.
Competitors may have greater financial resources, and have more extensive operational experience
and other capabilities than Meralco, giving them the ability to respond to operational,
technological, financial and other challenges more quickly and more efficiently than Meralco. In
addition, distribution utilities such as Meralco may experience reductions in their c ore distribution
revenue should certain segments of their existing distribution operations be opened to
competition.

Meralco’s facilities could be affected by catastrophic events over which it has no control.

The Philippines has experienced a number of major natural catastrophes over the years, including
typhoons, floods, volcanic eruptions and earthquakes. Such events may materially disrupt and
adversely affect Meralco’s business operations. In particular, Meralco’s distribution facilities and the
generation facilities being developed by Meralco’s affiliates may be exposed to the effects of
catastrophic events, such as severe weather events such as typhoons, or floods, major accidents,
natural disasters, terrorist attacks or incidents at electricity generation plants and NGCP’s
transmission system of the NGCP to which Meralco’s distribution network is connected. Although
constructed, operated and maintained to withstand some of these occurrences, Meralco’s facilities

29
Risk Factors and Other Considerations

may not be able to withstand all circumstances. This risk is heightened by the concentration of
substantially all of Meralco’s assets in one country.
For example, terrorist acts could result in damage to Meralco’s distribution network assets,
adversely affecting Meralco’s ability to provide electricity distribution services, or could result in
damage to its electricity suppliers’ generation plants or to the transmission system to which
Meralco’s distribution network is connected, adversely affecting supply of electricity and Meralco’s
ability to distribute electricity to consumers. Any repairs necessary to correct damage to Meralco’s
network assets could be costly and time consuming, particularly if flooding has occurred in the
affected areas, and may result in substantial lost revenues during the period of such repairs. While
Meralco may seek the ERC’s approval to recover from customers additional costs related to force
majeure events including natural catastrophes, such approval may not be obtained promptly, if at
all, and in any event does not protect Meralco from lost revenues.

Meralco’s insurance coverage may not be adequate to cover all losses.

Meralco faces the risk of loss or damage to its properties, which could affect the delivery of its
services. Potential sources of such loss include fire, floods, and other catastrophic events
including damage resulting from terrorist acts. Although constructed, operated and maintained to
withstand certain of such occurrences, Meralco’s network assets may not do so in all
circumstances. Meralco may also be subject to claims from third parties alleging negligent acts or
omissions by Meralco that result in damage to property, injuries or death.
Meralco does not currently have business interruption insurance and has not procured terrorism
insurance coverage for its key network assets. Although Meralco may seek the ERC’s approval to
recover from customers additional costs related to force majeure events such as natural
catastrophes, acts of war, terrorism and sabotage, any such recovery will not include any potential
loss of revenues. The insurance coverage that Meralco maintains may be inadequate to cover all
conceivable liabilities and losses, and a portion of Meralco’s risk is self -insured by its subsidiaries,
RSIC and LOIL, and a significant portion is not reinsured with third parties. While Meralco believes
that its insurance coverage is generally customary for Philippine companies in it industry, its
policies are subject to deductibles and exceptions and do not cover all risks. Meralco cannot be
certain that adequate insurance coverage for all potential liabilities and losses will be available in
the future on commercially viable terms, or at all. Although Meralco undertakes loss mitigation and
preventative measures to lessen the financial impact of uninsured occurrences, uncovered losses
may have an adverse impact on Meralco’s profit and financial position.

If Meralco’s system loss, whether due to technical factors or pilferage, exceeds the mandated
cap, its financial performance could be adversely affected.

Meralco experiences two types of system losses: technical losses and non -technical losses.
Technical losses are losses due to physical and systemic factors that occur in the ordinary course of
distributing electricity. Non-technical losses are losses that result from pilferage, illegal
connections, inaccurate meters, fraud and underbilling. Currently, ERC regulations allow Meralco to
charge customers for electricity losses so long as these losses do not exceed a mandated cap. The

30
Risk Factors and Other Considerations

mandated cap as at September 30, 2013 is 8.5% as established by RA No. 7832. Meralco takes
active measures to reduce the occurrence of system losses, including the aggressive prosecution of
pilferers, and has been effective at keeping its system losses below the mandated cap (See Section
“Description of the Business”—“System Efficiency” of this Prospectus). The following are
summaries of the number of RA No. 7832 and Revised Penal Code (“RPC”) cases prosecuted and
resolved by the Company for the past three (3) years:

RA 7832 RPC
Beginning Balance, January 1, 2011 633 213
Add: Referrals 33 98
Total Number of Cases 666 311
Less: Resolved 23 23
Ending Balance, December 31, 2011 643 288

RA 7832 RPC
Beginning Balance, January 1, 2012 643 288
Add: Referrals 136 78
Total Number of Cases 779 366
Less: Resolved 74 63
Ending Balance, December 31, 2012 705 303

RA 7832 RPC
Beginning Balance, January 1, 2013 705 303
Add: Referrals 60 40
Total Number of Cases 765 343
Less: Resolved 95 95
Ending Balance, December 31, 2013 670 248

However, there is no assurance that its strategies will continue to be successful in combating
electricity losses. A material increase in Meralco’s system losses could result in losses that exceed
the mandated cap and so cannot be recovered from customers, and could have a material adverse
effect on Meralco’s business, financial position and financial performance.

Meralco is exposed to health and safety risks.

Occupational health and safety is a key risk area in the operation and maintenance of Meralco’s
distribution network. Meralco is subject to health and safety regimes and is required to comply
with laws and regulations concerning the protection of the health and welfare of employees,

31
Risk Factors and Other Considerations

contractors and customers. Meralco will incur compliance costs and any failure in its compliance
with the health and safety regimes to which Meralco is subject may result in it being subject to
fines, damages and criminal or civil sanctions. In addition, act ual or alleged violations arising under
any health and safety laws may cause interruptions to Meralco’s operations and adversely affect its
reputation.

Licenses, permits and operating agreements necessary for Meralco’s business may not be
obtained, sustained, extended or renewed.

Meralco’s operations rely on permits, licenses and agreements and in some cases renewals of such
permits, licenses and agreements. Management believes that Meralco currently holds or has
applied for the licenses, permits and agreements necessary to carry on the activities that it is
currently conducting. However, Meralco’s ability to obtain, sustain or renew such licenses, permits
and agreements on acceptable terms is subject to changes in regulations and policies and to the
discretion of applicable governmental authorities and counterparties. Meralco’s franchise and
Certificate of Public Convenience and Necessity for its electricity distribution business are currently
set to expire on June 28, 2028. In addition, any breaches of the terms of any of Meralco’s permits,
licenses and operating agreements may result in the revocation or suspension of such permits and
licenses or termination of such agreements for cause. Any revocation, suspension or inability to
renew a required permit or license or termination of an operating agreement could limit Meralco’s
operations and have a material adverse effect on Meralco’s business, financial position and
financial performance.

The ability of distribution utilities, including Meralco, to generate revenue depends on available
electricity supply, which requires that transmission infrastructure have adequate capacity to
readily transmit the output of generating plants.

Currently, the Philippine electricity transmission infrastruc ture operated and maintained by NGCP
continues to experience constraints with respect to the amount of electricity that can be wheeled
from power plants to key load centers in specific areas in the different island grids, and reserve
shortages have been experienced in various areas of the Philippines. If the transmission system is
incapable of fully meeting rising demand and the transmission constraints remain unresolved, the
ability of Meralco and other distribution utilities to receive dispatch from their electricity suppliers’
power generation facilities will be adversely affected, and distribution utilities may have to resort
to temporary load shedding to avoid causing system instability. Should Meralco be forced to load
shed, perception of Meralco’s quality of service as well as the growth of its revenue from the
distribution and sale of electricity could be materially and adversely affected.

Meralco operates in an industry requiring large capital expenditures.

Meralco is required to expand, upgrade and maintain its network, customer service and other
facilities on a regular basis. Owing to the regulated nature of Meralco’s distribution business, the
regulated returns on such capital expenditure are received over an extended period of time. In this

32
Risk Factors and Other Considerations

regard, Meralco may require substantial financing to fund or support such capital expenditure and
future growth of its distribution business. Furthermore, Meralco needs consent from the ERC to
incur capital expenditures for its distribution business so that it can be taken into account in the
rate-setting process. There can be no assurance that financing will be made available or, if
available, that such financing will be obtained on terms favorable to Meralco or requisi te
regulatory approvals will be obtained. Meralco’s business and growth could be adversely affected
by insufficient financing, unfavorable financing terms or the inability to obtain regulatory approval.

Failure to obtain financing or the inability to obtain financing on reasonable terms could affect
the execution of Meralco’s growth strategies.

Meralco is obligated to undertake certain capital expenditures pursuant to ERC regulations, and
Meralco’s growth and expansion plans depend on its strategic inves tments in new projects and
acquisitions. These capital expenditures, investments and acquisitions are expected to be funded
through a combination of internally generated funds and external fund raising activities, including
debt and equity financing. Meralco’s ability to raise additional equity financing from non-Philippine
investors is subject to foreign ownership restrictions imposed by the Philippine Constitution and
applicable laws. Meralco’s continued access to debt financing as a source of funding for new
projects and acquisitions and for refinancing maturing debt is subject to many factors, many of
which are outside of Meralco’s control, including conditions set by the ERC which limit Meralco’s
permitted long-term debt to an amount equal to 50% of Meralco’s equity. Meralco cannot
guarantee that it will be able to arrange financing on acceptable terms, if at all. The inability of
Meralco to obtain debt financing from banks and other financial institutions would adversely affect
its ability to execute its growth strategies. In addition, any future debt incurred by Meralco may:

• increase Meralco’s vulnerability to general adverse economic and industry conditions;

• restrict Meralco’s ability to incur additional capital expenditures and other general corporate
expenses;

• require Meralco to dedicate a substantial portion of its cash flow to service debt payments;

• limit Meralco’s flexibility to react to changes in the power distribution business and the power
industry generally;

• restrict Meralco’s ability to declare dividends and its use of proceeds from the sale of assets;

• place Meralco at a competitive disadvantage in relation to competitors that have less debt;

• require Meralco to agree to additional financial covenants; and limit, along with other
restrictive covenants, Meralco’s ability to borrow additional funds and to operate its business.

33
Risk Factors and Other Considerations

Meralco has no recent operating history with respect to electricity generation.

Through its wholly owned subsidiary, MGen, Meralco acquired a 47% interest in RP Energy, which is
developing a 2 x 300MW, CFB coal-fired power plant in the Subic Bay Freeport Zone. MGen also
recently acquired an effective 28% interest in the 2 x 400MW LNG -fired power plant being
completed by PacificLight Power Pte. Ltd. (“PacificLight Power”) at Jurong Island, Singapore, which
is expected to be commercially operational by end of January 2014. While Meralco operated power
generation facilities in the 1970s, its primary business since the late 1970s has been distribution of
electricity and it has no current experience evaluating the viability and sustainability of electricity
generation plants. Meralco’s lack of recent history operating power generation plants exposes it to
certain risks, including, among others, risks associated with effectively managing a growing
business, risks associated with responding effectively to regulatory changes and risks associated
with the need to raise sufficient capital for the expansion and on -going operations of new
businesses.

The operation and development of electric generation plants involve significant risks.

The operation and development of electric generation plants involve significant risks, including,
among others:

breakdown or failure of power generation equipment, transmission and distribution lines,


pipelines or other necessary equipment or processes, leading to unplanned outages and other
operational issues;

flaws in the design of equipment or in the construction of an electric generation pl ant;

interruptions or insufficiency of fuel supply or other key inputs;

inability to secure sufficient power sales contracts to cover debt service and provide an
adequate rate of return;

problems with fuel quality;

material changes in laws or in governmental permit requirements;

operator error;

performance below expected levels of output or efficiency;

labor disputes, work stoppages, and other industrial actions by employees affecting either RP
Energy directly or the operations of MGen’s contractual counterparties;

diversion of resources away from Meralco’s core distribution business;

34
Risk Factors and Other Considerations

pollution or environmental contamination affecting the operation of MGen’s power generation


plants;

force majeure and other catastrophic events such as f ires, explosions, earthquakes, floods and
acts of terrorism and war that could result in forced outages, personal injury, loss of life, severe
damage to or partial or total destruction of MGen’s power generation plants and suspension of
their operations;

planned and unplanned power outages due to maintenance, expansion and refurbishment;

line congestion and other transmission issues;

the inability to maintain required governmental permits and approvals;

opposition from local communities and special-interest groups;

social unrest;

engineering and environmental problems;

contractual claims arising from the projects of MGen; and

construction and operational delays, or unanticipated cost overruns.

These events may cause personal injury and loss of life, severe damage to or destruction of
Meralco’s or its affiliates’ properties and the properties of others, and may result in the suspension
of their operations and the imposition of civil or criminal penalties. If Meralco or its affiliates
experience any of these or other problems, it may not be able to generate and sell electricity
profitably or at all, which would have an adverse effect on Meralco’s business, financial position
and financial performance. There can be no assurance that future occurrences of any of the events
listed above or any other events of a similar or dissimilar nature would not significantly decrease or
eliminate the revenues or cash flows from Meralco’s projects.

Meralco may have disputes with its joint-venture partners and counter-parties for its power
generation projects.

Meralco does not beneficially own a majority of the interests in RP E nergy or PacificLight Power,
and does not currently plan to take majority ownership of its other power generation projects.
Although Meralco exerts a degree of influence with respect to the management and operation of
these companies, having negotiated shareholder agreements with its partners that provide Meralco
with certain rights, the success and effective operation of these projects requires cooperation and
coordination between Meralco and its partners.

To the extent that there are disputes between Meralco and its partners or counter -parties
regarding the development, construction and operations of its joint-venture projects, Meralco

35
Risk Factors and Other Considerations

cannot provide any assurance that it will be able to resolve them in a manner that will be in
Meralco’s best interests. In addition, Meralco’s partners or counter -parties may:

• be unable or unwilling to fulfill their obligations, whether of a financial nature or otherwise;

• have economic or business interests or goals that are inconsistent with Meralco’s;

• take actions contrary to Meralco’s instructions or requests or contrary to Meralco’s policies and
objectives;

• secure settlements or judgments adverse to Meralco; or

• have financial difficulties.

Disagreements or disputes between Meralco and any of its partners or counter -parties that remain
unresolved for an extended period of time could result in significant costs, require significant
amounts of management time or result in the termination of Mer alco’s agreements with its
partners or counter-parties, and Meralco’s business, financial position and financial performance
could be materially and adversely affected.

Properties on which Meralco’s assets are located may be subject to defects in title o r Meralco’s
right to occupy or use such properties may be challenged.

While Meralco believes its rights to use its material properties are in good standing, no assurance
can be given that landowners to whose property Meralco has use rights, such as right -of-way for
poles and wires, have no defects in title. There can also be no assurance that Meralco’s rights will
not be challenged or impugned by third parties, including local governments.

Meralco’s franchise is subject to renewal at the discretion of the Philippine Congress. There is no
assurance that Meralco will be able to secure the extension or renewal of its franchise.

Under Philippine law, Meralco’s franchise for its electricity distribution business may be renewed
by the Philippine Congress, provided that certain requirements related to the rendering of public
services are met. Although Meralco intends to apply for the extension or renewal of its franchise
upon expiration on June 28, 2028, there can be no assurance that the Philippine Congress w ill
approve any application by Meralco to extend or renew its franchise because the Philippine
Congress has absolute discretion over whether to extend or renew existing franchises . The inability
to extend or renew its franchise would have a material advers e effect on Meralco’s financial
position and financial performance.

Meralco has relied and will continue to rely significantly on, and faces competition for, the
services of its experienced, skilled and specially trained technical personnel.

36
Risk Factors and Other Considerations

Meralco has relied, and will continue to rely, on a large number of specially trained technical
personnel with highly specialized skills and abilities for its power distribution and generating
activities. Meralco faces competition for its retained technical employees from other energy
distributors and similar business sectors, especially those located overseas where wages and
benefits are higher and better than those offered by Meralco. If Meralco is unable to retain a
sufficient number of its qualified personnel or if Meralco is unable to attract new employees with
the skills required for its technical operations, Meralco’s business operations could be adversely
affected. A general shortage of qualified personnel and the higher compensation offered by firms
in the general market and industry may also require Meralco to raise employee salaries and
benefits, which could negatively impact its profitability and operations.

Meralco may face labor disruptions that may interfere with its operations.

Meralco is exposed to the risk of strikes and other industrial actions. As at December 31, 2012,
Meralco employed a total of 5,960 full-time employees, of whom 82% was covered by one of two
collective bargaining agreements expiring in 2015 and 2017. While Meralco last experience d a
strike in 2000, there can be no assurance that there will be no disputes, strikes, work stoppages or
other industrial actions in the future. Any such event could disrupt operations, possibly for a
significant period of time, resulting in a material adverse effect on Meralco’s business, financial
position or financial performance.

Meralco is highly dependent on certain directors and members of senior management.

Meralco’s directors, including those appointed by its major shareholders, and senior management
have been integral to its successful business operations. The experience, knowledge, business
relationships and expertise that would be lost should any such per sons depart could be difficult to
replace. If Meralco loses the services of any such person and is unable to fill any vacant key
executive or management positions with qualified candidates, its business and financial
performance and financial performance may be materially and adversely affected.

Continued compliance with, and any changes to, environmental laws and regulations may
adversely affect Meralco’s financial performance and financial position.

The construction, development and operation of Meralco’s power distribution systems and future
power generation facilities are subject to a broad range of environmental laws and regulations.
These laws and regulations impose controls on air and water discharges, on the storage, handling,
discharge and disposal of fuel and hazardous substances, including wastes containing
polychlorinated biphenyls (“PCBs”), and on other aspects of the Meralco’s operations. Meralco has
incurred, and expects to continue to incur, operating costs and capital expenditures to comply with
environmental laws and regulations. The use of hazardous substances or discharge of pollutants
into the air, soil or water may cause Meralco to be liable to third parties or to the government.
Meralco may be required to incur costs to remedy any damage caused by such discharges or pay
fines or other penalties for non-compliance.

37
Risk Factors and Other Considerations

Environmental laws and regulations in the Philippines have become increasingly stringent and it is
possible that further laws and regulations will be adopted in the fut ure. The adoption of new
environmental laws and regulations, new interpretations of existing laws, increased governmental
enforcement of environmental laws or other developments in the future may require additional
capital expenditures or the incurrence of additional operating expenses in order to comply with
such laws and maintain operations. Furthermore, if the measures implemented by Meralco to
comply with such new laws and regulations are deemed insufficient by the Government,
compliance costs may significantly exceed current estimates. If Meralco fails to meet
environmental requirements, it may be subject to administrative, civil and criminal proceedings
initiated by the Government, as well as civil proceedings initiated by environmental groups or other
parties, which could result in substantial fines and penalties against Meralco, as well as orders that
could limit or halt its operations.

There can be no assurance that Meralco will not become involved in litigation or other proceedings
or be held responsible in any such future litigation or proceedings relating to environmental
matters, the costs of which, and management time required to resolve, could be material. Clean -up
and remediation costs of any sites in which Meralco’s facilities are located and any related
litigation could materially and adversely affect Meralco’s cash flow, financial performance and
financial position.

If the settlement agreement between Meralco and the National Power Corporation (“NPC”) is
invalidated, Meralco may be forced to incur significant expense relating to their prior contract
dispute.

In 2003, Meralco and the NPC signed a settlement agreement regarding a dispute over an
electricity sales contract dating from 1995, under which M eralco agreed to pay NPC P14,320
million. The settlement agreement has been challenged by the Office of the Solicitor General and
has since been subject to protracted litigation. While Meralco has been successful in a number of
court hearings, the Office of the Solicitor General has repeatedly appealed and petitioned for
review of the matter. For more information regarding this litigation, see “Business —Legal
Proceedings—NPC Settlement Agreement.” If the settlement agreement is subsequently
invalidated, Meralco may have to litigate its dispute with the NPC, and cannot guarantee that it will
obtain a favorable result. Should this occur, Meralco may have to incur significant expenses, and its
financial position and financial performance could be materially adversely affected.

Litigation may result in the delay or cancellation of RP Energy’s power generation project at Subic
Bay.

Meralco is currently developing a coal-fired CFB power plant in the Subic Bay Freeport Zone
through its indirect 47%-owned associate, RP Energy, which is expected to come online in early
2017. This project is the subject of an ongoing judicial proceeding. A Writ of Kalikasan
(environmental protection) complaint was filed in July 2012 by certain special interest parties
opposed to the Subic Bay project. In January 2013, the Court of Appeals issued a decision noting

38
Risk Factors and Other Considerations

certain procedural and documentary deficiencies relating to the Department of Environment and
Natural Resources’ issuance of an Environmental Compliance Certificate a nd the Subic Bay
Metropolitan Authority’s conclusion of a Lease and Development Agreement with RP Energy for the
project. The Court of Appeals has declared both the Environmental Compliance Certificate and the
Lease and Development Agreement invalid. Each of RP Energy, the Department of Environment and
Natural Resources and the Subic Bay Metropolitan Authority filed motions for reconsideration with
the Court of Appeals. In May 2013, the Court of Appeals denied the motions for reconsideration
and maintained that the original Environmental Compliance Certificate and the Lease Development
Agreement are invalid. As a result, RP Energy’s power generation project may be delayed or
cancelled in the event a favorable final decision is not secured. Furthermore, Meralco’s cash flow,
financial performance and financial position could be adversely affected. Meralco intends to appeal
the resolution denying the Motions for Reconsideration with the Supreme Court of the Philippines
via a Petition for Review on Certiorari. For more information , see “Business—Legal Proceedings—
Subic Bay Project.”

Adverse results of any pending and future litigation and disputes may impact Meralco’s future
cash flows, financial performance and financial position.

Meralco is currently involved in several legal proceedings, including tax disputes with various local
government units in the Philippines. These local government units have claimed that Meralco is
deficient in the payment of real property taxes on certain of its assets, including electric poles,
wires, insulators, transformers and substations. If these disputes are determined adversely to
Meralco, Meralco may seek ERC approval to recover the expenses incurred from its customers,
which it may not be able to do in a timely fashion, or at all. Meralco may also from time to time be
subject to routine claims by its retail customers for damage to electrical equipment or personal
injury.

For more information on Meralco’s legal proceedings, see “Business —Legal Proceedings.” While
Meralco believes the positions it has taken in these cases are legally valid, the final results of these
cases may prove to be different from its expectations. In addition, there is no assurance that
Meralco will not be involved in future litigation or other disputes, the results of whi ch may
materially and adversely impact its business and financial positions.

Certain statistical information in this Prospectus has not been independently verified.

Certain statistics in this Prospectus relating to the Philippines, the industries and ma rkets in which
Meralco’s businesses compete, including statistics relating to market size, are derived from various
Government and private publications, in particular, those produced by industry associations and
research groups. This information has not been independently verified and may not be accurate,
complete, up-to-date or consistent with other information compiled within or outside the
Philippines.

39
Risk Factors and Other Considerations

Meralco has substantial indebtedness which could adversely affect its financial health and
prevent it from fulfilling its obligations under the Bonds.

Meralco currently has and, after this offering, will continue to have a significant amount of
indebtedness. See “Description of Material Indebtedness.” Meralco’s indebtedness could have
negative consequences for investors and Meralco. For example, it could:

• make it more difficult for Meralco to satisfy its obligations with respect to the Bonds;

• increase Meralco’s vulnerability to general adverse economic and industry conditions;

• require Meralco to dedicate a substantial portion of its cash flows from operations to payments
on its indebtedness, thereby reducing the availability of its cash flows to fund working capital,
capital expenditures, acquisitions, dividends and other general corporate purpose s;

• limit Meralco’s flexibility in planning for, or reacting to, changes in its business and the industry
in which it operates;

• limit its ability to obtain financing in the future for working capital, capital expenditures,
acquisitions, dividends or other purposes on acceptable terms, on a timely basis or at all.

Meralco may be unable to refinance its outstanding debt and any future financing it receives may
be less favorable than current financing arrangements.

Meralco has issued notes and has multiple loan agreements with local banks. As at September 30,
2013, Meralco’s debt under its loan agreements amounted to P24,207 million. See “Description of
Material Indebtedness.” Meralco’s continued access to debt fin ancing is subject to a number of
factors which are outside of its control. For example, political instability, an economic downturn,
social unrest, changes in the Philippine regulatory environment or significant sustained shortages
in power supply could increase Meralco’s cost of borrowing or restrict its ability to obtain debt
financing. Market conditions and other factors may not permit future projects with loan terms
similar to those that Meralco has previously received. If Meralco is not able to refinan ce its
outstanding debt at maturity, it may have to undertake alternative means of financing, such as:

selling assets;

seeking to raise additional equity;

restructuring its debts; or

curtailing capital expenditures; or

other undertaking other methods of cost reduction..

40
Risk Factors and Other Considerations

The undertaking of any of the foregoing actions could have a materially adverse effect on Meralco’s
financial position and financial performance. In addition, if Meralco is unable to obtain financing
for its future projects on a favorable basis, it may have a material adverse effect on its growth
plans, financial position and financial performance.

Meralco’s operations are restricted by the terms of certain of its indebtedness, including the
Bonds, which could limit its ability to plan for or to react to market conditions or meet its capital
needs.

The terms of certain of Meralco’s indebtedness, including its bank loans and th e trust deed
governing the Bonds include a number of significant restrictive covenants. These covenants
restrict, among other things, Meralco’s ability to:

• incur additional debt;

• issue guarantees;

• enter into mergers, acquisitions or consolidations;

• dispose of a significant portion of its assets;

• engage in certain transactions with related parties; and

• create liens on its assets.

These covenants could limit Meralco’s ability to plan for or react to market conditions or to meet
its capital needs. Meralco’s ability to comply with these covenants may be affected by events
beyond its control, and it may have to curtail some of its operations and growth plans to maintain
compliance.

Meralco is exposed to counterparty risk.

Meralco is exposed to the credit of its counterparties under the contracts it has with such counter -
parties. For example, Meralco is exposed to risk relating to receivables collected by third party
collectors, as well as risks relating to financial institutions where such funds are held. In addit ion,
Meralco may enter into swap arrangements and derivative transactions, which expose it to the risk
that the counterparty may default on its obligations to perform under the relevant contract.
Meralco’s surplus funds are also invested in interest -bearing deposits with financial institutions. In
the event a counterparty, including a financial institution which holds Meralco’s funds, is declared
bankrupt or becomes insolvent, Meralco could experience delays in obtaining Meralco’s funds or
liquidating the position which could lead to losses. In the future, should Meralco enter into
derivative transactions, there is also a possibility that such transactions could be terminated for
reasons such as bankruptcy, supervening illegality or change in the tax laws or accounting rules

41
Risk Factors and Other Considerations

relevant to those transactions at the time the agreement was originated. Any of the foregoing
could have a material adverse effect on Meralco’s financial position and financial performance.

Meralco faces risks associated with its regulatory asset base.

While Meralco endeavors to optimize the capacity and useful life of its assets and replace them
when their performance becomes unsatisfactory, it may not be able to do so at all times and/or
replace its assets in a timely manner. The failure of the foregoing may result in service disruptions
and affect the reliability of Meralco’s network and services, thereby having a negative impact on
Meralco’s business and reputation. Meralco may further be subject to financial penalties imposed
by the ERC under the Performance Incentive Scheme (“PIS”) for annual network and service
performance not meeting set thresholds and for any interruptions resulting in a breach of the
required GSL. Consequently, Meralco’s business and financial position may be adversely affected.
In addition, some of Meralco’s assets may be deemed by the ERC to be unnecessary to the
provision of efficient and reliable service, which would reduce the size of Meralco’s rate base and,
consequently, the rates Meralco may charge.

Meralco may not be able to fully deploy the proceeds of the Bonds in a timely manner.

Meralco expects to use the proceeds of the Bonds to refinance existing debt and finance peso -
denominated capital expenditures. It is possible that some of the use of these proceeds will not
occur immediately. Any income that Meralco earns on the proceeds of this offering that it holds as
cash or cash equivalents will be less than the interest payable on the Bonds, which would adversely
affect its result of operations.

42
Risk Factors and Other Considerations

RISKS RELATING TO THE PHILIPPINES

The Philippine economy and business environment may be disrupted by political or social
instability.

The Philippines has from time to time experienced severe political and social instability, including
acts of political violence. In 2001, allegations of corruption against then President Joseph Estrada
resulted in protracted televised impeachment proceedings against him. These proceedings were
followed by widespread street demonstrations and a public withdrawal of support for then
President Estrada by the military that eventually forced Estrada to resign. On July 27, 2003, over
270 military officers and soldiers conducted an unsuccessful coup d’état against Estrada’s
successor, President Gloria Macapagal-Arroyo, due to allegations of corruption. After the May
2004 elections, President Arroyo was re-elected and persistent accusations of corruption and
electoral fraud were made against Arroyo during her second term. On February 24, 2006, another
attempted coup d’état led President Arroyo to issue Proclamation 1017, “Proclamation Declaring a
State of National Emergency,” which was criticized as a virtual declaration of martial law and
portions of it were later declared unconstitutional by the Supreme Court of the Philippines. O n
November 29, 2007, Senator Antonio Trillanes IV, a leader of the 2003 coup d’état who was
elected to the Senate while in jail, led an armed occupation by military officers and soldiers of a
luxury hotel in the Makati financial district and publicly called for President Arroyo’s ouster.
Senator Trillanes and his troops later surrendered. On November 23, 2009, in the southern island
of Mindanao’s Maguindanao province, approximately 100 armed men allegedly affiliated with the
Ampatuan political family murdered 58 persons, including members of the Mangudadatu family
(the Ampatuans’ political rivals in the province), lawyers, journalists and aides accompanying
them, and motorists whose vehicles were behind the Mangudadatus’ vehicles. This was the
deadliest incident of political violence and of violence directed at journalists in the Philippines’
recent history and President Arroyo sent hundreds of troops to and declared martial law over
Maguindanao after the incident.

On December 12, 2011, the Philippine House of Representatives initiated impeachment


proceedings against Renato Corona, then Chief Justice of the Supreme Court of the Philippines.
The impeachment complaint accused Corona of improperly issuing decisions that favored former
President Arroyo, as well as failure to disclose certain properties, in violation of rules applicable to
all public employees and officials. The trial of Chief Justice Corona began in January 2012. On May
29, 2012, the impeachment court found Corona guilty of fail ing to disclose to the public his
statement of assets, liabilities and net worth and removed Corona from his position as Chief
Justice of the Supreme Court of the Philippines.
More recently, a major Philippine broadsheet exposed a scam relating to the div ersion and misuse
of the Priority Development Assistance Fund by some members of Congress through a pseudo -
development organization headed by Janet Lim Napoles. As a result of this exposé, a number of
investigations, including one in the Senate of the Phi lippines, have been launched to determine
the extent of the diversion of the Priority Development Assistance Fund and the government
officials and the private individuals responsible for the misappropriation of public funds. Cases of
plunder and malversation of public funds are now pending against Janet Lim Napoles, three (3)
senators, a few members of the House of Representatives, and other private individuals.

43
Risk Factors and Other Considerations

There is no guarantee that future events will not cause political instability in the Philippine s. Such
instability may disrupt the country and its economy, discourage travel to Metro Manila and could
materially and adversely affect Meralco’s business, financial position and financial performance.

Continued terrorist activities in the Philippines could destabilize the country, adversely affecting
Meralco’s business environment.

Certain islands in the Philippines have been subject to a number of terrorist attacks and violent
crimes in recent years. An increase in the number of terrorist attacks or v iolent crimes, or the
occurrence of a large-scale terrorist attack, in the Philippines could negatively affect the Philippine
economy and, therefore, Meralco’s business, financial position and financial performance. The
Philippine army has been in conflict with the Abu Sayyaf organization, which has ties to the al-
Qaeda terrorist network and has been identified as being responsible for kidnapping and terrorist
activities in the Philippines. There has been a series of bombings in the Philippines, mainly in
southern cities. Although no one has claimed responsibility for these attacks, Philippine military
officials have stated that the attacks appeared to be the work of the Abu Sayyaf organization.
There has also been a number of violent crimes in the Philippines, including an isolated incident in
August 2010 involving the hijacking of a tour bus carrying 25 Hong Kong tourists in Manila, which
resulted in the deaths of eight tourists and prompted the Hong Kong government to declare a
travel warning on the Philippines. On January 25, 2011, five people were killed and thirteen were
injured when an improvised mortar bomb triggered by a mobile phone exploded on a bus in
Makati City. In August 2013, a series of bombings occurred in the cities of Cagayan de Oro and
Cotabato City, and in other areas in Maguindanao and North Cotabato provinces, all located in
Mindanao. Early in September 2013, an alleged splinter group of the Moro National Liberation
Front took hostages in Zamboanga and initiated an armed aggression vers us the Armed Forces of
the Philippines. While the Zamboanga standoff situation is improving, the conflict is not yet fully
resolved.

There can be no assurance that the Philippines will not be subject to further, or an increased
number of, acts of terrorism or violent crimes in the future. Terrorist attacks and violent crimes
have, in the past, had a material adverse effect on investment and confidence in, and the
performance of, the Philippine economy and, in turn, the Meralco Group’s business, financial
position and financial performance. Furthermore, there can be no assurance that the Philippines
will not suffer a large-scale terrorist attack which could impact the Philippine economy for a
significant period of time.

Territorial disputes with China and a number of Southeast Asian countries may disrupt the
Philippine economy and business environment.
The Philippines, China and several Southeast Asian nations have been engaged in a series of long -
standing territorial disputes over certain islands in the West Philippine Sea, also known as the
South China Sea. The Philippines maintains that its claim over the disputed territories is supported
by recognized principles of international law consistent with the United Nations Convention on the
Law of the Sea (“UNCLOS”). The Philippines made several efforts during the course of 2011 and

44
Risk Factors and Other Considerations

2012 to establish a framework for resolving these disputes, calling for multilateral talks to
delineate territorial rights and establish a framework for resolving disputes.

Despite efforts to reach a compromise, a dispute arose between the Philippines and China over a
group of small islands and reefs known as the Scarborough Shoal. In April and May 2012, the
Philippines and China accused each other of deploying vessels to the shoal in an attempt to take
control of the area, and both sides unilaterally imposed fishing bans at the shoal during later that
year. These actions threatened to disrupt trade and other ties between the two countries,
including a temporary ban by China on Philippine banana imports, as well as a temporary
suspension of tours to the Philippines by Chinese travel agencies. Since July 2012, Chinese vessels
have reportedly turned away Philippine fishing boats attempting to enter the shoal, and the
Philippines has continued to protest China’s presence there. In January 2013, the Philippines sent
notice to the Chinese embassy in Manila that it intended to seek international arbitration to
resolve the dispute under UNCLOS. China has rejected and returned the notice sent by the
Philippines to initial arbitral proceedings. In May 2013, the Philippine Coast Guard shot and killed
a Taiwanese fisherman in an area of the South China Sea claimed as an exclusive economic zone by
both countires.

In September 2013, the Permanent Court of Arbitration in The Hague, Netherlands issued the rules
of procedure and initial timetable for the arbitration in which it will act as a registry of the
proceedings.

Should these territorial disputes continue or escalate further, the Philippines and its economy may
be disrupted and Meralco’s operations could be adversely affected as a result. In particular,
further disputes between the Philippines and China may lead bo th countries to impose trade
restrictions on the other’s imports. Any such impact from these disputes could adversely affect
the Philippine economy, and materially and adversely affect Meralco’s business, financial position
and financial performance.

Corporate governance and disclosure standards in the Philippines may be less stringent than
those in other countries.
There may be less publicly available information about Philippine public companies than is
regularly made available by public companies in certain other countries. Philippine SEC and PSE
requirements with respect to corporate governance standards may also be less stringent than
those applicable in certain other jurisdictions. For example, the SRC requires publicly listed
companies to have at least two independent directors or such number of independent directors as
is equal to 20% of its board of directors, out of a total of seven directors, whichever is lower, but
in no case fewer than two. Meralco currently has two independent directors. Man y other
countries require a significantly greater number of independent directors. Further, rules and
policies against self-dealing and those regarding the preservation of Bondholder interests may be
less well-defined and enforced in the Philippines than elsewhere.

The relatively low credit ratings of the Philippines may restrict the access to capital of Philippine
companies, including Meralco.

45
Risk Factors and Other Considerations

Historically the Philippines’ sovereign debt has been rated relatively low by international credit
rating agencies. Although the Philippines’ long-term foreign currency-denominated debt was
recently upgraded by Fitch and Standard & Poor’s to the investment -grade rating of BBB-, and by
Moody’s to Baa3, the continued relatively low sovereign ratings of the Government w ill directly
and adversely affect companies domiciled in the Philippines as international credit rating agencies
issue credit ratings by reference to that of the sovereign. No assurance can be given that Fitch,
Moody’s, Standard & Poor’s or any other international credit rating agency will not downgrade the
credit ratings of the Government in the future and, therefore, Philippine companies, including
Meralco. Any such downgrade could have an adverse impact on the liquidity in the Philippine
financial markets, the ability of the Government and Philippine companies, including Meralco, to
raise additional financing, and the interest rates and other commercial terms at which such
additional financing is available.

46
Risk Factors and Other Considerations

RISKS RELATING TO THE BONDS

Liquidity Risk

The Philippine securities markets are substantially smaller, less liquid and more concentrated than
major securities markets abroad. The Company cannot guarantee that the market for the Bonds
will always be active or liquid. Even if the Bonds are listed o n the PDEx, trading in securities such
as the Bonds may be subject to extreme volatility at times, in response to fluctuating interest
rates, developments in local and international capital markets and the overall market for debt
securities among other factors. There is no assurance that the Bonds may be easily disposed at
prices and volumes at instances best deemed appropriate by their holders.

Pricing Risk

The Bond’s market value moves (either up or down) depending on the change in interest rates.
The Bonds when sold in the secondary market are worth more if interest rates decrease since the
Bonds have a higher interest rate relative to the market. Likewise, if prevailing interest rate
increases, the Bonds are worth less when sold in the secondary mark et. Therefore, an investor
faces possible loss if he decides to sell.

Reinvestment Risk

Prior to final maturity, the Company may redeem (in whole but not in part only) the outstanding
12-Year Bonds on the 7th Year from Issue Date (see "Description of the Bonds-- Early Redemption
Option"). In the event that the Company exercises this early redemption option, all Bonds will be
redeemed and the Company would pay the amounts to which Bondholders would be entitled.
Following such redemption and payment, there can be no assurance that investors in the
redeemed Bonds will be able to reinvest such amounts in securities that would offer a comparative
or better yield or terms at such time.

Retention of Ratings Risk

There is no assurance that the rating of the Bonds will be retained throughout the life of the
bonds. The rating is not a recommendation to buy, sell, or hold securities and may be subject to
revision, suspension, or withdrawal at any time by the assigning rating organization.

Risk on Enforcing Judgments against Meralco

It may be difficult for Bondholders to enforce judgments against Meralco obtained outside of the
Philippines. In addition, all of the directors and substantially all of the officers of Meralco are
residents of the Philippines, and all or a substantial portion of the assets of such persons are
located in the Philippines. As a result, it may be difficult for Bondholders to effect service of
process upon such persons, or to enforce against them judgments obtained in courts or arbitral

47
Risk Factors and Other Considerations

tribunals outside the Philippines predicated upon the laws of jurisdictions other than the
Philippines.

The Philippines is party to the United Nations Convention on the Enforcement and Recognition of
Arbitral Awards, though it is not party to any internat ional treaty relating to the recognition or
enforcement of foreign judgments. Nevertheless, the Philippine Rules of Civil Procedure provide
that a judgment or final order of a foreign court is, through the institution of an independent
action, enforceable in the Philippines as a general matter, unless there is evidence that: (a) the
foreign court rendering judgment did not have jurisdiction; (b) the judgment is contrary to the
laws, public policy, customs or public order of the Philippines; (c) the party ag ainst whom
enforcement is sought did not receive notice; or (d) the rendering of the judgment entailed
collusion, fraud, or a clear mistake of law or fact.

48
PHILIPPINE TAXATION
The following is a discussion of the material Philippine tax consequences of the acquisition,
ownership and disposition of the Bonds. This general description does not purport to be a
comprehensive description of the Philippine tax aspects of the Bonds an d no information is provided
regarding the tax aspects of acquiring, owning, holding or disposing of the Bonds under applicable
tax laws of other applicable jurisdictions and the specific Philippine tax consequence in light of
particular situations of acquiring, owning, holding and disposing of the Bonds in such other
jurisdictions. This discussion is based upon laws, regulations, rulings, and income tax conventions
(treaties) in effect at the date of this Prospectus.

The tax treatment of a holder of Bonds may vary depending upon such holder’s particular situation,
and certain holders may be subject to special rules not discussed below. This summary does not
purport to address all tax aspects that may be important to a Bondholder.

PROSPECTIVE PURCHASERS OF THE BONDS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE PARTICULAR TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF A BOND,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY LOCAL OR FOREIGN TAX LAWS.

As used in this section, the term “resident alien” refers to an individual whose residence is within the
Philippines and who is not a citizen thereof; a “non-resident alien” is an individual whose residence is
not within the Philippines and who is not a citize n of the Philippines. A non-resident alien who is
actually within the Philippines for an aggregate period of more than 180 days during any calendar
year is considered a “non-resident alien doing business in the Philippines,” otherwise, such non -
resident alien who is actually within the Philippines for an aggregate period of 180 days or less
during any calendar year is considered a “non-resident alien not doing business in the Philippines.”
A “resident foreign corporation” is a non-Philippine corporation engaged in trade or business within
the Philippines; and a “non-resident foreign corporation” is a non-Philippine corporation not
engaged in trade or business within the Philippines.

TAXATION OF INTEREST

The Tax Code provides that interest-bearing obligations of Philippine residents are Philippine-
sourced income subject to Philippine income tax. Under the Tax Code, the term “deposit
substitute” has been defined as an alternative form of obtaining funds from 20 or more individual
or corporate lenders at any one time, other than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the the borrower’s own account. If the Bonds are c onsidered
deposit substitutes, interest income derived by Philippine resident individuals from the Bonds
would be subject to income tax, which is withheld at source, at the rate of 20%. Generally,
interest on the Bonds received by non-resident foreign individuals engaged in trade or business in
the Philippines is subject to a 20% withholding tax while that received by non-resident foreign
individuals not engaged in trade or business is taxed at the rate of 25%. Interest income received
by domestic corporations and resident foreign corporations from the Bonds would be taxed at the
rate of 20%. The tax imposed on the interest is a final withholding tax which constitutes a final
settlement of Philippine income tax liability with respect to such interest.

49
Philippine Taxation

The foregoing rates with respect to non-resident foreign individuals not engaged in trade or
business in the Philippines and to non-resident foreign corporations are subject to further
reduction by any applicable tax treaties in force between the Philippines and the country of
residence of the non-resident owner. Most tax treaties to which the Philippines is a party
generally provide for a reduced tax rate of 15% in cases where the interest arises in the
Philippines and is paid to a resident of the other contracting state. However, most tax treaties also
provide that reduced withholding tax rates shall not apply if the recipient of the interest, who is a
resident of the other contracting state, carries on business in the Philippines through a permanent
establishment and the holding of the relevant interest -bearing instrument is effectively connected
with such permanent establishment. Availing of such reduced tax treaty rates will require
confirmation of entitlement thereto from the BIR, as discussed below.
Recent promulgations from the BIR concerning the tax treatment of interest income earnings on
financial instruments and other related transactions differ from previous promulgations and
opinions issued by the BIR on the same matter. Thus, depending on the position taken by the said
office, taxes on interest income applicable to the Bonds may, at any time, be subject to
adjustment. Such changes include the possibility of a higher tax rate.

TAX-EXEMPT OR TAX-REDUCED STATUS

Bondholders who are exempt from or are not subject to final withholding tax on interest income
may avail of such exemption by submitting the necessary documents. Said Bondholder shall submit
the following requirements to the Registrar, or to the Underwriters or selling agents (together
with their completed Application to Purchase) who shall then forward the same to the Registrar:

(i) a copy of the original tax exemption certificate, ruling or opinion issued by the BIR
addressed to the Applicant confirming the exemption, and certified by an authorized
officer of the Applicant as being a true copy of the original on file with the App licant;

(ii) a duly notarized undertaking, in the prescribed form, executed by

(ii.a) the Corporate Secretary or any authorized representative, who has


personal knowledge of the exemption based on his official functions, if the
Applicant purchases the Bonds for its account, or

(ii.b) the Trust Officer, if the Applicant is a universal bank authorized under
Philippine law to perform trust and fiduciary functions and purchase the Bonds
pursuant to its management of tax-exempt entities (i.e. Employee Retirement
Fund, etc.), declaring and warranting such entities’ tax -exempt status or
preferential rate entitlement, undertaking to immediately notify the Issuer and
the Registrar and Paying Agent of any suspension or revocation of the tax
exemption certificates or preferential rate entitlement, and agreeing to
indemnify and hold the Issuer and Registrar and Paying Agent free and
harmless against any claims, actions, suits, and liabilities arising from the non -
withholding of the required tax;

50
Philippine Taxation

(iii) such other documentary requirements as may be reasonably required under the
applicable regulations of the BIR/Philippine taxing authorities for purposes of
claiming tax treaty relief, which shall include a copy of the duly filed tax treaty relief
application with the International Tax Affairs Division of the BIR as required under
BIR Revenue Memorandum Order No. 72-2010; provided further that, all sums
payable by the Issuer to tax-exempt entities shall be paid in full without deductions
for Taxes, duties, assessments, or government charges, subject to the submission by
the Bondholder claiming the benefit of any exemption of reasonable evidence of
such exemption to the Registrar and Paying Agent.

Bondholders may transfer their Bonds at any time, regardless of tax statu s of the transferor vis-à-
vis the transferee. Should a transfer between Bondholders of different tax status occur on a day
which is not an Interest Payment Date, tax exempt entities trading with -non-tax exempt entities
shall be treated as non-tax exempt entities for the interest period within which such transfer
occurred. Transfers taking place in the Register of Bondholders after the Bonds are listed in PDEx
may be allowed between taxable and tax-exempt entities without restriction provided the same
are in accordance with the relevant rules, conventions and guidelines of PDEx and the depositary.

A selling or purchasing Bondholder claiming tax-exempt status is required to submit the following
documents to the Issuer, within three (3) Business Days from se ttlement date: (i) a written
notification of the sale or purchase, including the tax status of the selling or buying party, and (ii)
an indemnity agreement wherein the new Bondholder undertakes to indemnify the Issuer for any
tax that may later on be assessed from the Issuer on account of such transfer.

VALUE-ADDED TAX

Gross receipts arising from the sale of the Bonds in the Philippines by Philippine -registered dealers
in securities and lending investors shall be subject to a 12% value -added tax. For dealers in
securities, the term “gross receipt” means gross selling price less acquisition cost of the Bonds sold.
Dealer in securities refer to merchants of stock or securities, whether an individual partnership or
corporation, with an established place of business, regularly engaged in the purchase of securities
and their resale to customers, that is, one who as a merchant buys securities and sells them to
customers with a view to the gains and profits that may be derived therefrom. Lending investors
include all persons other than banks, non-bank financial intermediaries, finance companies and
other financial intermediaries not performing quasi banking functions, who make a practice of
lending money for themselves or others at interest.

GROSS RECEIPTS TAX

Bank and non-bank financial intermediaries are subject to gross receipts tax on gross receipts
derived from sources within the Philippines in accordance with the following schedule:

On interest, commissions and discounts from lending activities as well as income from financial
leasing, on the basis of remaining maturities of instruments from which such receipts are derived:

Maturity period is five years or less 5%


Maturity period is more than five years 1%

51
Philippine Taxation

In case the maturity period referred to above is shortened through pre-termination or otherwise
redeemed by the Issuer pursuant to the Terms and Conditions, then the maturity period shall be
reckoned to end as of the date of pre-termination for purposes of classifying the transaction and the
correct rate shall be applied accordingly.

Net trading gains realized within the taxable year on the sale or disposition of the Bonds shall be
taxed at 7%.

DOCUMENTARY STAMP TAX

A documentary stamp tax is imposed upon the issuance of debentures and certific ates of
indebtedness issued by Philippine companies, such as the Bonds, at the rate of P1.00 for each P200,
or fractional part thereof, of the issue price of such debt instruments; provided that, for debt
instruments with terms of less than one year, the documentary stamp tax to be collected shall be of
a proportional amount in accordance with the ratio of its term in number of days to 365 days.

The documentary stamp tax is collectible wherever the document is made, signed, issued, accepted,
or transferred, when the obligation or right arises from Philippine sources, or the property is
situated in the Philippines. Any applicable documentary stamp taxes on the original issue shall be
paid by the Issuer for its own account.

No documentary stamp tax is generally imposed on the subsequent sale or disposition of the Bonds
provided that such sale or disposition does not constitute a renewal or extension of the maturity of
the Bonds or carries with it a renewal or issuance of new instruments in the name of the tr ansferee
to replace the old ones.

TAXATION ON SALE OR OTHER DISPOSITION OF THE BONDS

Income Tax

A Bondholder will recognize a gain or loss on the sale or other disposition (including the exercise of
the Put Option as allowed under the Terms and Conditions) of the Bonds in an amount equal to the
difference between the amount realized from such disposition and such Bondholder’s acquisition
cost. Such gain or loss is likely to be deemed a capital gain or loss assuming that the Bonds qualify as
capital asset in the hands of the Bondholders.

Under the Tax Code, any gain realized from the sale, exchange or retirement of securities,
debentures and other certificates of indebtedness with an original maturity date of more than five
years (as measured from the date of issuance of such securities, debentures or other certificates of
indebtedness) shall not be subject to income tax. As the Bonds have a maturity of seven years and
twelve years, any gains realized by a Bondholder on the trading of the Bonds shall be exempt from
income tax.

In case of an individual taxpayer, only 50% of the capital gain or loss is recognized upon the sale or
exchange of a capital asset if it has been held for more than 12 months.

52
Philippine Taxation

An exercise by a Bondholder of the Fifth Year Put Option in 2019 or the Tenth Year Put Option on
2023 as allowed under the Terms and Conditions would be each considered a sale for purposes of
such tax. However, given that the amount to be received by the Bondholder in each case is limited
to par value plus accrued but unpaid interest, there should be no income tax due on exercise of the
Put Option, provided that the Bondholder’s acquisition cost is not lower than par value of the
Bonds.

Estate and Donor’s Tax

The transfer by a deceased person, whether a Philippine r esident or non-Philippine resident, to his
heirs of the Bonds shall be subject to an estate tax which is levied on the net estate of the deceased
at progressive rates ranging from 5% to 20%, if the net estate is over P200,000. A Bondholder shall
be subject to donor’s tax on the transfer of the Bonds by gift at either (i) 30%, where the donee or
beneficiary is a stranger, or (ii) at progressive rates ranging from 2% to 15% if the net gifts made
during the calendar year exceed P100,000 and where the donee or beneficiary is other than a
stranger. For this purpose, a “stranger” is a person who is not a: (a) brother, sister (whether by
whole or half-blood), spouse, ancestor and lineal descendant; or (b) relative by consanguinity in the
collateral line within the fourth degree of relationship. Donations between corporations and those
made between an individual and a corporation are considered donations made to a stranger.
Donor’s tax may also apply in cases where the Bonds are sold/transferred for less than an adequate
and full consideration in money or money’s worth, i.e., where the fair market value of the Bond at
the time of sale/transfer exceeds the consideration received.

The estate tax and the donor’s tax, in respect of the Bonds, shall not be collected (a) if the
deceased, at the time of death, or the donor, at the time of the donation, was a citizen and resident
of a foreign country which, at the time of his death or donation, did not impose a transfer tax of any
character in respect of intangible personal property of citizens of the Philippines not residing in that
foreign country; or (b) if the laws of the foreign country of which the deceased or donor was a
citizen and resident, at the time of his death or donation, allows a similar exemption from transfer
or death taxes of every character or description in respect of intangible personal property owned by
citizens of the Philippines not residing in the foreign cou ntry.

53
USE OF PROCEEDS

The net proceeds from the issue of the Bonds, without the overallotment option (after deduction of fees,
commissions, and expenses) are approximately P14,864,789,778.00. Assuming the overallotment option of up to
P5,000,000,000.00 is fully exercised, Meralco expects total net proceeds of approximately P19,823,660,746.00
after fees, commissions, and expenses.

Net proceeds from the Offer are estimated as follows:

For a P15.0 Billion Issue Size


Total
Estimated proceeds from the sale of the Bonds P15,000,000,000.00
Less: Estimated Upfront Expenses
Documentary Stamp Tax P 75,000,000.00
SEC Registration Fees 5,618,125.00
Underwriting Fees 48,387,097.00
Estimated Professional Expenses 950,000.00
Marketing/Printing/Photocopying Costs and 300,000.00
out-of-pocket expenses
Publication 150,000.00
Ratings Fee 4,480,000.00
Registry Account Opening Fee 75,000.00
Trustee Fee 50,000.00
Listing Fee 200,000.00

Estimated net proceeds to Meralco for a P15.0 Billion Issue Size P14,864,789,778.00

For a P5.0 Billion Overallotment Option


Total
Estimated proceeds from the sale of the Bonds P5,000,000,000.00
Less: Estimated Upfront Expenses
Documentary Stamp Tax P 25,000,000.00
Underwriting Fees 16,129,032.00

Estimated net proceeds to Meralco for a P5.0 Billion Overallotment P4,958,870,968.00

Total Net Proceeds (inclusive of P5.0 Bilion Overallotment) P19,823,660,746.00

Aside from the fees enumerated above, Meralco will be paying the following estimated annual fees related to the
Bonds:

1) PDTC registry maintenance annual fee of P200,000.00, in quarterly payments;

54
Use of Proceeds

2) After Issue Date, a paying agency fee with a minimum of P10,000.00 and a maximum of P100,000.00 is
payable every interest payment date. The Registrar will charge a monthly maintenance fee based on the face
value of the Bonds and the number of Bondholders;
3) Metropolitan Bank & Trust Company- Trust Banking Group as trustee to the Bondholders annual retainer fee
of P200,000.00;
4) PDEx annual listing maintenance fee of P50,000.00; and
5) PhilRatings annual monitoring fee of P504,000.00.

Expenses incurred in connection with the offering of the Bonds, including documentary stamp tax, fees of the
Trustee, Registrar and Paying Agent and the Joint Lead Underwriters’ legal counsel will be for the account of the
Company.

Net proceeds from the Offer amounting to approximately P19,823,660,746.00 will be utilized for refinancing
certain facilities including principal payments, accrued interest, prepayment penalties and other financing costs.

Details of refinancing include 1) prepayment of various corporate notes with principal amount of up P17.5 Billion
excluding accrued interest and prepayment penalties, if any; 2) prepayment of a P1.7 Billion short-term
obligation maturing on December 6, 2013 and 3) prepayment of P600 million worth of maturing obligations in
2014. Details of these facilities are detailed in the table below:

Principal Outstanding Prepayment/


Facility Date Purpose (in PHP millions) Interest Rate Maturity Date
November 25, 2010 Capital Expenditure 7-year notes: 1,987 7-year notes: 5.83% March 3, 2014
10-year 2,789 10-year notes: 6.45%
notes:
December 20, 2010 Capital Expenditure 5-year notes: 23 5-year notes: 5.23% December 23,
5.5-year notes: 4,877 5.5-year notes: 5.31% 2013
June 27, 2011 Capital Expenditure 7-year notes: 490 7-year notes: 6.27% June 30, 2014
10-year notes: 4,410 10-year notes: 6.89%
January 5, 2012 Capital Expenditure 7-year notes: 990 7-year notes: 5.54% January 9, 2014
10-year notes: 1,980 10-year notes: 5.64%
December 13, 2012 General Corporate 1,700 3.8% December 6,
Requirements 2013
October 5, 2009 Capital Expenditure 600 6M PDST-0.30% October 5, 2014

By refinancing its outstanding corporate notes with the Bonds, Meralco intends to extend its debt maturity
profile and improve its overall cost of debt with the lower interest rate on the bonds.

No part or portion of the proceeds will be used to reimburse any officer, director, employee or shareholder for
services rendered, assets previously transferred, money loaned or advanced, or otherwise. The Company
undertakes to inform its shareholders, the SEC and the PDEx in writing at least 30 days before any deviation or
adjustment in the planned use of proceeds is implemented.

55
DETERMINATION OF OFFER PRICE

The Bonds shall be issued at 100% of principal amount or face value.

56
PLAN OF DISTRIBUTION

THE OFFER

On September 27, 2013, Meralco filed a Registration Statement with the SEC in connection with the
offer and sale to the public of debt securities with an aggregate principal amount of up to Fifteen
Billion Pesos (P15,000,000,000.00), with an overallotment option of up to Five Billion Pesos
(P5,000,000,000.00). The SEC is expected to issue an order rendering the Registration Statement
effective, and a corresponding permit to offer securities for sale covering the Offer.

THE JOINT LEAD UNDERWRITERS

BPI Capital Corporation and First Metro Investment Corporation pursuant to an Underwriting
Agreement with Meralco executed on November 28, 2013 (the “Underwriting Agreement”), have
agreed to act as the Joint Lead Underwriters for the Offer and as such, distribute and sell the Bonds at
the Offer Price, and have also committed to underwrite up to Fifteen Billion Pesos
(P15,000,000,000.00) on a firm basis subject to the satisfaction of certain conditions and in
consideration of certain fees and expenses.

BPI Capital Corporation and First Metro Investment Corporation are the Joint Issue Managers for this
transaction.

Each of the Joint Lead Underwriters has committed to underwrite up to the amounts indicated below:

BPI Capital P 7,500,000,000.00


First Metro Investment Corporation P 7,500,000,000.00
TOTAL P 15,000,000,000.00

There is no arrangement for the Joint Lead Underwriters to return to Meralco any unsold Bonds. The
Underwriting Agreement may be terminated in certain circumstances prior to payment of the net
proceeds of the Bonds being made to Meralco. There is no arrangement as well giving the underwriters
the right to designate or nominate member(s) to the Board of Directors of Meralco.

The Joint Lead Underwriters are duly licensed by the SEC to engage in underwriting or distribution of
the Bonds. The Joint Lead Underwriters may, from time to time, engage in transactions with and
perform services in the ordinary course of its business for Meralco or other members of Meralco’s
business of which Meralco forms a part.

The Joint Lead Underwriters have no direct relations with Meralco in terms of ownership by either of
their respective major stockholder/s

SALE AND DISTRIBUTION

The distribution and sale of the Bonds shall be undertaken by the Joint Lead Underwriters who shall
sell and distribute the Bonds to third party buyers/investors. Nothing herein shall limit the rights of the
Joint Lead Underwriters from purchasing the Bonds for their own respective accounts.

There are no persons to whom the Bonds are allocated or designated. The Bonds shall be offered to
the public at large and without preference.
57
Plan of Distribution

The obligations of each of the Joint Lead Underwriters will be several, and not solidary, and nothing in
the Underwriting Agreement shall be deemed to create a partnership or joint venture between and
among any of the Joint Lead Underwriters. Unless otherwise expressly provided in the Underwriting
Agreement, the failure by a Lead Underwriter to carry out its obligations thereunder shall neither
relieve the other Lead Underwriters of their obligations under the same Underwriting Agreement, nor
shall any Lead Underwriter be responsible for the obligation of another Lead Underwriter.

OFFER PERIOD

The Offer Period shall commence at 9 am of December 2, 2013 and ends at 12 pm of December 6,
2013.

APPLICATION TO PURCHASE

Applicants may purchase the Bonds during the Offer Period by submitting to the Joint Lead
Underwriters properly completed Applications to Purchase, together with two signature cards, and the
full payment of the purchase price of the Bonds in the manner provided in said Application to
Purchase.

Corporate and institutional applicants must also submit, in addition to the foregoing, a copy of their
SEC Certificate of Registration of Articles of Incorporation and By -Laws, Articles of Incorporation, By-
Laws, and the appropriate authorization by their respective boards of directors and/or committees or
bodies relative to the purchase of the Bonds and designating the authorized signatory(ies) thereof.

Individual applicants must also submit, in addition to accomplished Application to Purchase and its
required attachments, a photocopy of any one of the following identification cards (ID), subject to
verification with the original ID: passport, driver’s license, postal ID, company ID, SSS/GSIS ID and/or
Senior Citizen’s ID.

A corporate and institutional investor who is exempt from or is not subject to w ithholding tax shall be
required to submit the following requirements to the Registrar, subject to acceptance by the Issuer as
being sufficient in form and substance: (i) a copy of the original tax exemption certificate, ruling or
opinion issued by the BIR addressed to such investor confirming the exemption, and certified by an
authorized officer of such investor as being a true copy of the original on file with such investor; (ii) a
duly notarized undertaking, in the prescribed form, executed by (ii.a) the Corporate Secretary or any
authorized representative, who has personal knowledge of the exemption based on his official
functions, if such investor purchases the Bonds for its account, or (ii.b) the Trust Officer, if such
investor is a universal bank authorized under Philippine law to perform trust and fiduciary functions
and purchase the Bonds pursuant to its management of tax -exempt entities (i.e. Employee Retirement
Fund, etc.), declaring and warranting such entities’ tax exempt status or preferential rate entitlement,
undertaking to immediately notify the Issuer and the Registrar and Paying Agent of any suspension or
revocation of the tax exemption certificates or prefe rential rate entitlement, and agreeing to
indemnify and hold the Issuer and the Registrar and Paying Agent free and harmless against any claims,
actions, suits, and liabilities arising from the non-withholding of the required tax; and (iii) such other
documentary requirements as may be reasonably required under the applicable regulations of the
relevant taxing or other authorities for purposes of claiming tax treaty relief, which shall include a
copy of the duly filed tax treaty relief application with the International Tax Affairs Division of the BIR
as required under BIR Revenue Memorandum Order No. 72 -2010; provided further that, all sums
payable by the Issuer to tax exempt entities shall be paid in full without deductions for taxes, duties

58
Plan of Distribution

assessments or government charges subject to the submission by the Bondholder claiming the benefit
of any exemption of reasonable evidence of such exemption to the Registrar and Paying Agent.

Completed Applications to Purchase and corresponding payments must reach the Joint Lead
Underwriters prior to the end of the Offer Period, or such earlier date as may be specified by the
Underwriters. Acceptance by the Underwriters of the completed Application to Purchase shall be
subject to the availability of the Bonds and the acceptance by Meralco. In the event that any check
payment is returned by the drawee bank for any reason whatsoever or the nominated bank account to
be debited is invalid, the Application to Purchase shall be automatically canceled and any prior
acceptance of the Application to Purchase is deemed revoked.

MINIMUM PURCHASE

A minimum purchase of Fifty Thousand Pesos (P50,000.00) shall be considered for acceptance.
Purchases in excess of the minimum shall be in multiples of Ten Thousand Pesos ( P10,000.00).

ALLOTMENT OF THE BONDS

If the Bonds are insufficient to satisfy all Applications to Purchase, the available Bonds shall be allotted
in accordance with the chronological order of submission of properly completed and appropriately
accomplished Applications to Purchase on a first-come, first-served basis, without prejudice and
subject to Meralco’s exercise of its right of rejection.

ACCEPTANCE OF APPLICATIONS

Meralco and the Joint Lead Underwriters reserve the right to accept or reject applications to subscribe
to the Bonds, and in case of oversubscription, allocate the Bonds available to the applicants in a
manner they deem appropriate. If any application is rejected or accepted in part only, the application
money or the appropriate portion thereof will be returned without intere st by the relevant Joint Lead
Underwriter.

REFUNDS

If any application is rejected or accepted in part only, the application money or the appropriate unused
portion thereof shall be returned without interest to such applicant through the Joint Lead
Underwriter with whom such application to purchase the Bonds was made.

PAYMENTS

The Paying Agent shall open and maintain a Payment Account, which shall be operated solely and
exclusively by said Paying Agent in accordance with the Registry and Paying Agency Agreement and the
PDTC Rules, provided that beneficial ownership of the Paymen t Account shall always remain with the
Bondholders. The Payment Account shall be used exclusively for the payment of the relevant interest
and principal on each Payment Date.

The Paying Agent shall maintain the Payment Account for six (6) months from th e relevant Maturity
Date or Optional Redemption Date or date of early redemption other than Optional Redemption Date.
Upon closure of the Payment Account, any balance remaining in such Payment Account shall be
returned to the Issuer and shall be held by the Issuer in trust and for the irrevocable benefit of the
Bondholders with unclaimed interest and principal payments.

59
Plan of Distribution

PURCHASE AND CANCELLATION

The Issuer may purchase the Bonds at any time in the open market or by tender or by contract at any
price without any obligation to make pro-rata purchases from all Bondholders. Bonds so purchased
shall be redeemed and cancelled and may not be re -issued. Upon listing of the Bonds on PDEx, the
Issuer shall disclose any such transactions in accordance with the appl icable PDEx disclosure rules.

SECONDARY MARKET

Meralco intends to list the Bonds in the PDEx. Meralco may purchase the Bonds at any time without
any obligation to make pro-rata purchases of Bonds from all Bondholders.

REGISTER OF BONDHOLDERS

The Bonds shall be issued in scripless form and shall be registered in the scripless Register of
Bondholders maintained by the Registrar. A Master Certificate of Indebtedness representing the Bonds
sold in the Offer shall be issued to and registered in the name of the Trustee, on behalf of the
Bondholders.

Legal title to the Bonds shall be shown in the Register of Bondholders to be maintained by the
Registrar. Initial placement of the Bonds and subsequent transfers of interests in the Bonds shall be
subject to applicable prevailing Philippine selling restrictions. The names and addresses of the
Bondholders and the particulars of the Bonds held by them and of all transfers of Bonds shall be
entered into the Register of Bondholders. Transfers of ownership s hall be effected through book-entry
transfers in the scripless Register of Bondholders.

60
DESCRIPTION OF THE BONDS

The following does not purport to be a complete listing of all the rights, obligations, or privileges of
the Bonds. Some rights, obligations, or privileges may be further limited or restricted by other
documents. Prospective investors are enjoined to caref ully review the Articles of Incorporation, By-
Laws and resolutions of the Board of Directors and Shareholders of Meralco, the information
contained in this Prospectus, the Trust Indenture, Underwriting Agreement, and other agreements
relevant to the Offer.

The issue of up to Fifteen Billion Pesos (P15,000,000,000.00) aggregate principal amount of Bonds,
with an overallotment option of up to Five Billion Pesos (P5,000,000,000.00,) was authorized by a resolution
of the Board of Directors of Meralco dated September 23, 2013. The Bonds are comprised of 4.375%
7-Year fixed rate bonds and 4.875% 12-Year fixed rate Bonds (the “Bonds”) and were approved by the
Board in the same meeting. The Bonds shall be constituted by a trust indenture (the “Trust
Indenture”) executed on November 28, 2013 between Meralco and Metropolitan Bank & Trust
Company- Trust Banking Group (the “Trustee”, which expression shall, wherever the context permits,
include all other persons or companies for the time being acting as trustee or trustees under the
Trust Indenture). The Trustee has no interest in or relatio n to the Issuer which may conflict with the
performance of its functions.

The Bonds are also subject to the terms and conditions of a registry and p aying agency agreement
executed on November 28, 2013 (the “Registry and Paying Agency Agreement”) between Meralco
and the Philippine Depository & Trust Corp. (“PDTC”) as Registrar and Paying Agent. PDTC has no
interest in or relation to Meralco which may conflict with its roles as Registrar and as Paying Agent
for the Offer.

The description of the terms and conditions of the Bonds set out below includes summaries of, and is
subject to, the detailed provisions of the Trust Indenture and the Registry and Paying Agency
Agreement.

Unless otherwise defined herein, capitalized terms used herein shall have the meaning ascribed to
such terms in the Trust Indenture.

The 7-Year Bonds will mature on December 12, 2020, subject to the provisions on exercise of the
Bondholder’s Put Option (as defined below), redemption and payment below.

The 12-Year Bonds will mature on December 12, 2025, subject to the provisions on exercise of the
Bondholder’s Put Option (as defined below), redemption and payment below.

Copies of the Trust Indenture and the Registry and Paying Agency Agreement are available for
inspection during normal business hours at the specified offices of the Trustee and the Registrar. The
Bondholders are entitled to the benefit of, are bound by, an d are deemed to have notice of, all the
provisions of the Trust Indenture and are deemed to have notice of those provisions of the Registry
and Paying Agency Agreement applicable to them.

1. FORM, DENOMINATION AND TITLE

(a) Form and Denomination

61
Description of the Bonds

The Bonds are in scripless form, and will be issued and traded or redeemed in accordance with
the Bondholder’s Put Option (as defined below), in denominations of P
= 50,000, as a minimum, and
in integral multiples of P
= 10,000 thereafter.

(b) Title

Legal title to the Bonds will be shown in the Register of Bondholders maintained by the Registrar.
A notice confirming the principal amount of the Bonds purchased by each applicant in the Offer
(the “Registry Confirmation”) will be issued by the Registrar to all Bondholders no later than
seven (7) Business Days following the Issue Date. The Bondholder has twenty (20) days from the
date indicated in the Registry Confirmation to request the Registrar for amendment, correction or
completion of the relevant information in the Register of Bondholders. The Bondholder shall,
within such period, request the Registrar, through the Underwriter from whom the Bonds were
purchased, to amend entries in the Registry by issuing an Affidavit of Correction duly endorsed by
such Bondholder’s Underwriter. Upon any assignment, title to the Bonds will pass by recording of
the transfer from the transferor to the transferee in the electronic Register of Bondholders
maintained by the Registrar. Settlement in respect of such transfe r or change of title to the
Bonds, including the settlement of any cost arising from such transfers, including, but not limited,
to documentary stamps taxes, if any, arising from subsequent transfers, shall be for the account
of the relevant Bondholder.

(c) Bond Rating

The Bonds have been rated PRS Aaa by Philippine Rating Services Corporation (“PhilRatings”) on
November 13, 2013. In coming up with the rating, PhilRatings considered Meralco’s robust cash
flows and sustained profitability, its dominant franchise, its experienced management team and
shareholders, as well as its conservative capital structure and strong financial flexibility.

The rating was based on available information at the time it was given and is subject to reviews
annually, or more frequently as market developments may dictate, for as long as the Bonds are
outstanding. The rating may be changed at any time should PhilRatings determine that
circumstances warrant a change.

2. TRANSFER OF BONDS

(a) Register of Bondholders

Meralco will cause the Register of Bondholders to be kept by the Registrar, in electronic form.
The names and addresses of the Bondholders and the particulars of the Bonds held by them and
of all transfers of Bonds shall be entered into the Register of Bondholders. As required by Circular
No. 428-04 issued by the Bangko Sentral ng Pilipinas (“BSP”), the Registrar shall send each
Bondholder a written statement of registry holdings at least every qua rter (at the cost of
Meralco) and a written advice confirming every receipt or transfer of the Bonds that is effected in
the Registrar’s system. Such statement of registry holdings shall serve as the confirmation of
ownership of the relevant Bondholder as of the date thereof. Any requests of Bondholders for
certifications, reports or other documents from the Registrar, except as provided herein, shall be
for the account of the requesting Bondholder. No transfers of the Bonds may be made during the
period commencing on a Record Date as defined in Condition 4(a) (“Interest Payment Date”).

62
Description of the Bonds

(b) Transfers; Tax Status

Bondholders may transfer their Bonds at anytime, regardless of tax status of the transferor vis -a-
vis the transferee. Should a transfer between Bondholders of different tax status occur on a day
which is not an Interest Payment Date, tax exempt entities trading with non -tax exempt entities
shall be treated as non-tax exempt entities for the interest period within which such transfer
occurred. Transfers taking place in the Register of Bondholders after the Bonds are listed on PDEx
shall be allowed between taxable and tax-exempt entities without restriction and observing the
tax exemption of tax exempt entities, if and/or when so allowed under and in accordance with
the relevant rules, conventions and guidelines of PDEx and PDTC.

A Bondholder claiming tax-exempt status is required to submit a written notification of the sale
or purchase to the Registrar, including the tax status of the transferor or transferee, as
appropriate, together with the supporting documents specified below under “Payment of
Additional Amounts; Taxation”, within three (3) days from the settlement date for such transfer
before such tax-exempt status shall be accepted by Meralco.

(c) Registrar

For transfers and record updates, notices and communication with the Registrar may be made
through the following:

Philippine Depository & Trust Corporation


37th Floor Enterprise Centre Tower I
Ayala Avenue, Makati City, Metro Manila

Telephone no.: (632) 884-4439


Fax no.: (632) 757-6025
E-mail: corazon.ordonez@pds.com.ph
Attention: Ma. Corazon Ordonez
Executive Director

Telephone no.: (632) 884-4425


Fax no.: (632) 757-6025
E-mail: baby_delacruz@pds.com.ph
Attention: Baby Dela Cruz
Associate Director

(d) Secondary Trading of the Bonds

Meralco intends to list the Bonds in PDEx for secondary market trading or such other securities
exchange licensed as such by the SEC on which the trading of debt securities in significant
volumes occurs. Secondary market trading and settlement in PDEx shal l follow the applicable
PDEx rules, conventions and guidelines, including rules, conventions and guidelines governing
trading and settlement between bondholders of different tax status, and shall be subject to the
relevant fees of PDEx and PDTC.

3. RANKING

63
Description of the Bonds

The Bonds constitute direct, unconditional, unsecured and unsubordinated Peso -denominated
obligations of Meralco and will rank pari passu and rateably without any preference or priority
amongst themselves and at least pari passu with all other pre sent and future unsecured and
unsubordinated obligations of the Meralco, other than obligations preferred by law.

4. INTEREST

(a) Interest Payment Dates

i. 7-Year Bonds

The 7-Year Bonds shall bear interest on its principal amount from and including the Issue
Date at the rate of 4.375% p.a., payable quarterly in arrears, commencing on March 12,
2014 as the first Interest Payment Date, and on March 12, June 12, September 12 and
December 12 of each year following the first Interest Payment Date, or the subsequent
Business Day without adjustment to the amount of interest paid, if such Interest Payment
Date is not a Business Day.

For purposes of clarity, the last Interest Payment Date on the 7 -Year Bonds shall fall on
the Maturity Date or seven (7) years from the Issue Date.

ii. 12-Year Bonds

The 12-Year Bonds shall bear interest on its principal amount from and inclu ding Issue
Date at the rate of 4.875% p.a., payable quarterly in arrears, commencing on March 12,
2014 as the first Interest Payment Date, and on March 12, June 12, September 12 and
December 12 of each year following the first Interest Payment Date, or the subsequent
Business Day without adjustment to the amount of interest to be paid, if such Interest
Payment Date is not a Business Day.

For purposes of clarity, the last Interest Payment Date on the 12 -Year Bonds shall fall on
the Maturity Date or twelve (12) years from the Issue Date.

The cut-off date in determining the existing Bondholders entitled to receive intere st or
principal amount due shall be the day two (2) Business Days prior to the relevant Interest
Payment Date (the “Record Date”), which shall be the reckoning day in determining the
Bondholders entitled to receive interest, principal or any other a mount due under the Bonds.
No transfers of the Bonds may be made during this period intervening between and
commencing on the Record Date and the relevant Interest Payment Date.

(b) Interest Accrual

Each Bond will cease to bear interest from and including the Maturity Date, as defined in
Condition 6(a) (“Final Redemption”), unless, upon due presentation, payment of the principal
in respect of the Bond then outstanding is not made, is improperly withheld or refused, in
which case the Penalty Interest (see Condition 12(c)), will apply.

(c) Determination of Rate of Interest

64
Description of the Bonds

The interest shall be calculated on the basis of a 360 -day year consisting of 12 months of 30
days each and, in the case of an incomplete month, the number of days elapsed on the basis
of a month of 30 days.

5. BONDHOLDERS’ PUT OPTIONS

(a) Put Options

i. The Fifth Year Put Option

On the First Interest Payment Date after the fifth anniversary from Issue Date (the “Fifth
Year Put Option Date”), each Bondholder of the 7-Year Bonds shall have the right, but
not the obligation, to require Meralco to redeem , in whole or in part, the outstanding 7-
Year Bonds registered in such Bondholder’s name with a minimum amount of P = 10,000
and in integral multiples of P= 10,000 thereafter at a redemption price computed as the
aggregate of: (i) par or one hundred percent (100%) of face value of the outstanding
principal amount of the Bonds being redeemed; and (ii) accrued interest computed up to
the Fifth Year Put Option Date (collectively, the “Fifth Year Put Option Payment”) in
respect of the Bonds covered by an exercised Fifth Year Put Option.

Bondholders with less than P= 10,000 of outstanding bonds during the Fifth Year Put
Option Date will not be entitled to the Fifth Year Put Option as exercise of said option is
in denominations of P= 10,000 each, as a minimum and in integral multiples of P = 10,000
thereafter.

ii. The Tenth Year Put Option

On the tenth (10th) anniversary from Issue Date (the “Tenth Year Put Option Date”), each
Bondholder of the 12-Year Bonds shall have the right, but not the obligation, to require
Meralco to redeem the outstanding 12-Year Bonds registered in such Bondholder’s name
in whole or in part, with a minimum amount of P = 10,000 and in integral multiples of
P
= 10,000 thereafter at a redemption price computed as the aggregate of: (i) par or one
hundred percent (100%) of face value of the outstanding principal amount of the Bonds
being redeemed; and (ii) accrued interest computed up to the Tenth Year Put Option
Date (collectively, the “Tenth Year Put Option Payment”) in respect of the Bonds covered
by an exercised Tenth Year Put Option.

Bondholders with less than P= 10,000 of outstanding bonds during the Tenth Year Put
Option Date will not be entitled to the Tenth Year Put Option as exercise of said option is
in denominations of P= 10,000 each, as a minimum and in integral multiples of P = 10,000
thereafter.

(b) Exercise of the Put Option

i. With respect to the Fifth Year Put Option

During business hours on a date no earlier than sixty (60) days and no later than thirty
(30) days prior to the Fifth Year Put Option Date (the “Fifth Year Put Exercise Period”),

65
Description of the Bonds

any Bondholder of the 7-Year Bonds that elects to exercise the Fifth Year Put Option shall
do so by delivery of an original and four (4) copies of a notice of such exercise to the
Trustee (the “Fifth Year Put Option Notice”) in the form set out in paragraph (c), below,
of this Condition 5.

Upon receipt of a Fifth Year Put Option Notice fully complying with these Terms and
Conditions, the Trustee shall officially tally/summarize all Put Option Notices received in
the form prescribed by the Registrar and Paying Agent and transmit the same together
with copies thereof to Meralco and the Registrar and Paying Agent.

Payment of the Fifth Year Put Option Payment on the Fifth Year Put Option Date to
Bondholders of the 7-Year Bonds that have delivered complete and verified Five Year Put
Option Notices during the Five Year Put Exercise Pe riod shall be in the same manner as
all payments to the relevant Bondholder under Condition 7 (Payments).

Once executed, completed and delivered to the Trustee, a Fifth Year Put Option Notice is
irrevocable. From such time until the redemption and payment by Meralco of the Fifth
Year Put Option Payment, the Bonds may not be transferred in the books of the Registry
by a Bondholder of the 7-Year Bonds that has exercised a Fifth Year Put Option over such
Bonds.

ii. With respect to the Tenth Year Put Option

During business hours on a date no earlier than sixty (60) days and no later than thirty
(30) days prior to the Tenth Year Put Option Date (the “Tenth Year Put Exercise Period”),
any Bondholder of the 12-Year Bonds that elects to exercise the Tenth Year Put Option
shall do so by delivery of an original and four (4) copies of a notice of such exercise to
the Trustee (the “Tenth Year Put Option Notice”) in the form set out in paragraph (c), of
this Condition 5.

Upon receipt of an Tenth Year Put Option Notice fully complying with these Terms and
Conditions, the Trustee shall officially tally/summarize all Put Option Notices received in
the form prescribed by the Registrar and Paying Agent and transmit the same together
with copies thereof to Meralco and the Registrar and Paying Agent.

Payment of the Tenth Year Put Option Payment on the Tenth Year Put Option Date to
Bondholders of the 12-Year Bonds that have delivered complete and verified Tenth Year
Put Option Notices during the Tenth Year Put Exercise Period shall be in the same
manner as all payments to the relevant Bondholder under Condition 7 (Payments).

Once executed, completed and delivered to the Trustee, a Tenth Year Put Option Notice
is irrevocable. From such time until the redemption and payment by M eralco of the
Tenth Year Put Option Payment, the Bonds may not be transferred in the books of the
Registry by a Bondholder of the 12-Year Bonds that has exercised a Tenth Put Option
over such Bonds.

(c) Information Required in the Put Option Notice

A Fifth (5th) Year and a Tenth (10th) Year Put Option shall be exercised by due execution and
delivery of the form provided (at the end of this section (attached as Annex 1 and 2 hereof)

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Description of the Bonds

during the Fifth (5th) Year and Tenth (10th) Year put exercise period respectively, submitted
together with the required attachments.

6. REDEMPTION AND PURCHASE

(a) Final Redemption

Unless previously purchased and cancelled, the Bonds will be redeemed at par or one
hundred percent (100%) of face value on December 12, 2020 for the 7-Year Bonds and
December 12, 2025 for the 12-Year Bonds (the “Maturity Date”). However, payment of all
amounts due on such date may be made by Meralco through the Paying Agent, without
adjustment, on the succeeding Business Day if the Maturity Date is not a Business Day.

(b) Early Redemption Option

Prior to final maturity, the Company may redeem (in whole but not in part only) the
outstanding 12-Year Bonds on the 7th Year from Issue Date at the Early Redemption Price of
101.0%.

The Company shall give no less than ten (10) nor more than twenty (20) days prior written
notice of its intention to redeem the Bonds, which notice shall be irrevocable and binding
upon the Company to effect such early redemption of the Bonds at the Interest Payment
Dated stated in such notice.

The amount payable to the Bondholders in respect of any such re demption shall be
calculated as the sum of (i) the relevant Early Redemption Price applied to the principal
amount of the then outstanding Bonds being redeemed and (ii) all accrued interest on the
Bonds as of the relevant Optional Redemption Date.

(c) Redemption for Taxation Reasons

If payments under the Bonds become subject to additional or increased taxes other than the
taxes and rates of such taxes prevailing on the Issue Date as a result of certain changes in
law, rule or regulation, or in the interpretation thereof, and such additional or increased rate
of such tax cannot be avoided by use of reasonable measures available to Meralco, Meralco
may redeem the Bonds in whole, but not in part, on any Interest Pay ment Date (having given
no less than ten (10) nor more than twenty (20) days’ notice to the Trustee) at par plus all
accrued interest on the bonds as of the date of redemption.

(d) Change in Law or Circumstance

When any provision of the Trust Indenture or any of the related documents is or becomes,
for any reason, other than a Default, invalid, illegal or unenforceable to the extent that it
becomes for any reason unlawful for Meralco to give effect to its rights or obligations
hereunder, or to enforce any provisions of the Trust Indenture or any of the related
documents in whole or in part, or any law is introduced to prevent or restrain the
performance by the parties hereto of their obligations under the Trust In denture or any
other related documents, such event shall be considered as changes in law or circumstances
(“Change of Law”) as it refers to the obligations of Meralco and to the rights and interests of
the Bondholders under the Trust Indenture and the Bonds.

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Description of the Bonds

In the event that Meralco should invoke this Condition 6( d), Meralco shall provide the
Trustee an opinion of legal counsel confirming the occurrence of the relevant event and the
consequences thereof as consistent herewith, such legal counsel reasonably acceptable to
the Trustee. Thereupon, the Trustee shall confirm that Meralco may redeem the Bonds in
whole, but not in part, on any Business Day (having given not more than twenty (20) nor less
than ten (10) days’ notice to the Trustee) at par plus all accrued interest on the Bond as of
the date of redemption.

(e) Purchase and Cancellation

Meralco may at any time purchase any of the Bonds at any price in the open market or by
tender or by contract at any price, without any obligation to purchase Bonds pro -rata from
all Bondholders and the Bondholders shall not be obliged to sell. Any Bonds so purchased
shall be redeemed and cancelled and may not be re-issued.

7. PAYMENTS

The principal of, interest on and all other amounts payable on the Bonds shall be paid to the
Bondholders as of the relevant Record Date as follows: not later than 12:00 noon of each relevant
Payment Date, the Paying Agent shall pay on behalf of Meralco the amou nts due in respect of the
Bonds by crediting the proper amounts via Real Time Gross Settlement (RTGS), net of applicable
withholding taxes and fees, to the bank deposit account designated by each of the Bondholders
for the purpose. The principal of, interest on, the Bonds shall be payable in Philippine Pesos.
Meralco will ensure that so long as any of the Bonds remains outstanding, there shall at all times
be a Paying Agent for the purposes of the Bonds and Meralco may not terminate the appointment
of the Paying Agent, except as provided in the Registry and Payin g Agency Agreement. In the
event of the appointed office of any bank being unable or unwilling to continue to act as the
Paying Agent, Meralco shall appoint the Pasig City office, whether a head office or a branch, of
such other leading bank in the Philippines to act in its place. The P aying Agent may not resign its
duties or be removed without a successor having been appointed.

8. PAYMENT OF ADDITIONAL AMOUNTS; TAXATION

Interest income on the Bonds is currently subject to a final withholding tax at rates of between
20% and 30% depending on the tax status of the relevant Bondholder under relevant law,
regulation or tax treaty. Except for withholding taxes (either final or creditable) as may be
imposed under the Tax Code or relevant regulations of the BIR and as otherwise provided, all
payments of principal and interest shall be made free and clear of any deductions or withholding
for or on account of any present or future taxes or duties imposed by or on behalf of Republic of
the Philippines, including, but not limited to, issue, registration or any similar tax or other taxes
and duties, including interest and penalties. If such taxes or duties are imposed, the same shall be
for the account of Meralco, provided, however, that notwithstanding the foregoing, Meralco shall
not be liable for:

(a) The applicable withholding tax applicable on interest earned on the Bonds prescribed under
the Tax Code. An investor who is exempt from the aforesaid withholding tax, or is subject to a
preferential withholding tax rate shall be required to submit the foll owing requirements to
the Registrar, subject to acceptance by Meralco as being sufficient in form and substance:
(i) certified true copy of the tax exemption certificate, ruling or opinion issued by the Bureau

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Description of the Bonds

of Internal Revenue confirming the exemption or preferential rate; (ii) a duly notarized
undertaking, in the prescribed form, declaring and warranting its tax exempt status or
preferential rate entitlement, undertaking to immediately notify Meralco of any suspension
or revocation of the tax exemption certificates or preferential rate entitlement, and agreeing
to indemnify and hold Meralco and the Registrar free and harmless against any claims,
actions, suits, and liabilities resulting from the non-withholding of the required tax; and (iii)
such other documentary requirements as may be required under the applicable regulations of
the relevant taxing or other authorities which for purposes of claiming tax treaty withholding
rate benefits, shall include evidence of the applicability of a tax treaty and consularized proof
of the Bondholder’s legal domicile in the relevant treaty state , and confirmation acceptable to
Meralco that the Bondholder is not doing business in the Philippines provided, further, that
all sums payable by Meralco to tax exempt entities shall be paid in full without deductions for
taxes, duties assessments or government charges subject to the submission by the
Bondholder claiming the benefit of any exemption of reasonable evidence of such exemption
to the Registrar;

(b) Gross Receipts Tax under Section 121 of the Tax Code;

(c) taxes on the overall income of any securities dealer or Bondholder, whether or not subject to
withholding; and

(d) Value-Added Tax (“VAT”) under Sections 106 to 108 of the Tax Code, and as amended by R A
No. 9337.

Documentary stamp tax for the primary issue of the Bonds and the execution of the Bond
Agreements, if any, shall be for Meralco’s account. Any documentary stamp tax for the subsequent
sale or transfer of the Bonds shall be for the Bondholder’s account.

9. MAINTENANCE OF FINANCIAL RATIO

For as long as any of the Bonds remain outstanding, Meralco hereby covenants that it shall
maintain a Debt Service Coverage Ratio be at a minimum of 1.1x computed on the basis of non -
consolidated financial statements of Meralco.

10. NEGATIVE PLEDGE

For as long as any of the Bonds remains outstanding, Meralco covenants that Meralco will not
create or permit to subsist any Lien upon the whole or any part of its assets or revenues present
or future to secure any Debt or any guarantee of or indemnity in respect of any Debt unless the
Issuer has made or will make effective provision, reasonably satisfactory to the Bondholders,
whereby the Lien thereby created will secure, on an equal first ranking and ratable basis, any and
all the obligations of the Issuer hereunder and such other Debt which such Lien purports to
secure; provided that this shall not apply to:

(1) Liens for taxes, assessments or governmental charges or levies on an asset of the Issuer if
the same shall not at the time be delinquent and thereafter can be paid without penalty, or
are being contested in good faith and by appropriate proceedings promptly instituted and
diligently pursued, provided that any reserve or other appropriate provision that shall be
required in conformity with PFRS shall have been made therefor.

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Description of the Bonds

(2) Liens imposed by operation of law, including, without limitation, carrier’s warehousemen’s
and mechanics’ liens and other similar liens, on an asset of the Issuer arising in the ordinary
course of its business and securing payment of obligations that are n ot more than sixty (60) days
past due or being contested in good faith and by appropriate proceedings.

(3) Liens on an asset of the Issuer incurred in the ordinary course of its business to secure
performance of obligations with respect to statutory or regulatory requirements, performance
or return-of-money bonds, surety bonds or other obligations of a like nature and incurred in a
manner consistent with industry practice, provided that, in each case any such security interest:

i. is not created to secure any Debt, and

ii. does not in the aggregate impair in any material respect the use of any asset which is
material to the operations or the business of the Issuer.

(4) pledges or deposits by Meralco under workmen's compensation laws, unemployment,


insurance laws or similar legislation, good faith deposits in connection with bids, tenders,
contracts (other than for payment of Debt), leases (including capitalized lease obligations of
Meralco) to which Meralco is a party or may be a party, deposits to secure public or
statutory obligations of Meralco, and deposits for the payment of rent, in each case incurred
in the ordinary course of Meralco’s business;

(5) utility easements, building restrictions and such other security interests of a similar n ature
against real property owned by Meralco as are of a nature generally existing with respect to
properties of a similar character;

(6) any Lien created in substitution for any Lien otherwise permitted provided such Lien is over
the same asset and the principal amount so secured following the substitution does not
exceed the principal amount secured on such asset immediately prior to such substitution;

(7) any Lien not otherwise permitted provided that the aggregate principal amount of
indebtedness secured to such other Lien does not exceed Two Billion Pesos
(P
= 2,000,000,000.00);

(8) any Lien affecting, or over, assets acquired by Meralco and which is in existence prior to such
acquisition provided that such Lien was not entered into in contemplation of such acquisition;

(9) any other Lien created with the consent of the Majority Bondholders;

(10) any attachment or judgment Lien not constituting an Event of Default;

(11) Liens granted in connection with Project Finance Borrowings;

(12) arrangements by which receivables arising from ERC’s rulings on Issuer’s pass-through costs
are sold or discounted; and

(13) any Lien created by Meralco in the ordinary course of its business and required to secure the
performance of its obligations in accordance with:

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Description of the Bonds

i. any transmission service agreement and the arrangements contemplated therein to be


entered into between Meralco and NGCP, or its successors;

ii. the transition supply contract required to be entered into by Meralco with the NPC in
accordance with Section 67 of the EPIRA;

iii. the prudential requirements for participants in the WESM as described in the WESM
Rules; or

iv. any contract for the supply of electricity or generating capacity to Meralco.

11. EVENTS OF DEFAULT

Meralco shall be considered in default under the Bonds and the Trust Indenture in case any of the
following events (each an “Event of Default”) shall occur and is continuing:

(a) Payment Default

Meralco fails to pay when due and payable any amount, which Meralco is obliged to pay to
the Bondholders under the Trust Indenture and the Bonds, provided, that such non -payment
shall not constitute an Event of Default if it is solely due to an administrative or technical
cause, not attributable to the fault or negligence of Meralco, affecting the transfer of funds
despite timely payment instruction having been given by Meralco and such payment is
received by the Paying Agent within three (3) Business Days from the relevant due date.

(b) Representation/Warranty Default

Any representation and warranty of Meralco hereof or any certificate or opinion submitted
pursuant hereto proves to have been untrue, incorrect or misleading in any material respect
as and when made and the circumstances which cause such represen tation or warranty to be
incorrect or misleading continue for not less than thirty (30) days (or such longer period as
the Majority Bondholders shall approve) after receipt of written notice from the Bondholders
to that effect.

(c) Other Default

Meralco fails to perform or violates any other provisions of the Trust Indenture and the
Bonds, and such failure or violation is not remediable or, if remediable, continues to be
unremedied after the applicable grace period, or in the absence of such grace period, after
thirty (30) days from the date Meralco receives written notice of such failure or violation
given by the Trustee; provided, that a Default under Conditions (d), (e)(i) to (iv) and (f) shall
constitute an Event of Default immediately upon occurrence of such Event of Default.

(d) Cross Default

i. any Debt of Meralco in respect of any borrowed money is not paid (a) when due (after the
expiry of any grace period, if applicable) or (b), by reason of a default or event of default
(howsoever described and whether or not involving culpability on the part of any Person),
and the aggregate of all such Debt exceeds One Billion Two Hundred Fifty Million Pesos
(P1,250,000,000.00) or its equivalent from time to time in other currencies, unless such

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Description of the Bonds

payment is deferred or waived by the parties to whom such payme nt is owed or is actively
being contested in good faith; provided that in case the failure to pay when due is caused
by Force Majeure, the Majority Bondholders shall not unreasonably withhold their
consent to waive the Event of Default stated in this Section 11; or

ii. an event of default (howsoever described) in the performance of any of its non -payment
obligations in any other loan agreement to which Meralco is the borrower has been
declared, and such default shall have a Material Adverse Effect, provided that in case the
event of default is caused by Force Majeure, the Majority Bondholders shall not
unreasonably withhold their consent to waive the Event of Default stated in this Section
11.

(e) Insolvency

Meralco shall:

i. become insolvent or unable to pay its Debts as they mature;

ii. stop or suspend payment of all or a material part of its Debts;

iii. propose in writing or make any agreement for the deferral, rescheduling or other
readjustment of all of (or all of a particular type of) its Debts, unless such def erral,
rescheduling or other readjustment is not due to its inability to pay its Debts and Meralco
gives notice of such deferral, rescheduling or other readjustment to the Bondholders and
the reasons therefor;

iv. propose in writing or make a general assignment or an arrangement or composition with


or for the benefit of relevant creditors in respect of any of such Debt, unless such
general assignment, arrangement or composition is not due to its inabil ity to pay its Debt
and Meralco gives notice of such general assignment, arrangement or composition to the
Bondholders and the reasons therefor;

v. file a petition under insolvency, moratorium, corporate rehabilitation or other Laws for
the relief of debtors; or

vi. there shall be commenced against Meralco any proceeding under such Laws, or any
judgment or order is entered by a court of competent jurisdiction for the appointment of
a receiver, trustee or the like to take charge of all or substantially all of the assets of
Meralco, and such proceedings shall not have been discharged or stayed within a period
of sixty (60) days or such longer period as Meralco satisfies the Majority Bondholders as
appropriate under the circumstances.

(f) Expropriation or Nationalization

Any act or deed or judicial or administrative proceeding in the nature of an expropriation,


confiscation, nationalization, intervention, acquisition, seizure, or condemnation of or with
respect to the whole or a substantial portion of the business a nd operations, capital stock,
property, or assets of Meralco, shall be undertaken or instituted by any governmental
authority, unless such act, deed or proceedings are otherwise contested in good faith by
Meralco;

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Description of the Bonds

(g) Enforcement Proceedings

An attachment or garnishment of or levy upon a material part of the properties of Meralco is


made and is not discharged, stayed or fully bonded, within ninety (90) days (or such longer
period as Meralco satisfies the Majority Bondholders as appropriate und er the
circumstances);

(h) Validity

Any of the agreements or the Bonds or any material portion thereof is declared to be illegal
or unenforceable, unless such illegality or enforceability is remedied within thirty (30) days of
the occurrence or declaration of the illegality or unenforceability, as the case may be, or
Meralco shall contest in writing the validity or enforceability of the agreements or the Bonds
or shall deny generally in writing the liability of Meralco under the agreements or the Bonds.

(i) Material Adverse Change

Any of the concessions, permits, rights, franchises, or privileges required for the conduct of
the electric power distribution business and operations of Meralco shall be revoked, canceled
or otherwise terminated, or the free and continued use and exercise thereof shall be curtailed
or prevented in such manner as shall have a Material Adverse Effect as reasonably
determined by the Majority Bondholders and such continues unremedied for a period of sixty
(60) days from the date of such revocation, cancellation, termination or curtailment; or

(j) Judgment

A final judgment, decree or order has been entered against Meralco by a court of competent
jurisdiction from which no appeal may be made or is taken for the payment of money in
excess of One Billion Two Hundred Fifty Million Pesos (P1,250,000,000.00), and any relevant
period specified for payment of such judgment, decree or order shall have expired without it
being satisfied, discharged or stayed.

12. CONSEQUENCES OF DEFAULT

(a) Declaration by the Majority Bondholders

Subject to the terms of the Trust Indenture, if any one or more of the Events of Default shall
have occurred and be continuing, the Trustee shall, upon the written direction of the Majority
Bondholders, by notice in writing delivered to Meralco, or the Majority Bondholders, by
notice in writing delivered to Meralco and the Trustee, may declare all amounts due,
including the Principal of the Bonds, all accrued interest and other charges thereon, if any, to
be immediately due and payable, and upon such declaration, the same shall be immediately
due and payable, anything contrary to the Trust Indenture or in the Bonds to the contrary
notwithstanding.

(b) Notice from the Trustee

At any time after any Event of Default shall have occurred, the Trustee may:

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Description of the Bonds

i. by notice in writing to Meralco, the Paying Agent and the Registrar, require the Paying
Agent and the Registrar to:

(x) act thereafter as agents of the Bondholders represented by the Trustee on the terms provided
in the Registrar and Paying Agency Agreement (with consequential amendments as necessary
and save that the Trustee’s liability under any provisions thereof for the indemnification,
remuneration and payment of out-of-pocket expenses of the Paying Agent and the Registrar
shall be limited to amounts for the time being held by the Trustee on the trusts of the Trust
Indenture in relation to the Bonds and available to the Trustee for such purpose) and
thereafter to hold all evidence of all bonds and all sums, documents and records held by them
in respect of the Bonds on behalf of the Trustee; and/or

(y) deliver all Bond Certificates and all sums, documents and records held by them in respect of
the Bonds to the Trustee or as the Trustee shall direct in such notice; provided, that, such
notice shall be deemed not to apply to any document or record which the Paying Agent or
Registrar is not obliged to release by any law or regulation.

ii. by notice in writing to Meralco require Meralco to make all subsequent payments in
respect of the Bonds to the order of the Trustee and with effect from the issue of any
such notice until such notice is withdrawn, proviso (x) above and Section 4.1(a) of the
Trust Indenture shall cease to have effect.

(c) Penalty Interest

Upon the occurrence and during the continuance of any Event of Default, Meralco shall pay
interest on all amounts then due under and owing to the Bondholder under the Trust
Indenture, including but not limited to the unpaid principal amount and any in terest thereon,
at a rate equal at all times to two percent (2%) per annum over and above and in addition to
the Interest Rate computed on the actual number of days from and including the date on
which the said amount/s became due until full payment thereof on a year of 360 days.

(d) Payment in the Event Of Default

Meralco covenants that in case any Event of Default shall occur and be duly declared in
accordance with the Terms and Conditions of the Bonds, then, in any such case, Meralco shall
pay to the Bondholders, through the Paying Agent, the whole amount which shall then have
become due and payable on all such outstanding Bonds with interest at the rate borne by
the Bonds on the overdue principal and with Penalty Interest, and in addition thereto,
Meralco shall pay to the Trustee such further amounts as shall be determined by the Trustee
to be sufficient to cover the cost and expenses of collection, including reasonable
compensation to the Trustee, its agents, attorneys and counsel, and any reasonable expenses
or liabilities incurred without negligence or bad faith by the Trustee.

(e) Application of Payments

Any money collected or delivered to the Paying Agent and any other funds held by it, subject
to any other provision of the Trust Indenture, the Registry and Paying Agency Agreement
relating to the disposition of such money and funds, shall be applied by the Paying Agent in
the order of preference as follows: first, to the payment to the Trustee, the Regist rar and
Paying Agent, of the costs, expenses, fees and other charges of collection, including

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Description of the Bonds

reasonable compensation to them, their agents, attorneys and counsel, and all reasonable
expenses and liabilities incurred or disbursements made by them, without negligence or bad
faith; provided that the Trustee or Registrar and Paying Agent has sent an invoice to Meralco
regarding the incurrence of such costs, expenses, fees and charges ; second, to the payment of
the interest in default, in the order of the maturity of such interest with Penalty Interest;
third, to the payment of the whole amount then due and unpaid upon the Bonds for principal
and interest, with Penalty Interest; and fourth, the remainder, if any shall be paid to Meralco,
its successors or assigns, or to whoever may be lawfully entitled to receive the same, or as a
court of competent jurisdiction may direct.

(f) Remedies

All remedies conferred by the Trust Indenture to the Trustee and the Bondholders shall be cumulative
and not exclusive and shall not be so construed as to deprive the Trustee or the Bondholders
of any legal remedy by judicial or extra-judicial proceedings appropriate to enforce the
conditions and covenants of the Trust Indenture, subject to the Bondholders’ Ability to File
Suit as defined in the paragraph “Waiver or Revocation of Default by the Bondholders” below.

No delay or omission by the Trustee or the Bondholders to exercise any right or power arising
from or on account of any default hereunder shall impair any such right or power, or shall be
construed to be a waiver of any such default or an acquiescence thereto; and every power
and remedy given by the Trust Indenture to the Trustee or the Bondholders may be exercised
from time to time and as often as may be necessary or expedient.

(g) Prescription

Claims in respect of principal and interest or other sums payable hereunder will be prescribed
unless made within ten years (in the case of principal or other sums) or five years (in the case
of interest) from the date on which payment becomes due.

(h) Ability to File Suit

No Bondholder shall have any right by virtue of or by availing of any provision of the Trust
Indenture to institute any suit, action or proceeding for the collection of any sum due from
Meralco hereunder on account of principal, interest and other charges, or for the
appointment of a receiver or trustee, or for any other remedy hereunder unless (i) such
Bondholder previously shall have given to the Trustee written notice of an Event of Default
and of the continuance thereof and the related request for the T rustee to convene a meeting
of the Bondholders to take up matters related to their rights and interests under the Bonds;
(ii) the Majority Bondholders shall have decided and made the written request upon the
Trustee to institute such action, suit or proceeding in its own name; (iii) the Trustee for 60
days after the receipt of such notice and request shall have neglected or refused to institute
any such action, suit or proceeding and (iv) no directions inconsistent with such written
request shall have been given under a waiver of default by the Bondholders, it being
understood and intended, and being expressly covenanted by every Bondholder with every
other Bondholder and the Trustee, that no one or more Bondholders shall have any right in
any manner whatever by virtue of or by availing of any provision of the Trust Indenture to
affect, disturb or prejudice the rights of the holders of any other such Bonds or to obtain or
seek to obtain priority over or preference to any other such holder or to enforce any r ight

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Description of the Bonds

under the Trust Indenture, except in the manner herein provided and for the equal, ratable
and common benefit of all the Bondholders.

(i) Waiver of Default by the Bondholders

The Majority Bondholders may direct the time, method and place of conductin g any
proceeding for any remedy available to the Trustee or exercising any trust or power conferred
upon the Trustee, or may on behalf of the Bondholders waive any past Default and the
consequences of such declaration, upon such terms, conditions and agree ment, if any, as they
may determine; provided that no Default arising from the following circumstances described
in the paragraph “Events of Default” above: Section 11(a) (Payment Default), Section 11(d)
(Cross Default), and Section 11(e) (Insolvency), and its consequences, may be waived or
revoked; provided further that, no such waiver or revocation shall extend to or shall affect
any subsequent Default or shall impair any right arising therefrom.

In case of any such waiver or revocation, Meralco, the Trustee and the Bondholders shall be
restored to their former positions and rights hereunder; but no such waiver or revocation
shall extend to any subsequent or other Default or impair any right arising therefrom. Any
such waiver or revocation by the Majority Bondholders shall be conclusive and binding upon
all Bondholders and upon all future holders and owners thereof, irrespective of whether or
not any notation of such waiver is made upon the certificate representing th e Bonds.

The Trustee shall, within five Business Days after receipt of the written waiver from the
Majority Bondholders of any Event of Default or revocation of any default previously
declared, give to the Bondholders written notice of such waiver, or revocation known to it via
publication in a newspaper of general circulation in Metro Manila for two consecutive days as
soon as practicable, indicating in the published notice an Event of Default has occurred and
has been waived or a declaration of a default has been revoked by the Majority Bondholders.

13. NOTICE OF DEFAULT

The Trustee shall, within five (5) days after the occurrence of any Event of Default, give to the
Bondholders written notice of such default known to it, via publication in a newspaper of general
circulation in Metro Manila for two (2) consecutive days as soon as practicable, indicating in the
published notice that an Event of Default has occurred, unless the same shall have been cured
before the giving of such notice.

14. TRUSTEE, NOTICES

(a) To the Trustee

All documents required to be submitted to the Trustee pursuant to the Trust Indenture and
the Prospectus and all correspondence addressed to the Trustee shall be delivered to:

To the Trustee Metropolitan Bank & Trust


Company- Trust Banking Group
Attention : Atty. Jasmin S. Bilasano
Senior Manager
Maribel L. Sanchez
Senior Assistant Manager

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Description of the Bonds

Address : 17th Floor, GT Tower International,


Ayala Avenue corner H.V. de la Costa
St., Salcedo Village, Makati City
Facsimile : (632) 8588010
Telephone : (632) 8575614; 8575643
E-mail : jazbilasano@metrobank.com.ph
bey.sanchez@metrobank.com.ph

All documents and correspondence not sent to the above -mentioned address shall be
considered as not to have been sent at all.

(b) To the Bondholders

Notices to Bondholders shall be sent to their mailing address as set forth in the Register of
Bondholders when required to be made through registered mail, surface mail, electronic mail,
in case the Bondholder has provided his email address in the Application to Purchase the
Bonds or in writing to the Trustee with instruction to send notices by electronic mail, or
personal delivery. Except where a specific mode of notification is provided for herein, notices
to Bondholders shall be sufficient when made in writing and transmitted in any one of the
following modes: (i) registered mail; (ii) surface mail; (iii) by one-time publication in a
newspaper of general circulation in the Philippines; or (iv) personal delivery to the address of
record in the Register of Bondholders; or (iii) disclosure through the Online Disclosure System
of the PDEx. The Trustee shall rely on the Register of Bondholders in determining the
Bondholders entitled to notice. All notices shall be deemed to have been received (i) ten days
from posting if transmitted by registered mail; (ii) 15 days from mailing, if transmitt ed by
surface mail; (iii) on date of publication (iv) on date of delivery, for personal delivery; (v) on
date of transmission from the electronic mail server of the Trustee; and (vi) on the date that
the disclosure is uploaded on the website of the PDEx, respectively.

A notice to the Trustee is notice to the Bondholders. The publication in a newspaper of


general circulation in the Philippines of a press release or news item about a communication
or disclosure made by Meralco to the Securities and Exchange Commission or the PDEx on a
matter relating to the Bonds shall be deemed a notice to the Bondholders of said matter on
the date of the first publication.

(c) Binding and Conclusive Nature

Except as provided in the Trust Indenture, all notifications, opinions , determinations,


certificates, calculations, quotations and decisions given, expressed, made or obtained by the
Trustee for the purposes of the provisions of the Trust Indenture, shall (in the absence of
wilful default, bad faith or manifest error) be binding on Meralco and all Bondholders, and (in
the absence as referred above), no liability to Meralco, the Registrar and Paying Agent or the
Bondholders shall attach to the Trustee in connection with the exercise or non -exercise by it
of its powers, duties and discretions under the Trust Indenture.

15. DUTIES AND RESPONSIBILITIES OF THE TRUSTEE

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Description of the Bonds

(a) Duties and Responsibilities

i. The Trustee is appointed as trustee for and in behalf of the Bondholders and accordingly
shall perform such duties and shall have such responsibilities as expressly provided in
herein.

ii. The Trustee shall, in accordance with these Terms and Conditions, monitor the compliance
or non-compliance by Meralco with all its representations and warranties, and Meralco’s
observance of all its covenants and performance of all its obligations, under and pursuant
to the Trust Indenture.

iii. The Trustee shall, prior to the occurrence of an Event of Default or after the curing of all
such defaults which may have occurred, perform only such duties as are specifically set
forth in the Trust Indenture and its Terms and Conditions.

iv. The Trustee, in the performance of its duties, shall exercise such rights and powers vested
in it by the Trust Indenture, and use the same degree of care and skill in their exercise, as
a prudent man would exercise or use under the circumstances in the conduct of his own
affairs under similar circumstances.

(b) Liability of the Trustee

No provision of the Trust Indenture shall be construed to relieve the Trustee from liability for
its own gross negligent action, its own gross negligent failure to act or its willful misconduct,
provided that:

i. prior to the occurrence of an Event of Default or after the curing or the waiver of all Events of
Default which may have occurred, in the absence of bad faith on the part of the Trustee,
the Trustee may conclusively rely upon, as to the truth of the statements and the
correctness of the opinion expressed in, any certificate or opinion furnished to the
Trustee conforming to the requirements of the Trust Indenture;

ii. the Trustee shall not be liable for any error of judgment made in good faith by their
respective responsible officer or officers, unless it shall be proven that the Trustee was
grossly negligent in ascertaining the pertinent facts; and

iii. the Trustee shall not be liable with respect to any action taken or omitted to be taken by
them in good faith in accordance with the direction of the Majority Bondholders relating
to the time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred upon the T rustee under the Trust
Indenture.

None of the provisions contained in the Trust Indenture shall require the Trustee to expend or
risk its own funds or otherwise incur personal financial liability in the performance of any of
their duties or in the exercise of any of their rights or powers if, in the determination of the
Trustee, there is reasonable ground for believing that the repayment of such funds or liability
is not reasonably assured to them under the terms of the Trust Indenture.

(c) Ability to Consult Counsel

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Description of the Bonds

The Trustee may consult with reputable counsel in connection with the duties to be
performed by the Trustee under the Trust Indenture and any opinion of such counsel shall be
full and complete authorization and protection in respec t of any action taken or omitted to be
taken by the Trustee hereunder in good faith and in accordance with such opinion; provided
that, prior to taking or not taking such action for which opinion of counsel is sought, the
Trustee shall inform Meralco of the relevant opinion of counsel; provided further that, the
Trustee shall not be bound by the foregoing condition to inform Meralco of counsel’s opinion
if the opinion of counsel which is being sought by the Trustee pertains to, or involves actions
to be undertaken due to, an Event of Default or issues pertaining thereto.

Notwithstanding any provision of the Trust Indenture authorizing the Trustee conclusively to
rely upon any certificate or opinion, the Trustee may, before taking or refraining from taking
any action in reliance thereon, require further evidence or make any further investigation as
to the facts or matters stated therein which they may in good faith deem reasonable in the
circumstances; and the Trustee shall require such further evidence or ma ke such further
investigation as may reasonably be requested in writing by the Majority Bondholders.

(d) The Trustee as Owner of the Bonds

The Trustee, in its individual or any other capacity, may become a holder of the Bonds with
the same rights it would have if it were not the Trustee and the Trustee shall otherwise deal
with Meralco in the same manner and to the same extent as though it were not the Trustee
hereunder; provided, that such ownership shall not be considered a conflict of interest
requiring resignation or change of the Trustee under Section 15(e) below.

(e) Resignation and Change of Trustee

The Trustee may at any time resign by giving 60 days prior written notice to Meralco and to
the Bondholders of such resignation.

Upon receiving such notice of resignation of the Trustee, Meralco shall immediately appoint a
successor trustee by written instrument in duplicate, executed by its authorized officers, one
copy of which instrument shall be delivered to the resigning Trustee and one copy to the
successor trustee. If no successor shall have been so appointed and have accepted
appointment within 45 days after the resigning Trustee has served its notice of resignation on
Meralco, the resigning Trustee, on behalf of the Bondholders and with prior written notice to
Meralco, may appoint a successor trustee. Upon the acceptance of any appointment as
trustee hereunder by a successor trustee, such successor trustee shall thereupon succeed to
and become vested with all the rights, powers, privileges and duties of the resigning Trustee,
and the resigning Trustee shall be discharged from its duties and obligations hereunder. The
resigning Trustee shall cooperate with the successor trustee and the Bondholders in all
reasonable ways to ensure an orderly turnover of its functions and the records in its custody.
Subject to the provisions of Section 15(f) below, such a successor trustee should possess all
the qualifications required under pertinent laws.

In case at any time the Trustee shall become incapable o f acting, or has acquired conflicting
interest, or shall be adjudged as bankrupt or insolvent, or a receiver for the Trustee, or of its
property shall be appointed, or any public officer shall take charge or control of the Trustee,
or of its properties or affairs for the purpose of rehabilitation, conservation or liquidation,
then Meralco may within 30 days therefrom remove the Trustee concerned, and appoint a
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Description of the Bonds

successor trustee, by written instrument in duplicate, executed by its authorized officers, one
copy of which instrument shall be delivered to the Trustee so removed and one copy to the
successor trustee. If Meralco fails to remove the Trustee concerned and appoint a successor
trustee, any bona fide Bondholder shall petition any court of competent jur isdiction for the
removal of the Trustee concerned and the appointment of a successor trustee. Such court
may thereupon after such notice, if any, as it may deem proper, remove the Trustee and
appoint a successor trustee. Upon the acceptance of any appoi ntment as trustee hereunder
by a successor trustee, such successor trustee shall thereupon succeed to and become vested
with all the rights, powers, trusts privileges and duties of the removed Trustee, and the
removed Trustee shall be discharged from its duties and obligations hereunder. The removed
Trustee shall cooperate with the successor trustee and the Bondholders in all reasonable
ways to ensure an orderly turnover of its functions and the records in its custody. Subject to
the provisions of Section 15(f) below, such successor trustee should possess all the
qualifications required under pertinent laws.

The Majority Bondholders may at any time remove the Trustee for cause, and appoint a
successor trustee, by the delivery to the Trustee so removed, t o the successor trustee and to
Meralco, the required evidence under the provisions on Evidence Supporting the Action of the
Bondholders in the Terms and Conditions.

Any resignation or removal of the Trustee and the appointment of a successor trustee
pursuant to any of the provisions of this Subsection shall become effective upon the earlier
of: (i) acceptance of appointment by the successor trustee; or (ii) the effectivity of the
resignation notice sent by the Trustee (the “Resignation Effective Date”) or the lapse of the
30-day period from the time the cause for removal (the “Removal Effective Date”) provided,
however, that after the Resignation Effective Date and Removal Effective Date, as relevant,
until a successor trustee is qualified and appointed (th e “Holdover Period”), the resigning
Trustee shall discharge duties and responsibilities solely as a custodian of records for
turnover to the successor Trustee promptly upon the appointment thereof by Meralco,
provided further that the resigning Trustee sha ll be entitled the fee stipulated in Section 2.2
of the Trust Indenture during the Holdover Period.

(f) Successor Trustee

Any successor trustee appointed as provided this paragraph shall execute, acknowledge and
deliver to Meralco and to its predecessor Trustee an instrument accepting such appointment
hereunder, and thereupon the resignation or removal of the predecessor Trustee shall
become effective and such successor trustee, without further act, deed or conveyance, shall
become vested with all the rights, powers, trusts, duties and obligations of its predecessor in
the trusteeship hereunder with like effect as if originally named as trustee herein; but,
nevertheless, on the written request of Meralco or of the successor trustee, the Trustee
ceasing to act shall execute and deliver an instrument transferring to such successor trustee,
upon the trusteeship herein expressed, all the rights, powers and duties of the Trustee so
ceasing to act. Upon request of any such successor trustee, Meralco shall execute an y and all
instruments in writing as may be necessary to fully vest in and confer to such successor
trustee all such rights, powers and duties.

Upon acceptance of the appointment by a successor trustee as provided in this Subsection,


Meralco shall notify the Bondholders in writing of the succession of such trustee to the
trusteeship herein provided. If Meralco fails to notify the Bondholders with in ten days after

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Description of the Bonds

the acceptance of appointment by the trustee, the latter shall cause the Bondholders to be
notified at the expense of Meralco.

(g) Merger or Consolidation

Any corporation into which the Trustee may be merged or with which it may be consol idated
or any corporation resulting from any merger or consolidation to which the Trustee shall be a
party or any corporation succeeding to the business of the Trustee shall be the successor of
the Trustee hereunder without the execution or filing of any p aper or any further act on the
part of any of the parties hereto, anything herein to the contrary notwithstanding, provided
that, such successor trustee shall be eligible under the provisions of the Trust Indenture and
the Securities Regulation Code; however, where such successor trustee is not qualified under
the pertinent Laws, then the provisions under Section 15(e) shall apply.

(h) Reliance

In the performance of its obligations under the Trust Indenture, the Trustee is entitled to rely
on the records of the Registrar, but shall exercise such judgment and care under the
circumstances then prevailing, that individuals of prudence, discretion and intelligence, and
familiar with such matters exercise in the management of their own affairs.

In addition, the Trustee shall not be held liable for any of its act or omission unless (i) such
act or omission was committed with fraud, evident bad faith, gross or willful negligence, or
(ii) the Trustee failed to exercise the skill, care, prudence and/or diligence required by law
and under the circumstances.

16. REPORTS TO BONDHOLDERS

(a) The Trustee shall submit to the Bondholders on or before February 28 of each year from the
relevant Issue Date until full payment of the Bonds a brief report dated as of December 31 of
the immediately preceding year with respect to:

i. The property and funds, if any, physically in the possession of the Paying Agent held in
trust for the Bondholders on the date of such report; and

ii. Any action taken by the Trustee in the performance of its duties under the Trust Indenture
which it has not previously reported and which in its opinion materially affects the Bonds,
except action in respect of a default, notice of which has been or is to be withheld by it.

(b) The Trustee shall submit to the Bondholders a brief report within ninety (90) days from the
making of any advance for the reimbursement of which it claims or may claim a lien or charge
which is prior to that of the Bondholders on the property or funds held or collected by the
Paying Agent with respect to the character, amount and the circumstances surrounding the
making of such advance; provided that, such advance remaining unpaid amounts to at least
ten percent (10%) of the aggregate outstanding principal amount of the Bonds at such time.

(c) The following pertinent documents may be inspected during regular business hours on any
Business Day at the principal office of the Trustee:

i. Trust Indenture

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Description of the Bonds

ii. Registry and Paying Agency Agreement

iii. Articles of Incorporation and By-Laws of the Company

iv. Registration Statement of the Company with respect to the Bonds

17. MEETINGS OF THE BONDHOLDERS

A meeting of the Bondholders may be called at any time and from time to time for the purpose of
taking any actions authorized to be taken by or on behalf of the Bondholders of any specified
aggregate principal amount of Bonds under any other provisions of the Trust Indenture or under
the law and such other matters related to the rights and interests of the Bondholders under the
Bonds.

(a) Notice of Meetings

The Trustee may at any time call a meeting of the Bondholders, or the holders of at least
twenty-five percent (25.0%) of the aggregate outstanding principal amount of Bonds may
direct the Trustee to call a meeting of the Bondholders, to take up any allowed action, to be
held at such time and at such place as the Trustee shall determine. Notice of every me eting of
the Bondholders, setting forth the time and the place of such meeting and the purpose of
such meeting in reasonable detail, shall be sent by the Trustee to Meralco and to each of the
registered Bondholders not earlier than fifteen (15) days nor later than forty-five (45) days
prior to the date fixed for the meeting. All reasonable costs and expenses incurred by the
Trustee for the proper dissemination of the requested meeting shall be reimbursed by
Meralco within ten (10) days from receipt of the duly supported billing statement.

(b) Failure of the Trustee to Call a Meeting

In case at any time Meralco, pursuant to a resolution of its board of directors or executive
committee, or the holders of at least twenty-five percent (25.0%) of the aggregate
outstanding principal amount of the Bonds, shall have requested the Trustee to call a meeting
of the Bondholders by written request setting forth in reasonable detail the purpose of the
meeting, and the Trustee shall not have mailed and published, in accorda nce with the notice
requirements, the notice of such meeting within twenty (20) days after receipt of such
request, then Meralco or the Bondholders in the percentage above specified may determine
the time and place for such meeting and may call such meetin g by mailing and publishing
notice thereof.

(c) Quorum

The presence of the Majority Bondholders, personally or by proxy, shall be necessary to


constitute a quorum to do business at any meeting of the Bondholders except for any meeting
called by Meralco solely for the purpose of obtaining the consent of the Bondholders to an
amendment of the Trust Indenture or the Bonds or waiver of any provisions of the Trust
Indenture or the Bonds, where the failure of any Bondholder to transmit an objection to such
proposal of Meralco after at least 2 notices to such Bondholder have been sent by the
Trustee, will be considered by the Trustee as an affirmative vote (and such Bondholder will be
considered present for quorum by the Trustee) for the proposal of Meralco.

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Description of the Bonds

(d) Procedure for Meetings

i. The Trustee shall preside at all the meetings of the Bondholders unless the meeting shall
have been called by Meralco or by the Bondholders, in which case Meralco or the
Bondholders calling the meeting, as the case may be, shall in like manner move for the
election of the chairman and secretary of the meeting.

ii. Any meeting of the Bondholders duly called may be adjourned from time to time for a
period or periods not to exceed in the aggregate of one (1) year from the date for which
the meeting shall originally have been called and the meeting as so adjourned may be
held without further notice. Any such adjournment may be ordered by persons
representing a majority of the aggregate principal amount of the Bonds represented at
the meeting and entitled to vote, whether or not a quorum shall be present at the
meeting.

(e) Voting Rights

To be entitled to vote at any meeting of the Bondholders, a person shall be a registered


holder of one or more Bonds or a person appointed by an instrument in writing as proxy by
any such holder as of the date of the said meeting. Bondholders shall be en titled to one vote
for every P10,000 face value of the Bonds held at the relevant time. The only persons who
shall be entitled to be present or to speak at any meeting of the Bondho lders shall be the
persons entitled to vote at such meeting and any representatives of Meralco and its legal
counsel.

(f) Voting Requirement

All matters presented for resolution by the Bondholders in a meeting duly called for the
purpose shall be decided or approved by the affirmative vote of the Majority Bondholders
present or represented in a meeting at which there is a quorum except as other wise provided
in the Trust Indenture. Any resolution of the Bondholders which has been duly approved with
the required number of votes of the Bondholders as herein provided shall be binding upon all
the Bondholders and Meralco as if the votes were unanimou s.

(g) Role of the Trustee in Meetings of the Bondholders

Notwithstanding any other provisions of the Trust Indenture, the Trustee may make such
reasonable regulations as it may deem advisable for any meeting of the Bondholders, in
regard to proof of ownership of the Bonds, the appointment of proxies by registered holders
of the Bonds, the election of the chairman and the secretary, the appointment and duties of
inspectors of votes, the submission and examination of proxies, certificates and other
evidences of the right to vote and such other matters concerning the conduct of the meeting
as it shall deem fit.

18. AMENDMENTS

(a) Meralco and the Trustee may amend or waive any provisions of the Bond Agreements if such
amendment or waiver is of a formal, minor, or technical nature or to correct a manifest error
or inconsistency, without prior notice to or the consent of the Bondholde rs or other parties,

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Description of the Bonds

provided in all cases that such amendment or waiver does not adversely affect the interests
of the Bondholders and provided further that all Bondholders are notified of such amendment
or waiver.

(b) Meralco and the Trustee may amend the Terms and Conditions of the Bonds with notice to
every Bondholder following the written consent of the Majority Bondholders (including
consents obtained in connection with a tender offer or exchange offer for the Bonds) or a
vote of the Majority Bondholders at a meeting called for the purpose. However, without the
consent of each Bondholder affected thereby, an amendment may not:

i. reduce the percentage of principal amount of Bonds outstanding that must consent to an
amendment or waiver;

ii. reduce the rate of or extend the time for payment of interest on any Bond;

iii. reduce the principal of or extend the Maturity Date or vary the Put Option Date of any
Bond;

iv. impair the right of any Bondholder to receive payment of principal of and interest on such
Holder’s Bonds on or after the due dates therefore or to institute suit for the enforcement
of any payment on or with respect to such Bondholders;

v. reduce the amount payable upon the redemption or repurchase of any Bond under the
Terms and Conditions or change the time at which any Bond may be redeemed;

vi. make any Bond payable in money other than that stated in the Bond;

vii. subordinate the Bonds to any other obligation of Meralco;

viii. release any security interest that may have been granted in favor of the Bondholders;

ix. amend or modify the Payment of Additional Amounts, Taxation, the Events of Default of
the Terms and Conditions or the Waiver of Default by the Bondholders; or

x. make any change or waiver of this Condition.

It shall not be necessary for the consent of the Bondhol ders under this Condition to approve the
particular form of any proposed amendment, but it shall be sufficient if such consent approves
the substance thereof. After an amendment under this Condition becomes effective, Meralco
shall send a notice briefly describing such amendment to the Bondholders in the manner
provided in Section 14(b).

19. EVIDENCE SUPPORTING THE ACTION OF THE BONDHOLDERS

Wherever in the Trust Indenture it is provided that the holders of a spe cified percentage of the
aggregate outstanding principal amount of the Bonds may take any action (including the making of
any demand or requests, the giving of any notice or consent or the taking of any other action), the
fact that at the time of taking any such action the holders of such specified percentage have
joined therein may be evidenced by: (i) any instrument executed by the Bondholders in person or
by the agent or proxy appointed in writing or (ii) the duly authenticated record of voting in favor

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Description of the Bonds

thereof at the meeting of the Bondholders duly called and held in accordance herewith or (iii) a
combination of such instrument and any such record of meeting of the Bondholders.

20. NON-RELIANCE

Each Bondholder also represents and warrants to the Trustee that it has independently and,
without reliance on the Trustee, made its own credit investigation and appraisal of the financial
condition and affairs of Meralco on the basis of such documents and information as it has deemed
appropriate and that he has subscribed to the Issue on the basis of such independent appraisal,
and each Bondholder represents and warrants that it shall continue to ma ke its own credit
appraisal without reliance on the Trustee. The Bondholders agree to indemnify and hold the
Trustee harmless from and against any and all liabilities, damages, penalties, judgments, suits,
expenses and other costs of any kind or nature wi th respect to its obligations under the Trust
Indenture, except for its gross negligence or wilful misconduct.

21. GOVERNING LAW

The Bond Agreements are governed by and are construed in accordance with Philippine law.

22. WAIVER OF PREFERENCE

The obligations created under the Bond Agreements and the Bonds shall not enjoy any priority of
preference or special privileges whatsoever over any indebtedness or obligations of Meralco.
Accordingly, whatever priorities or preferences that this instrument may have or any person
deriving a right hereunder may have under Article 2244, paragraph 14 of the Civil Code of the
Philippine are hereby absolutely and unconditionally waived and renounced. This waiver and
renunciation of the priority or preference under Article 22 44, paragraph 14 of the Civil Code of the
Philippines shall be revoked if it be shown that an indebtedness of Meralco for borrowed money
has a priority or preference under the said provision.

85
Annex 1 to the Terms and Conditions

IMPORTANT NOTE: BONDHOLDERS WITH LESS THAN P10,000 OF OUTSTANDING


BONDS DURING THE FIFTH YEAR PUT EXERCISE PERIOD WILL NOT BE ENTITLED TO
THE FIFTH YEAR PUT OPTION AS EXERCISE OF SAID OPTION IS IN DENOMINATIONS
OF P10,000 EACH, AS A MINIMUM AND IN INTEGRAL MULTIPLES OF P10,000
THEREAFTER.

FORM OF FIFTH YEAR PUT OPTION NOTICE


[LETTERHEAD OF THE BONDHOLDER]
[Date]

Manila Electric Company


Lopez Building, Ortigas Avenue
Pasig City

Through: [•]

Re: FIFTH YEAR PUT OPTION NOTICE IN RESPECT OF THE 4.3750% FIXED RATE BONDS
DUE 2020 (“7-Year Bonds”) ISSUED BY MANILA ELECTRIC COMPANY (“MERALCO”)
UNDER A TRUST INDENTURE DATED November 28, 2013 (“Trust Indenture”).

Dear Sir/Madam:

Reference is made to the Trust Indenture and the Terms and Conditions (as the said term is defined in the
Trust Indenture). Unless otherwise defined herein, capitalized terms in this letter shall have the meaning
ascribed to them in the Terms and Conditions.

This is an irrevocable Fifth Year Put Option Notice by the undersigned Bondholder (the “Holder”). Being
the holder of P_________ in aggregate principal amount of the 7-Year Bonds duly recorded and registered
in my/our name with the Registrar, I/we hereby exercise my/our Fifth Year Put Option in the amount of
Pesos: ____________ (P________) in accordance with Condition 5 (Bondholders’ Put Option) of the
Terms and Conditions which states that “ … each Bondholder shall have the right, but not the obligation, to
require the Issuer to redeem in whole or in part of the outstanding 7-Year Bonds registered in such
Bondholder’s name with a minimum amount of P10,000 and in integral multiples of P10,000 thereafter …
” and attach the required documents with and in support of this notice.

I/We hereby authorize you, MERALCO and the Registrar to verify the foregoing with the Registry and
agree that the records of the Registry shall be conclusive insofar as this Fifth Year Put Option Notice is
concerned. In the event that the Registrar’s records show that the principal amount of 7-Year Bonds
registered in my/our name is less than the principal amount indicated in this Fifth Year Put Option Notice,
then I/we irrevocably agree that this Fifth Year Put Option Notice covers all of my/our 7-Year Bonds.

I/We acknowledge and understand that:

1. this Fifth Year Put Option Notice can only be valid and effective against MERALCO if it is received by
the Trustee within the Fifth Year Put Exercise Period; and

2. from and after the date of this Fifth Year Put Option Notice until the redemption and payment of the
relevant Bonds by MERALCO on the Fifth Year Put Option Date, I/We will not be able to amend or
withdraw this Fifth Year Put Option Notice and will not be able to transfer any Bonds covered thereby to
any other Person.

I/We represent and warrant that:


(a) the Holder has good, complete and unencumbered title to the Bonds or is entitled to such title and
has not sold or otherwise dealt with those Bonds;
(b) the Holder has obtained all consents which may be required by law or contract in respect of the
Holder or the Bonds to enable the Holder to deliver the relevant Bonds to MERALCO for
redemption as provided under the Terms and Conditions;
(c) the redemption of the relevant Bonds by MERALCO will not result in the Holder contravening
any law or agreement to which the Holder or the relevant Bonds is subject or (as relevant) any
provisions of its constitutive documents;
(d) at the date of this notice and at all times until the time of payment of the Fifth Year Put Option
Payment by MERALCO, the Holder will have good legal and beneficial title to the relevant Bonds
free from any lien, encumbrance, third party interest or any other restriction on sale or transfer;
and
(e) the undersigned is duly authorized to execute and deliver this Fifth Year Put Option Notice and it
is legal, binding and may be fully relied upon by MERALCO, the Trustee, the Registrar and the
Paying Agent, who shall each be held free and harmless from any liability, loss or damage that
may arise from their reliance on this Fifth Year Put Option Notice.

If the Fifth Year Put Option Notice is accomplished by a dealer/broker on behalf of a client, the
undersigned broker hereby does declare that all the information given in connection with this Fifth Year
Put Option Notice is true, legal and valid pursuant to the authority duly granted by the beneficial owner of
the Bonds, and may be fully and unconditionally relied upon by MERALCO, the Trustee, the Registrar and
the Paying Agent. The dealer/broker thus agrees to hold PDTC free and harmless from any liability, loss or
damage that may arise from the execution of this instruction. We recognize and agree that the transfer is
subject to the PDTC Registry Rules that are in force and effect.

This notice is irrevocable.

Name and Signature of Holder/Dealer/Broker:


Address:
Contact Phone Number:
Principal Amount of Bonds Subject to the Put Option Notice:
Tax Identification Number:
Registry Account Number:
Registry Confirmation Number:

Required Attachments

FOR INDIVIDUAL INVESTORS:


o Identification documents of the Bondholder;
o Two (2) duly accomplished signature cards containing the specimen signature of the Bondholder, validated / signed
by the Broker’s authorized signatory/ies, whose authority/ies and specimen signatures have been submitted to PDTC;
and
o Authorization Letter, if applicable, for the payment and delivery of the Put Option Payment.
o Such other documents as may be reasonably required by the Broker(s) / Registrar in implementation of its internal
policies regarding “knowing your customer” and anti-money laundering.

FOR CORPORATE AND OTHER JURIDICAL ENTITY INVESTORS:


o An original notarized Certificate of the Corporate Secretary or Assistant Corporate Secretary of the Bondholder
setting forth resolutions of the Bondholder’s Board of Directors authorizing the exercise of the Put Option and
designating the signatories, with their specimen signatures, for the said purposes;
o Copies of its Articles of Incorporation and By-laws and latest amendments thereof, together with the Certificate of
Incorporation issued by the SEC or equivalent government institution, stamped and signed as certified as true copies by
the SEC or by the Bondholder’s Corporate Secretary, or by an equivalent officer/s who is/are authorized signatory/ies;
o Two (2) duly accomplished signature cards containing the specimen signatures of the Bondholder’s authorized
signatories, validated by its Corporate Secretary or by an equivalent officer/s who is/are authorized signatory/ies, and
further validated/signed by the Broker’s authorized signatory/ies whose authority/ies and specimen signatures have
been submitted to PDTC;
o Identification document(s) of Bondholder’s authorized signatories;
o Such other documents as may be reasonably required by the Broker(s) / Registrar in implementation of its internal
policies regarding “knowing your customer” and anti-money laundering.
o Authorization Letter, if applicable, for the payment and delivery of the Put Option Payment.

Identification Documents Shall Consist Of: Any one (1) of the following valid identification documents bearing a
recent photo, and which is not expired: Passport, Driver’s License, Professional Regulation Commission (PRC) ID,
National Bureau of Investigation (NBI) Clearance, Police Clearance, Postal ID, Voter’s ID, Barangay Certification,
Government Service Insurance System (GSIS) e-Card, Social Security System (SSS) Card, Senior Citizen Card,
Overseas Workers Welfare Administration (OWWA) ID, OFW ID, Seaman’s Book, Alien Certification of
Registration/Immigrant Certificate of Registration, Government Office and GOCC ID, e.g. Armed Forces of the
Philippines (AFP ID), Home Development Mutual Fund (HDMF ID), Certification from the National Council for the
Welfare of Disabled Persons (NCWDP), Department of Social Welfare and Development (DSWD) Certification,
Integrated Bar of the Philippines ID, Company IDs issued by private entities or institutions registered with or
supervised or regulated either by the BSP, SEC OR IC, or school ID duly signed by the principal or head of the school
(for students who are beneficiaries of remittances/fund transfers who are not yet of voting age).
Annex 2 to the Terms and Conditions

IMPORTANT NOTE: BONDHOLDERS WITH LESS THAN P10,000 OF OUTSTANDING


BONDS DURING THE TENTH YEAR PUT EXERCISE PERIOD WILL NOT BE ENTITLED TO
THE TENTH YEAR PUT OPTION AS EXERCISE OF SAID OPTION IS IN DENOMINATIONS
OF P10,000 EACH, AS A MINIMUM AND IN INTEGRAL MULTIPLES OF P10,000
THEREAFTER.

FORM OF TENTH YEAR PUT OPTION NOTICE


[LETTERHEAD OF THE BONDHOLDER]
[Date]

Manila Electric Company


Lopez Building, Ortigas Avenue
Pasig City

Through: [•]

Re: TENTH YEAR PUT OPTION NOTICE IN RESPECT OF THE 4.8750% FIXED RATE BONDS
DUE 2025 (“12-Year Bonds”) ISSUED BY MANILA ELECTRIC COMPANY (“MERALCO”)
UNDER A TRUST INDENTURE DATED November 28, 2013 (”Trust Indenture”).

Dear Sir/Madam:

Reference is made to the Trust Indenture and the Terms and Conditions (as the said term is defined in the
Trust Indenture). Unless otherwise defined herein, capitalized terms in this letter shall have the meaning
ascribed to them in the Terms and Conditions.

This is an irrevocable Tenth Year Put Option Notice by the undersigned Bondholder (the “Holder”). Being
the holder of P_________ in aggregate principal amount of the 12-Year Bonds duly recorded and registered
in my/our name with the Registrar, I/we hereby exercise my/our Tenth Year Put Option in the amount of
Pesos: ____________ (P________) in accordance with Condition 5 (Bondholders’ Put Option) of the
Terms and Conditions which states that “ … each Bondholder shall have the right, but not the obligation, to
require the Issuer to redeem in whole or in part of the outstanding 12-Year Bonds registered in such
Bondholder’s name with a minimum amount of P10,000 and in integral multiples of P10,000 thereafter …
” and attach the required documents with and in support of this notice.

I/We hereby authorize you, MERALCO and the Registrar to verify the foregoing with the Registry and
agree that the records of the Registry shall be conclusive insofar as this Tenth Year Put Option Notice is
concerned. In the event that the Registrar’s records show that the principal amount of 12-Year Bonds
registered in my/our name is less than the principal amount indicated in this Tenth Year Put Option Notice,
then I/we irrevocably agree that this Tenth Year Put Option Notice covers all of my/our 12-Year Bonds.

I/We acknowledge and understand that:

1. this Tenth Year Put Option Notice can only be valid and effective against MERALCO if it is received by
the Trustee within the Tenth Year Put Exercise Period; and

2. from and after the date of this Tenth Year Put Option Notice until the redemption and payment of the
relevant Bonds by MERALCO on the Tenth Year Put Option Date, I/We will not be able to amend or
withdraw this Tenth Year Put Option Notice and will not be able to transfer any Bonds covered thereby to
any other Person.

I/We represent and warrant that:


(a) the Holder has good, complete and unencumbered title to the Bonds or is entitled to such title and
has not sold or otherwise dealt with those Bonds;
(b) the Holder has obtained all consents which may be required by law or contract in respect of the
Holder or the Bonds to enable the Holder to deliver the relevant Bonds to MERALCO for
redemption as provided under the Terms and Conditions;
(c) the redemption of the relevant Bonds by MERALCO will not result in the Holder contravening
any law or agreement to which the Holder or the relevant Bonds is subject or (as relevant) any
provisions of its constitutive documents;
(d) at the date of this notice and at all times until the time of payment of the Tenth Year Put Option
Payment by MERALCO, the Holder will have good legal and beneficial title to the relevant Bonds
free from any lien, encumbrance, third party interest or any other restriction on sale or transfer;
and
(e) the undersigned is duly authorized to execute and deliver this Tenth Year Put Option Notice and it
is legal, binding and may be fully relied upon by MERALCO, the Trustee, the Registrar and the
Paying Agent, who shall each be held free and harmless from any liability, loss or damage that
may arise from their reliance on this Tenth Year Put Option Notice.

If the Tenth Year Put Option Notice is accomplished by a dealer/broker on behalf of a client, the
undersigned broker hereby does declare that all the information given in connection with this Tenth Year
Put Option Notice is true, legal and valid pursuant to the authority duly granted by the beneficial owner of
the Bonds, and may be fully and unconditionally relied upon by MERALCO, the Trustee, the Registrar and
the Paying Agent. The dealer/broker thus agrees to hold PDTC free and harmless from any liability, loss or
damage that may arise from the execution of this instruction. We recognize and agree that the transfer is
subject to the PDTC Registry Rules that are in force and effect.

This notice is irrevocable.

Name and Signature of Holder/Dealer/Broker:


Address:
Contact Phone Number:
Principal Amount of Bonds Subject to the Put Option Notice:
Tax Identification Number:
Registry Account Number:
Registry Confirmation Number:

Required Attachments

FOR INDIVIDUAL INVESTORS:


o Identification documents of the Bondholder;
o Two (2) duly accomplished signature cards containing the specimen signature of the Bondholder, validated / signed
by the Broker’s authorized signatory/ies, whose authority/ies and specimen signatures have been submitted to PDTC;
and
o Authorization Letter, if applicable, for the payment and delivery of the Put Option Payment.
o Such other documents as may be reasonably required by the Broker(s) / Registrar in implementation of its internal
policies regarding “knowing your customer” and anti-money laundering.

FOR CORPORATE AND OTHER JURIDICAL ENTITY INVESTORS:


o An original notarized Certificate of the Corporate Secretary or Assistant Corporate Secretary of the Bondholder
setting forth resolutions of the Bondholder’s Board of Directors authorizing the exercise of the Put Option and
designating the signatories, with their specimen signatures, for the said purposes;
o Copies of its Articles of Incorporation and By-laws and latest amendments thereof, together with the Certificate of
Incorporation issued by the SEC or equivalent government institution, stamped and signed as certified as true copies by
the SEC or by the Bondholder’s Corporate Secretary, or by an equivalent officer/s who is/are authorized signatory/ies;
o Two (2) duly accomplished signature cards containing the specimen signatures of the Bondholder’s authorized
signatories, validated by its Corporate Secretary or by an equivalent officer/s who is/are authorized signatory/ies, and
further validated/signed by the Broker’s authorized signatory/ies whose authority/ies and specimen signatures have
been submitted to PDTC;
o Identification document(s) of Bondholder’s authorized signatories;
o Such other documents as may be reasonably required by the Broker(s) / Registrar in implementation of its internal
policies regarding “knowing your customer” and anti-money laundering.
o Authorization Letter, if applicable, for the payment and delivery of the Put Option Payment.

Identification Documents Shall Consist Of: Any one (1) of the following valid identification documents bearing a
recent photo, and which is not expired: Passport, Driver’s License, Professional Regulation Commission (PRC) ID,
National Bureau of Investigation (NBI) Clearance, Police Clearance, Postal ID, Voter’s ID, Barangay Certification,
Government Service Insurance System (GSIS) e-Card, Social Security System (SSS) Card, Senior Citizen Card,
Overseas Workers Welfare Administration (OWWA) ID, OFW ID, Seaman’s Book, Alien Certification of
Registration/Immigrant Certificate of Registration, Government Office and GOCC ID, e.g. Armed Forces of the
Philippines (AFP ID), Home Development Mutual Fund (HDMF ID), Certification from the National Council for the
Welfare of Disabled Persons (NCWDP), Department of Social Welfare and Development (DSWD) Certification,
Integrated Bar of the Philippines ID, Company IDs issued by private entities or institutions registered with or
supervised or regulated either by the BSP, SEC OR IC, or school ID duly signed by the principal or head of the school
(for students who are beneficiaries of remittances/fund transfers who are not yet of voting age).
INDEPENDENT AUDITORS AND COUNSEL

LEGAL MATTERS

All legal opinions/matters in connection with the issuance of the Bonds which are subject of this Offer
shall be passed upon by Picazo Buyco Tan Fider & Santos Law Offices (“Picazo”) for the Joint Lead
Underwriters, and Quiason Makalintal Barot Torres Ibarra & Sison Law Firm (“QMBTIS”) for the
Company. The aforesaid counsels have no shareholdings in Meralco, or any right, whether legally
enforceable or not, to nominate persons or to subscribe to the securities of Meralco, in accordance
with the standards of independence required in the Code of Professional Responsibility and as
prescribed by the Supreme Court of the Philippines.

INDEPENDENT AUDITORS

The consolidated financial statements of Meralco as at December 31, 2010, 2011 and 2012 , and for
the years ended December 31, 2012, 2011 and 2010 appearing in this Prospectus have been audited
by SyCip, Gorres, Velayo & Co. (“SGV & Co.”), independent auditors, as set forth in their report
thereon appearing elsewhere herein.

The aggregate fees billed by SGV & Co. are shown below (with comparative figures for 2011):

2012 2011
Audit fees P6,300,000.00 P9,200,000.00
Assurance-related and other fees - P1,000,000.00
Total P6,300,000.00 P10,200,000.00

Audit fees. This includes audit of Meralco Group’s annual financial statements and review of quarterly
financial statements in connection with the statutory and regulatory filings or engagements for the
years ended December 31, 2011 and 2012.

Assurance-related and other fees. This includes one-time, non-recurring special projects/consulting
services and seminars.

The fees presented above include out-of-pocket expenses incidental to the independent auditor’s
services.

The Company’s independent auditors, SGV & Co., were evaluated, nominated and recommended for
appointment including their audit fees by the Audit & Risk Committee, and such recommendation was
approved by the Board. The re-appointment of SGV & Co. was thereafter confirmed by the
shareholders in the annual general meeting (“AGM”) held on May 28, 2013.

The Company has no disagreements with its independent auditors on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or procedure.

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Philippine Power Industry

The information in this section has been derived from various government and private publications or
obtained from communications with various Government agencies unless otherwise indicated and has
not been prepared or independently verified by the Company , the Joint Lead Underwriters or any of
their respective affiliates or advisors. The information may not be consistent with other information
compiled within or outside the Philippines.

Regulatory Framework

Electric Power Industry Reform Act or EPIRA

Republic Act (“RA) No. 9136, also known as EPIRA, was passed in June 2001 with the main objective of
providing affordable and reliable electricity supply by (i) restructuring and deregulating the industry
and (ii) privatizing National Power Corporation (“NPC”) assets and NPC-Independent Power Producer
(“IPP”) contracts. Prior to EPIRA, the industry was mainly made up of NPC and private distribution
utilities (“DUs”) such as Meralco, Visayan Electric Company, Inc., and Davao Light and Power Co.),
electric cooperatives, and local government owned utilities in the country, which at that ti me
controlled approximately 90% of the country’s installed generating capacity and performed both the
generation and transmission functions. DUs and electric cooperatives we re responsible for the
distribution function, which pertains to the physical distribution, and the supply function, which
pertains to the buying and retailing, of electricity. Today, the industry has transitioned into four
sectors—generation and supply sectors, which are competitive, and transmission and distribution
sectors, which remain regulated. The EPIRA provides that there should be RCOA on distribution wires.
Pursuant to this provision, the ERC issued Resolution No. 10, Series of 2011 in June 2011, w hich
declared that all the pre-conditions for RCOA have been fulfilled, setting the start of RCOA in Luzon
and the Visayas on December 26, 2011, which was later moved to June 26, 2013. However, the ERC
has provided for a transition period and set the full implementation of RCOA to begin December 26,
2013. The ERC subsequently issued Resolution No. 16, Series of 2012 in December 2012 containing
transitory rules for the initial implementation of RCOA in Luzon and the Visayas.

On June 26, 2013, RCOA commenced on a voluntary basis, allowing major electricity consumers to
shop for the lowest electricity prices. Out of approximately 700 qualified customers in the Meralco
franchise area, over 230 customers opted for immediate contestability and , of those, 151 customers
representing 60% by volume of electricity consumed signed up with Meralco's Retail Electricity Supply
unit MPower.

Through Department Circular No. DC2013-05-006 issued on May 6, 2013, the DOE has enjoined all
industry participants to fully comply with their obligations under relevant laws, rules, and regulations
relating to the implementation of the RCOA.

Energy Regulatory Commission


The ERC is the independent, quasi-judicial regulatory body created under the EPIRA, tasked to
promote competition, encourage market development, ensure customer choice, and penalize abuse of
market power in the restructured electricity industry. It has the authority, among others, to enforce
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the implementing rules and regulations of the EPIRA and the rules governing the operations of the
WESM and activities of its participants; establish and enforce a methodology for setting transmission
and distribution wheeling rates and the retail rates for the captive market of a DU; issue licenses and
permits; set and enforce technical and financial standards for industry participants; and monitor,
investigate and take measures to penalize violations of rules and regula tions.

Department of Energy
In accordance with its mandate to supervise the restructuring of the electric power industry, the DOE
exercises, among others, the following functions: preparation and annual updating of the Philippine
Energy Plan and the Philippine Power Development Program, and thereafter integration of the latter
into the former; ensuring the reliability, quality and security of the supply of electric power; exercise
of supervision and control over all government activities pertaining to ene rgy projects;
encouragement of private investment in the electricity sector and promotion of the development of
indigenous and renewable energy sources for power generation; facilitation of reforms in the
structure and operation of distribution utilities f or greater efficiency and lower costs; promotion of
incentives to encourage industry participants, including new generating companies and end -users, to
provide adequate and reliable electric supply; and establishment of the WESM in cooperation with
electric power industry participants, and formulating rules governing its operations.

Renewable Energy Act of 2008


The Renewable Energy Act of 2008 (“RE Law”) is a landmark legislation and is considered the most
comprehensive renewable energy law in Southeast Asia. It was signed into law on December 16, 2008
and took effect on January 30, 2009.

The RE Law’s declared policies are to encourage and develop the use of renewable energy resources
of the country to reduce dependence on fossil fuels and the overall cos ts of energy, and decrease, if
not prevent, harmful emissions into the environment to promote health and sustainable environment.

The DOE has been designated as the lead regulatory agency to implement the RE Law. On May 25,
2009, the DOE issued Circular No. DC2009-05-0008 known as the Implementing Rules and Regulations
of the RE Law (effective June 12, 2009), followed on July 12, 2009 by Circular No. DC2009 -07-0011
prescribing guidelines governing renewable energy service/operating contracts and the proces s for
the registration of renewable energy developers (effective August 10, 2009). A new office within the
DOE, the Renewable Energy Management Bureau, has been created to, among others, implement the
renewable energy policies, plans and programs.

The two main features of the RE Law are the fiscal incentives made available to renewable energy
activities and the non-fiscal incentives or market mechanisms geared towards promoting and
encouraging commercialization of renewable energy resources.

The key fiscal incentives available to renewable energy projects and activities include, among others,
an income tax holiday, duty-free importations of renewable energy machineries and materials, special
realty tax rates, preferential income tax rate of 10% after the income tax holiday, zero-rated VAT rate,
and tax credits on domestic purchase of capital equipment and services. The RE Law also provides
renewable energy developers, suppliers, fabricators and manufacturers with fiscal incentives for
renewable energy commercialization including, among others, an income tax holiday, special realty
tax rates and a zero-rated VAT rate.

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The non-fiscal incentives or market mechanisms include the Renewable Portfolio Standards (“RPS”)
which sets a minimum percentage of generation from eligible renewable energy resources; the Feed-
in Tariff (the “FiT”) System which authorizes a fixed tariff for electricity produced from emerging
renewable energy resources; the Renewable Energy Market , which shall operate under the WESM to
facilitate compliance with the RPS; Net Metering and the Green Energy Option , which allows end-
users to directly contract their energy requirements from renewable energy facilities.

In addition to the fiscal and non-fiscal incentives, the RE Law provides registered renewable energy
developers utilizing intermittent renewable energy resource the option to pay transmission and
wheeling charges on a per kilowatt-hour basis equivalent to the average per kilowatt-hour rate of all
other electricity transmitted through the grid. These renewable energy developers are also given the
benefit of priority dispatch.

The RE Law also directs government financial institutions to provide preferential financial packages
for renewable energy projects recommended and endorsed by the D OE.

As to the government share in the exploration, development and utilization of renewable energy
resources with respect to existing and new renewable energy development projects, the RE Law
prescribes a rate of 1% of the gross income from sale of renewa ble energy (1.5% for indigenous
geothermal energy), and other incidental income from renewable energy generation, transmission and
sale of electric power to be remitted to the Government.

The RE Law mandates DUs to provide the mechanism for the physical connection and commercial
arrangements necessary to ensure the success of the Net Metering for Renewable Energy Program
(“Net Metering”). Net Metering is a system, appropriate for distributed generation, in which a
distribution grid user has a two-way connection to the grid and is only charged for his net electricity
consumption and is credited for any overall contribution to the electricity grid.

The ERC released the Net Metering Rules and Interconnection Standards (the “Net Metering Rules”)
on July 3, 2013. Following publication in newspapers on July 9, 2013, the Net Metering Rules took
effect on July 24, 2013, upon which Meralco began formally accepting applications to the Net
Metering program from its customers.

Renewable Portfolio Standards

The Renewable Portfolio Standards (“RPS”) places an obligation on electric power industry
participants such as generators, distribution utilities, or suppliers to source or produce a specified
fraction of their electricity from eligible renewable energy resources, as determined by the National
Renewable Energy Board (“NREB”), in consultation with the appropriate government agencies and in
accordance with the National Renewable Energy Program. As the implementing agency, the DOE is
tasked to formulate and promulgate the RPS Rules, which are expected to be issued in the second half
of 2013. These rules are expected to include guidelines on the minimum percentage of generation
from eligible renewable energy resources, the annua l minimum incremental requirement, the sectors
where the RPS shall be imposed on a per grid basis and the types of renewable energy resources to be
certified and required to comply with RPS.

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Feed-in Tariff or FiT

The FiT system mandates that electric power industry participants source electricity from renewable
energy generation at a guaranteed fixed price applicable for a given period of time, which shall in no
case be less than 12 years, to be determined by the ERC. The FiT system also includes a proposed FiT
Allowance which is a surcharge that allows all electricity consumers to share in the cost of the FiT. It
shall be part of the transmission wheeling rates to be imposed and collected from customers by NGCP.
The FiT system shall be adopted to accelerate the development of emerging renewable energy
resources (wind, solar, ocean, run-of-river hydropower and biomass energy resources) through a fixed
tariff system. The FiT Rules were issued by the ERC on July 23, 2010 unde r ERC Resolution No. 16,
Series of 2010, as amended by Resolution No. 15, Series of 2012.

On May 16, 2011, pursuant to the FiT Rules, the NREB filed its Petition to Initiate Rule Making for the
Adoption of Feed-in-Tariff. The petition proposed a specific FiT rate for each emerging renewable
resource. After undergoing several public consultations and public hearings, on July 27, 2012, the ERC
approved FiT rates significantly lower than the rates applied for by the NREB. The ERC also decided to
defer approving a FiT rate for ocean-generated power for further study and data gathering.

To fund the FiT payments to eligible RE developers, a FiT -allowance charge will be imposed on all end-
users. The FiT-allowance will be established by the ERC on an annual basis upon petition by TransCo,
which has been designated as the FiT fund administrator. Similar to the NREB’s FiT rate petition, the
FiT-allowance petition will go through a process of public hearings and consultations.

To supplement the FiT Rules, the ERC is currently drafting the FiT-allowance payment and collection
guidelines that will govern how the FiT-allowance will be calculated and outline the process of billing
and collecting the FiT-allowance from electricity consumers, its remittance to a specified f und,
disbursements from the fund and the payment to eligible RE developers.

Green Energy Option

The Green Energy Option program is a mechanism yet to be established by the DOE, which aims to
provide end-users the option to choose renewable energy resources as their source of energy. The
end-users may directly contract with renewable energy facilities for their energy requirements, to be
distributed through their respective distribution utilities.

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Industry Sectors

EPIRA divides the electric power industry into four sectors—generation, transmission, supply and
distribution. The generation and supply sectors are competitive while the transmission and
distribution sectors remain regulated. The following diagram shows the structure of the electric
power industry.

The generation sector converts fuel and other forms of energy into electricity. This sector
consists of: (i) NPC-owned and NPC-operated generation facilities; (ii) NPC-IPP plants, which
consist of NPC-owned plants operated by IPPs, and IPP-owned and IPP-operated plants, all of
which supply electricity to NPC; and (iii) IPP -owned and IPP-operated plants that supply
electricity to distribution utilities and customers other than NPC. The success of the privatization
process of NPC has created momentum for power industry reforms.

Under the EPIRA, generation companies are allowed to sell electricity to DUs or retail electricity
suppliers through either bilateral contracts or the WESM. Upon commencement of RCOA on June
26, 2013, generation companies, through their licensed retail arms, began selling electricity to
eligible end-users.

In terms of market share limitations, no generation company or a related group may own more
than 30% of the installed generating capacity of any of the Luzon, Vis ayas, or Mindanao grids,
and/or 25% of the total nationwide installed generating capacity. The ERC annually monitors the
installed generating capacity of each grid and the national grid. To date, there has been no

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instance where the ERC has declared any power generation company to have breached the
mandated ceilings. Also, no generation company associated with a DU may supply more than 50%
of the DU’s total demand, under bilateral contracts, without prejudice to the bilateral contracts
entered into prior to the effectiveness of EPIRA.

Supply

Retail Electricity Suppliers (“RES”) are those engaged in the business of selling electricity to end -
users. The business is not considered a public utility operation and suppliers are not required to
obtain a national franchise. Except for the DUs and electric cooperatives with respect to their
existing franchise areas, all suppliers of electricity to Contestable Customers need to be licensed
by the ERC. However, the prices charged by suppliers to Contestable Customers of a distribution
utility are not subject to regulation by the ERC. Under the Transitory Rules for the Initial
Implementation of RCOA, Contestable Customers may enter into a retail supply contract with a
RES/local RES before May 20, 2013. The Transitory Rules, however, provide for a grace period
ending on December 26, 2013, upon which Contestable Customers must enter into supply
contracts and may no longer be served by the DU.

Upon full implementation of RCOA, as mandated by the EPIRA, end-users with electricity demand
who meet the thresholds set by the ERC will be allowed to source electricity from electricity
suppliers of their choice. The EPIRA also contemplates that certain end -users who are registered
as direct market participants may source power directly through the WESM. Other Contestable
Customers who register as indirect WESM members may indirectly participate in the WESM
through its elected RES who must be a direct WESM member. This will encourage competition at
the retail level. It is planned that Retail Competition will gradually increase over t ime.
Commercial operations of RCOA on a voluntary basis began on June 26, 2013, following a six-
month transition period. A total of 19 RESs were licensed by the ERC to provide competitive retail
supply service to eligible contestable customers, or end-users with twelve months’ registered
demand of 1 MW and above. Within the Meralco franchise, 237 customers or 37% of the total
number of eligible customers certified by the ERC opted for contestability and are now being
supplied by competitive retail suppliers.

Transmission

Electricity generated by power generation facilities is generally transported via a high -voltage
transmission system to various DUs or electric cooperatives. Transmission is critical in ensuring
that generated electricity is delivered to the DUs’ load cent ers within proper technical standards.
It is a regulated common electricity carrier business subject to the rate -making powers of the
ERC.

Pursuant to the EPIRA, NPC transferred its transmission and sub-transmission assets to TransCo,
which was created to operate the transmission systems throughout the Philippines. TransCo is
also mandated to provide Open Access to all industry participants. The EPIRA granted TransCo a
monopoly over the high-voltage transmission network and subjected it to performance -based
regulations.

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The EPIRA also required the privatization of TransCo through an outright sale or concession
contract to be carried out by the Power Sector Assets and Liabilities Management Corporation
(“PSALM”). In December 2007, the consortium of Monte Oro Grid Resources Corporation, Calaca
High Power Corporation and the State Grid Corporation of China (the “Consortium”) won the
concession contract for TransCo with a bid of U.S.$ 3.95 billion. On January 14, 20 09, PSALM
formally turned over the 25-year concession of TransCo to the NGCP, the company formed by the
Consortium. NGCP operates the national grid under a nation al franchise granted under RA No.
9511, “An Act Granting The National Grid Corporation Of The Philippines A Franchise To Engage In
The Business Of Conveying Or Transmitting Electricity Through High Voltage Back -Bone System Of
Interconnected Transmission Lines, Substations And Related Facilities, And For Other Purposes” .

Distribution

The distribution of electricity to end-users is considered a common carrier business requiring a


national franchise and is regulated primarily by the ERC. A DU has the obligation to provide
distribution services and connections to its system for any end -user within its franchise area in
accordance with rules. Access by all users to its system shall be open and non -discriminatory. The
National Electrification Administration (“NEA”) is the government agency mandated to: (1)
implement programs to strengthen the technical capability and financial viability of electric
cooperatives, DUs organized and registered pursuant to Presidential Decree No. 269, as
amended; and (2) prepare them for the implementation of RCOA. In February 2013, the Philippine
legislature enacted RA No. 10531, which empowers the NEA to, among others, supervise the
management and operation of all electric cooperatives, pursue the total electrification of the
country through the electric cooperatives by way of enhancing distribution development and
restructure ailing electric cooperatives to make them economically and financially viable. As
reported by the ERC, the distribution sector is composed of 120 electric cooperatives and 20
privately-owned utilities. These DUs may purchase electricity from genera tion companies or the
WESM, when qualified, for distribution to residential, commercial, industrial and other end -user
segments. NEA may act as guarantor for purchases of electricity in the WESM by any electric
cooperative or small DU to support their credit standing and grant loans to elective cooperatives
for the construction, maintenance and improvements of subtransmission and distribution
facilities.

In principle, DUs serve a captive market and therefore are required by law to supply electricity in
the least cost manner because their generation costs are entirely passed on to their customers.
This is why power purchase agreements between DUs and generation companies go through a
stringent approval process, including public hearings, publications, and po sting of notices in each
of the municipalities and cities covered by their respective franchise areas.

With DU charges being regulated by the ERC, DUs and the generators supplying electricity to
them were exposed to regulatory risks given that adjustments in their generation rates can be
disallowed by the ERC every time they have their billings reviewed every month. ERC Resolution
No. 10—Series of 2004 allows automatic adjustment of generation rates and systems loss rates of
DUs.

Based on its interpretation of Section 4(e), Rule 3 of the EPIRA, the Supreme Court of the
Philippines, issued an order in August 2006, directing that Meralco make a filing with ERC prior to

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adjusting generation rates instead of implementing the mechanism for automatic adjustment of
such rates. The DOE remedied the situation in June 2007 by amending said regulation and
expressly allowing the automatic adjustment mechanism to allow the timely recovery of
generation and other pass-through costs. Thereafter, Meralco resumed implementation of the
automatic adjustment mechanism.

More recently, there has been a move towards a more accurate and updated method of cost
recovery. In July 2009, the ERC released the regulations for the Automatic Cost Adjustment and
True-Up Mechanisms for Distribution Utilities.

The major distribution utilities in the Philippines as of December 31, 2012 are as follows:

Area Served Metro Manila Cebu City and Davao City and
and environs environs environs

Peak Demand (MW) 5,633 412 295


Franchise area (sq. km.) 9,337 674 3,561
34 cities 4 cities 2 cities
Districts 77 municipalities 4 municipalities 3 municipalities
Service Area Population 25.9 1 1.7 1.8
(Millions)
Customer Count 5,189,247 341,611 303,135
Source: respective companies’ public filings.
1
Estimated figures only, based on official 2010 census.

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Competitive Market Devices

Wholesale Electricity Spot Market or WESM

EPIRA mandates the establishment of a wholesale market that provides the mechanism for
identifying and setting the price of actual variations from the quantities transacted under
contracts between sellers and purchasers of electricity. This market, known as the WESM,
became operational in the Luzon grid on June 26, 2006. It is a “gross pool, net settlements”
market that enables suppliers and buyers to trade electricity as a commodity. The main purpose
of the WESM is to provide industry stakeholders the correct price signals in order to properly
guide them in making various investments, as well as their operational decisions. The
establishment of the WESM was a necessary precondition for competition to be achieved in the
market.

Prior to the initial operation, the DOE issued the WESM Rules, which set the guidelines and
standards for participation in the market, providing a level playing field to all electric power
industry participants. Such guidelines and standards include procedures for establishing the merit
order dispatch for each time (i.e. hourly) trading period and determining the market -clearing
prices. The ERC also approved and issued the price determination methodology for the WESM.

The Philippine Electricity Market Corporation (“PEMC”) acts as the market operator that governs
the WESM. The PEMC’s Board of Directors is composed of rep resentatives of electric power
industry participants and independent members. Its primary purpose is to establish, maintain,
operate and govern an efficient, competitive, transparent and reliable market for the wholesale
purchase of electricity and ancillary services in the Philippines in accordance with relevant laws,
rules and regulations. Moreover, in accordance with EPIRA, the present structure of PEMC will
undergo changes upon the implementation of an independent market operator set -up.

The WESM is currently operating in the Luzon and Visayas regions. While WESM in Mindanao has
not yet been implemented, on April 1, 2013, the ERC authorized PEMC to use the undisbursed
portion of the market transaction fees collected in 2012 for the establishment of the Interim
Mindanao Electricity Market (“IMEM”). IMEM would allow generators and other entities to sell
excess generation in order to augment and address the present supply deficiency in Mindanao.

Retail Competition and Open Access or RCOA

EPIRA likewise provides for a system of open access on transmission and distribution wires,
whereby TransCo/NGCP and distribution utilities may not refuse the use of their wires by
qualified persons, subject to the payment of distribution and wheeling charges. Conditions for
the commencement of the RCOA system are as follows:

establishment of the WESM;

approval of unbundled transmission and distribution wheeling charges;

initial implementation of the cross-subsidy removal scheme;

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privatization of at least 70% of the total capacity of generating assets of NPC in Luzon and
the Visayas; and

transfer of the management and control of at least 70% of the total energy output of
power plants under contract with NPC to the IPP administrators.

EPIRA provides for the implementation of RCOA in phases, beginning with end-users with a
monthly average peak demand of at least one megawatt (1 MW).

In a decision dated June 6, 2011 on Case No. 2011-004RM, the ERC determined that the
preconditions for the commencement of RCOA have been met. At the time of the decision,
PSALM had privatized or disposed of 22 NPC generation assets, with an aggregate rated capacity
of 4,236.18 MW or 79.56% of NPC’s generating capacity in the Luzon and Visayas grids.
Meanwhile, the WESM began operations in Luzon in June 2006 and in the Visayas in December
2010.

Subsequently, end-users who comprise the Contestable Market for this purpose have been
identified. In accordance with the ERC’s “Transitory Rules for the Initial Implementation of Open
Access and Retail Competition”, commercial operations of RCOA began on June 26, 2013 on a
voluntary basis, following a six-month transition period.

Upon implementation of Open Access, the various contracts entered into by utilities and
generating companies may potentially be “stranded”. Stranded contract cost refers to the excess
of the contracted cost of electricity under eligible contracts of NPC or distribution utilities over
the actual selling price of the contracted energy output of such contracts that would be incurred
upon RCOA. Under EPIRA, recovery of stranded contract cost may be allowed provided that such
contracts were approved by the ERB (now the ERC) as of December 31, 2000.

Unbundling of Rates and Removal of Cross Subsidies

EPIRA mandates that distribution wheeling charges be unbundled from retail rates and that rates
reflect the respective costs of providing each service. EPIRA also states that cross -subsidies shall
be phased out within a period not exceeding three (3) years from the establishment by the ERC of
a universal charge, which shall be collected from all electricity end -users. However, the ERC may
extend the period for the removal of the cross -subsidies for a maximum of one year if it
determines that cessation of such mechanism would have a material adverse effect upon the
public interest or an immediate, irreparable and adverse financial effect on a distribution utility.

These arrangements are now in place, in satisfaction of the conditions for RCOA. EPIRA likewise
provides for a socialized pricing mechanism called a “lifeline rate” to be set by the ERC for
marginalized or low income captive electricity consumers who cannot afford to pay the full cost
of electricity. These end-users are exempt from the cross-subsidy removal for a period of twenty
(20) years, unless extended by law, in accordance with RA No. 10150, which extends the lifeline
rate as defined in Section 73 of the EPIRA.

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Implementation of the Performance-Based Regulation (“PBR”)

On July 26, 2006, the ERC issued the Rules for Setting Distribution Wheeling Rates (“RDWR”) for
privately-owned Distribution Utilities entering PBR on the first entry point. ERC issued the RDWR
for privately owned distribution utilities entering PBR on the second and later entry points in
December 2006. However, on December 8, 2008, the ERC issued Resolution No. 20, Series of
2008, adopting a new RDWR for privately-owned Distribution Utilities entering PBR on the third
entry point. As clarified by ERC Resolution No. 20, Series of 2008, each of the four (4) Entry Points
will have its own set of RDWR which are identical, with the exception of differences in dates to
account for the different Entry Points.

The RDWR set out the mechanisms and principles in sett ing and regulating the maximum
distribution-related charges. The PBR replaced the return-on-rate-base (“RORB”) regulation that
was previously used to determine the distribution charges p aid by the customers of the DUs.

Under the PBR, the distribution-related charges that DUs can collect from customers over a four-
year regulatory period are set by reference to projected revenues which are reviewed and
approved by the ERC and used by the ERC to determine a distribution utility’s efficiency factor.
For each year during the regulatory period, a DU distribution charge is adjusted upwards or
downwards taking into consideration the utility’s efficiency factor set against changes in overall
consumer prices in the Philippines.

The ERC has also implemented a performance incentive scheme whereby annual rate adjustments
under PBR also take into consideration the ability of a DU to meet or exceed service performance
targets set by the ERC, such as the average frequency and duration of power outages, the average
time to provide connections to customers and the average time to respond to customer calls,
with utilities being rewarded or penalized depending on their ability to meet these performance
targets.

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Electricity Demand and Supply

According to the DOE’s Power Statistics 2011, the Philippine electricity market has a total non -
coincident peak demand of 10,379 MW. This demand is divided into three (3) major grids, with
the Luzon grid experiencing the largest demand at approximately 7,552 MW. The Visayas and
Mindanao grids have smaller demands, with peak demands at 1,481 MW and 1,346 MW,
respectively.

The ERC defines “customer segment” as a category of customers , which have similar consumption
characteristics for regulated transmission services, based on their geographic location and
consumption profile, as measured by the number of connections, the energy throughput (in
MWh), the non-coincident peak load (in MW), the co-incident peak load (in MW), the time-of-day
or any other physical measure as approved from time to time by the ERC. A customer segment is
likely to include all of the customers who are charged the same tariff by the regulated entity for
the provision of regulated transmission services.

The DOE classifies customers as industrial, residential, commercial and others (streetlights).
Residential customers are customers using electricity for all domestic and household purposes in
a single family dwelling served under a single meter. Commercial customers are service
establishments wherein the main economic activity is agriculture, construction, trading,
transportation operation and administration, communication services, storage and warehousing,
waterworks and supply, financial services, real estate, restaurants and hotel services, and other
community social and personal services. Commercial customers also include parks, registered
charitable institutions, government-owned hospitals, government-owned meter streetlight
services for public streets and government-owned traffic lights. Industrial customers are
establishments wherein the main economic activity is manufacturing and processing, mining and
quarrying, electricity generation and distribution as well a s gas and steam manufacturing.
Streetlight customers are those with streetlight service consisting of company -owned luminaries
mounted on existing distribution poles and billed under a flat rate schedule approved by the ERC.

Electricity Consumption

Total power consumption comprises total sales, own-use and system loss. The industrial customer
segment, which accounts for about 28% of total power consumption, exhibited a decrease in
growth from 8% in 2010 to 4% in 2011. A slowdown in growth was also experie nced in the
commercial sector, which accounts for about 24% of total electricity consumpti on, as it grew by
2% in 2011 compared with the 9% growth in 2010. The residential sector, which has a 27% share
in consumption, also slowed down with a contraction of 1% in 2011 compared with growth of 7%
in 2010. Moving forward, Meralco expects demand growth in the industrial and commercial
sectors to increase as the Philippine economy continues to grow.

Electricity Sales

The following table provides data for electric power consumption in the Philippines, with each
sector’s percentage of sales presented as a percentage of total sales in 2011.

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2011 Electricity Sales by Customer Sector

Source: DOE Power Statistics 2011


(1) Includes streetlighting, public buildings, irrigation and others not classified within industrial, residential or
commercial.

On the supply side, required reserve tightness is already being experienced in Luzon and Visayas.
In Mindanao, supply shortages are resulting in brown-outs and load dropping. New capacities are
very much needed across all grids as the DOE projects that the country will need a total of 5,288
MW of new capacity additions to sustain demand until 2018.

Electricity Demand and Supply Outlook

Economic activity, as measured by GDP, remains the key determinant of energy demand. With the
2013 GDP growth target of 6% to 7% set by the National Economic Development Authority
(“NEDA”), the Philippines’ peak demand is expected to increase. Under its Po wer Development
Plan, the DOE forecasts that peak demand through 2030 will grow at an AAGR of 4.13% in Luzon,
4.52% in the Visayas, and 4.75% in Mindanao. By 2030, aggregate peak demand is expected to
reach 16,477 MW in Luzon, 3,431 MW in the Visayas and 3,250 MW in Mindanao.

Consumption of electricity per capita, as well as the electrification ratio in the Philippines is
relatively low in comparison with the other developed Asian countries in the region.

The chart below depicts the estimated electricity consumption per capita for countries in the
region, including the Philippines, for the year 2012.

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2012 Electricity Consumption Per Capita


(MWh per Capita)

Source: Economist Intelligence Unit

The chart below depicts the estimated electrification ratio for countries in the region, including
the Philippines, for the year 2010.

Electrification Ratios for Asian Countries (As at 2010)

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According to the Economist Intelligence Unit, the Philippine electricity consumption is expected
to grow from a per capita electricity consumption of 0.6 MWh in 2012 to 0.9 MWh in 2020.
Likewise, gross domestic electricity consumption is expected to grow from 66 TWh in 2012 to 103
TWh in 2020.

The chart below depicts the growth in gross domestic electricity consum ption as well as the per
capita electricity consumption in the Philippines from 2012 to 2020.

Philippine Gross Domestic and Per Capita Electricity Consumption: 2012 -2020

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Luzon Power Supply and Demand Outlook: 2012-2030

According to the DOE, electricity demand in the Luzon grid is projected to increase at an AAGR of
4.13%, from 7,969 MW in 2012 to 10,693 MW in 2020 and 16,477 MW in 2030.

Visayas Power Supply and Demand Outlook: 2012-2030

According to the DOE, the Visayas’ electricity demand is pro jected to increase at a 4.52% AAGR,
from a demand of 1,568 MW in 2012 to 2,237 MW in 2020 and 3,431 MW in 2030.

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Mindanao Power Supply and Demand Outlook: 2012 -2030

Of the three grids in the Philippines, Mindanao has the largest growth rate projection i n the 2012
Philippines Development Plan (“PDP”) update. At a 4.75% AAGR, projected peak demand in 2012
is at 1,407 MW and is expected to increase to 2,068 MW in 2020 and to increase further to 3,250
MW in 2030.

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History and Corporate Structure

In 1903, the Municipal Board of Manila granted Meralco’s predecessor company, Manila Electric
Railroad and Light Company, a 50-year franchise to operate an electric street railway service and
furnish electric current for light, heat and power in Manila, including the surrounding suburbs. Soon
after, the Manila Electric Railroad and Light Company began operations by taking over “La
Electricista’s” distribution system and subsequently building its first power plant. The Company
reorganized its operations in 1919 and incorporated itself as the Manila Electric Company. For a little
more than four decades, Meralco provided the residents of Manila their first modern mass public
transportation system with electric streetcars. World War II destroyed most of Meralco’s electr ic and
streetcar facilities and Meralco discontinued its transportation business in 1948.

Until the late 1960s, Meralco continued to invest in electricity generation plants as well as sub -
transmission and distribution facilities and grew until it became t he first billion-Peso non-financial
corporation in the Philippines in 1969. The onset of martial law in 1972, however, precipitated the
transfer of all of Meralco’s generation facilities to NPC, with the exception of its Rockwell Station.

During the 1980s, Meralco, upon the request of the government, organized, started up and operated
the country’s first elevated light rail transit system in Manila between Baclaran and Monumento. At
the end of the decade, Meralco turned over the system to the Government.

Following the severe power crisis that emerged in the late 1980’s until the mid -1990’s, private
investment in electric generation was encouraged. Reflecting a trend worldwide, the Philippines has
undergone a major restructuring of the entire electric utili ty industry. In general, this has included
efforts to move towards privatization and at the same time limit monopolies and encourage open
competition in large portions of the industry. Under the administration of President Corazon Aquino,
Meralco’s ownership and management reverted to private investors, including the Lopez Group,
although certain government financial institutions also became principal shareholders. In 1991,
Meralco effected an initial public offering of shares of its common stock on the Man ila Stock Exchange
(now the PSE). In 2009, First Pacific Company Limited, through its Philippine investees, acquired a
substantial portion of the holdings of First Philippine Holdings Corporation and First Philippine Union
Fenosa, Inc. (now known as First Philippine Utilities, Inc.)

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Overview

Meralco is the Philippines’ largest electric power distribution company, with a franchise area covering
9,337 square kilometers. It provides power to over five million residential, commercial and industrial
customers in 34 cities and 77 municipalities, including Metro Manila, the provinces of Rizal, Cavite
and Bulacan, and parts of the provinces of Pampanga, Batangas, Laguna and Quezon. Turnover of
business establishments in the franchise area accounted for approxim ately 50% of the country’s 2011
gross domestic product, based on data from the National Statistical Coordination Board.

CEDC, a 65%-owned subsidiary of Meralco, holds the power distribution franchise for the Clark Special
Economic Zone in Clark, Pampanga. CEDC’s franchise area covers 320 square kilometers and services
over 1,700 customers.

Meralco’s business is divided into two segments: (1) power and (2) other services. The power
segment, primarily power distribution, contributed 99% of Meralco’s revenues in 2012 and consists of
operations of Meralco and CEDC. The other services segment contributed 1% of Meralco’s revenues in
2012.

Power

The power segment of Meralco’s business consists of (a) electricity distribution, (b) power generation
and (c) retail electricity supply. Electricity distribution is principally electricity distribution and supply
of power on a pass-through basis covering the Meralco franchise area and the CEDC franchise area in
the Luzon grid. According to data from the DOE, as of 2011, electricity distribution within the Meralco
franchise area accounts for approximately 55% of the electricity sales of the country and
approximately 75% of the electricity sales in Luzon. Meralco is also seeking opportunities to grow its
distribution service in other areas of the Philippines that are underserved due to the lack of reliable
or reasonably-priced power.

In 2010, Meralco made a strategic decision to re -enter the power generation business through MGen.
Presence in power generation is intended to enable Meralco to (i) enhance the provision of adequate,
reliable and reasonably-priced power to its millions of customers, (ii) compete profitably in the retail
electricity supply market as RCOA is ramped up in phases, and (iii) generate positive returns and cash
flows from power generation.

On July 22, 2011, MGen acquired a 47% interest in RP Energy, which is developing a 2 x 300MW,
coal-fired CFB power generation plant in the Subic Freeport Zone. MGen is also in various stages of
pursuing the potential joint development of other power generation projects. On August 29, 2013,
MGen and New Growth B.V., a wholly-owned subsidiary of the EGCO Group of Thailand, signed a Joint
Development Agreement for the new 460 MW supercritical coal-fired power plant project in Mauban,
Quezon. Under the Joint Development Agreement, MGen will have a 51% stake in the project
company, including rights to assign up to 2% to an approved assignee, with New Growth B.V. holding
the remaining 49%. The project’s cost is yet to be determined and will depend largely on final design,
specifications and other terms determined during the engineering, procurement and construction
tender process.

On October 7, 2013, MGen executed a Share Sale and Purchase Agreement with First Metro
Investment Corporation (“FMIC”) followed by the Shareholders Agreement signed on October 22,
2013, for the sale by FMIC and purchase by MGen of a 20% equity interest in Global Business Power

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Corporation (“GBPC”). GBPC has a total of 627 MW gross capacity in operations and 82 MW under
construction in Visayas.

On June 6, 2011, Meralco informed the ERC of its intention to become a local RES, consistent with the
provisions of the EPIRA. Meralco has entered into new power supply agreements, which include
provisions enabling Meralco to supply electricity to qualified Contestable Customers under RCOA.
Meralco will serve as a local retail electricity supplier within its franchise area under the brand
MPower. MPower has signed contracts with a number of Contestable Customers and starting on June
25, 2013, certain qualified Contestable Customers sourced their electricity supply from MPower.

Other services

The other services segment is involved principally in electricity -related services such as electro-
mechanical engineering, construction, consulting and related manpower, light rail -related
maintenance, bill payments collection and e-transaction, insurance and reinsurance, data
telecommunications carrier and energy efficiency and systems management.

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Competitive Strengths

Meralco believes that the following are its key business strengths that establish a sound platform for
it to enable the execution of its business strategy:

Highly strategic franchise area generating relatively stable and predictable cash flows

Meralco is the Philippines’ largest electric power distribution company, with an existing franchise in
the cities and municipalities of Bulacan, Cavite, Metro Manila, and Rizal and certain cities,
municipalities, and barangays in the provinces of Batangas, Laguna, Pampanga, and Quezon , which
accounts for approximately 25% of the Philippine populatio n. Meralco’s franchise area covers the
core of the Philippines’ industrial, commercial and population centers, which accounted for
approximately 50% of the country’s 2011 GDP based on data from the National Statistical
Coordination Board. Meralco earns relatively stable distribution charge revenue during a given
Regulatory Period in respect of all electricity distributed to consumers connected to and utilizing its
distribution network, regardless of the source of power, subject to the applicable regulatorily -
determined Maximum Average Price (“MAP”) for electricity distribution. In 2010, 2011 and 2012,
18.3%, 19.1% and 18.0%, respectively, of Meralco’s consolidated revenues from the sale of electricity
represents revenues from distribution service charges. Its electricity consumers comprise a diverse
mix of industrial, commercial and residential consumers. Meralco’s cash from operating activities in
2010, 2011 and 2012 were P20,358 million, P31,934 million and P36,244 million, respectively.

Regulatory regime with performance rewards

Meralco operates within an established regulatory framework and maintains appropriate


engagement with the ERC. Its distribution charges are determined based on a performance -based
regulatory framework that offers rewards for meeting certain regulatory standards. Meralco’s
distribution tariffs are subject to regulatory reset and the approval of the ERC. This performance-
based regulatory framework allows Meralco to benefit from the rewards in the form of some
uplift in the MAP for outperformance as measured against clearly defined performance standards
set by the ERC. Reductions in system losses provide savings to Meralco’s customers. Meralco’s
institutionalized system loss management programs have resulted in customer savings of P3,430
million in 2012 or a cumulative savings of P8,700 million over the last five (5) years, equivalent to
5.96 centavos/kWh. Since 2008, Meralco’s system loss has been below the ERC-mandated cap,
allowing Meralco to avoid the incurrence of any unrecoverable purchased power cost.

Strong network and technical performance

Meralco’s network performance as measured by availability and reliability indices such as System
Average Interruption Frequency Index (“SAIFI”), System Average Interruption Duration Index (“SAIDI”)
and Customer Average Interruption Duration Index (“CAIDI”) , among others, has significantly
improved over time, and its system loss management program has led to declining system loss rates.
With the technical and engineering expertise of its skilled workforce and its established operating and
maintenance policies and procedures, Meralco has consistently achieved high levels of technical
performance, surpassing the targets set by the ERC under its Performance Incentive Scheme. Meralco
regularly monitors and assesses its network assets and implements effective main tenance policies to
achieve improved network performance. Meralco’s key asset management initiatives include

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implementing reliability-centered maintenance reinforced with a risk assessment framework and


replacement of network assets based on a structured condition monitoring program.

Strong platform to fund future growth and expansion

Meralco believes that its growth strategy, robust financial position and strong organization provide a
platform to pursue and fund future business growth and expansion. Mera lco maintains relatively low
financial leverage and strong interest cover, and has a track record of earnings growth and stable cash
flow over the past few years. Meralco’s net income increased at a CAGR of 30.2% from 2010 to 2012.
Meralco anticipates that continued growth of power demand in the Philippines will support the
potential for future growth of its business. For example, Meralco’s robust balance sheet is expected to
support its strategies of profitably re-entering the power generation business and opportunistically
pursuing investment opportunities in the generation industry, while satisfying funding requirements
for capital expenditures in its distribution business.

Focused, high performing management team

Meralco’s management team consists of seasoned executives with significant professional experience
in electricity distribution and power plant, energy and infrastructure development. The capability of
its management team has been demonstrated by its strong track record with respect to sales,
customer service, network reliability, operational efficiency and financial performance. Meralco also
maintains a relatively stable and harmonious engagement and relations with its labor force. In 2012,
Meralco was the Employer of the Year Awardee of the People Management Association of the
Philippines and the Asia CEO Awardee for 2012 Top Employer Organization.

In addition, Meralco has implemented corporate governance measures designed to provide oversight
of Meralco’s operations. Meralco’s business plans are clearly communicated throughout its entire
organization and, progress is closely monitored by its management and board, which includes
experienced, independent directors. Meralco was an awardee of Corporate Governance Asia for Best
in Asia for Corporate Governance and Best Corporate Social Responsibility, among others.

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Business Strategies

Meralco’s principal strategic objective is to grow its earnings and sustain profitability and a sound
financial position by targeting strategic opportunities in the electricity generation and distribution
businesses both in the Philippines and overseas. Building on its business strengths, Meralco has
developed the following principal plans and strategies to achieve this obj ective:

Grow its core distribution business by providing excellent customer service

Meralco believes that excellent customer service is critical to the core electricity distribution
business, which currently represents substantially all of Meralco’s revenues. Meralco is committed to
serving its customers by minimizing the duration and frequency of service interruptions and the
probability of voltage violations, lowering system loss, containing the generation costs it passes on to
customers and providing value-added services. Meralco believes that maintaining superior consumer
service will further improve its relationship with its customers, the ERC and the Government and
potentially enhance the regulatory treatment of its business.

In order to maintain its strong network performance, Meralco undertakes significant measures to
sustain its success in preventing major system failures from occurring across its distribution network,
including the implementation of condition monitoring systems to detect inc ipient failures in its
network equipment. Meralco has implemented an Operating Trouble Management System (“OTMS”)
which, together with its technical and engineering expertise, skilled workforce and its structured
maintenance and operating procedures, enables it to achieve high network reliability and service
quality. Meralco has recently entered into long-term PSAs with five (5) major generators, representing
an aggregate 2,880 MW of capacity, in addition to the long -term Power Purchase Agreements
covering 1,960 MW of capacity entered into in the late 1990s with three (3) other generators. These
PSAs replaced the more expensive Transition Supply Contracts (“TSCs”) with the NPC, which expired in
December 2012. On September 2, 2013, Meralco signed a PSA with Therma Mobile, Inc. (“TMO”) for
the output of the barge-mounted, bunker oil-fired diesel engines which are moored at the Fishport
Complex in Navotas, Manila. On November 4, 2013, the ERC provisionally approved the PSA with
TMO. In addition, Meralco, through MGen, intends to develop up to an aggregate 3,000 MW of
generating capacity within the Luzon grid, to include coal -fired and LNG-fired power plants and
renewables such as wind. By procuring reasonably-priced power supply arrangements, Meralco seeks
to moderate the cost of power to its customers and their exposure to the volatile WESM. Meralco
believes that by continuing to pilot and develop potentially viable innovative value -added services for
its customers, and those of its subsidiaries and affiliates, such as fiber optic carrier services for home
area networks, prepaid electricity, e-vehicle charging and beyond the meter services, it will
strengthen its brand and increase the demand for its services.

Profitably re-enter the power generation business

To maintain adequate, reliable, reasonably-priced power for its core distribution business, compete
effectively in retail electricity supply and diversify its revenue and income stream, Meralco intends to
develop its power generation portfolio consisting primarily of large -scale baseload and mid-merit
plants. Within the Luzon grid, Meralco is developing a 2x300 MW CFB coal-fired power plant in the
Subic Bay Freeport Zone and is in various stages of joint feasibility studies and discussions for other
power generation projects. These include a potential LNG -fired power plant project with possible joint
venture partners in the provinces of Quezon and Batangas. In addition, Meralco is evaluating a
number of other coal-fired power plant and renewable energy project development s within the
Philippines. These projects are expected to help supply the requirements of the Luzon, Visayas and

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Mindanao grids including those of Meralco and CEDC. Meralco also expects that its investment in an
LNG-fired power plant at Jurong Island, Singapore, which is scheduled to commence commercial
operations by end of January 2014, will support this strategic objective, by providing Meralco with
additional income and cash flow as well as experience operating LNG -fired power plants in a highly
competitive merchant market.

Strategically compete in the retail electricity market

Meralco believes that RCOA in the Philippine power industry represents an opportunity to develop
additional revenue and income streams. Under the prior regulatory scheme, Meralco sources over
35,000 GWh of electricity annually that it distributes to its customers on a zero -margin basis, while
earning revenue through the regulated distribution charges it bills to it s customers. Under Phase 1 of
RCOA, Meralco shall start selling to Contestable Customers who signed retail electricity supply
agreements with it, under Meralco’s brand, MPower. This is anticipated to allow Meralco to profitably
sell electricity directly to retail customers at pre -agreed prices and terms. Meralco plans to use a
portion of its existing Power Supply Agreements and, later on, power generated from plants
developed and owned by MGen, to supply electricity to Contestable Customers in the Philippines.
Meralco believes that its competitive offerings, long-term relationship with customers, expertise and
brand represent significant advantages it can leverage to compete effectively in the Retail Electricity
Supply market.

Extend its distribution footprint outside its existing franchise area to reach underserved areas

While approximately 97% of the households in Meralco’s existing franchise area are electrified, the
figure for the Philippines nationally was only 78% as at September 30, 2012, according to figur es from
the DOE. As such, Meralco is of the view that a number of localities across the Philippines are
underserved and therefore represent opportunities for Mer alco to extend its distribution footprint
beyond its existing franchise area and expand its customer base. Meralco is in the process of
identifying these opportunities wherein it can effectively leverage its distribution expertise and
sourcing strength.

Selectively seek overseas investment opportunities in the generation and distribution industry to
enhance its income streams and cash flow

In addition to focusing on the development of Meralco’s existing and new businesses in the
Philippines, Meralco plans to explore additional investment opportunities in the generation and
distribution industries overseas. Meralco recently acquired an effective 28% interest in the 2x400 MW
LNG-fired power plant being completed by PacificLight Power Pte Ltd. (“PacificLight Power”) at Jurong
Island, Singapore, which is expected to be commercially operational by end of January 2014, for a
consideration of US$217.4 million (P8.9 billion). Meralco believes this acquisition will provide
experience in LNG-fired power generation in a highly competitive power merchant market, as well as
additional income and cash flow streams.

Meralco has also been engaged to act as technical partner to Integrated Energy Distribution and
Marketing Ltd., a Nigerian entity, which was declared the preferred bidder in the privatization of the
Nigerian distribution utilities in Yola and Ibadan, in which Meralco would also take an initial 5% equity
stake. In evaluating appropriate overseas investment opportunities, Meralco typically considers the
following investment criteria: (i) acceptable rate of return; (ii) stability of cash flows; (iii) quality of
assets; (iv) reliability and track record of any strategic joint venture partner; and (v) ability to leverage
the expertise gained from operating its existing distribution business in the Philippines.

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Electricity Distribution

The principal business of Meralco is the distribution and sale of electricity through its distribution
network facilities within its franchise area. As at December 31, 2012, Meralco serves over 5.2 million
customers in 34 cities and 77 municipalities. RA No. 9209 grants Meralco a 25-year franchise valid up
to June 28, 2028 to construct, operate and maintain the electric distribution system of Metro Manila,
the provinces of Rizal, Cavite and Bulacan, and certain cities, municipalities and barangays in the
provinces of Pampanga, Batangas, Laguna and Quezon. On October 20, 2008, the ERC, granted
Meralco a consolidated Certificate of Public Convenience and Necessity for the operation of el ectric
service within its franchise coverage, effective until the end of Meralco’s congressional franchise.

Meralco’s customer base is divided into four (4) classes: residential, commercial, industrial and
streetlighting. Residential customers are customers using electricity for all domestic and household
purposes in a single family dwelling served under a single meter. Commercial customers are service
establishments wherein the main economic activity includes but is not limited to agriculture,
construction, trading, transportation operation and administration, communication services, storage
and warehousing, waterworks and supply, financial services, real estate, restaurants and hotel
services, and other community social and personal services. Commercia l customers also include parks,
registered charitable institutions, government-owned hospitals, government-owned meter streetlight
services for public streets and government-owned traffic lights. Industrial customers are
establishments wherein the main economic activity includes but is not limited to manufacturing and
processing, mining and quarrying, electricity generation and distribution as well as gas and steam
manufacturing. Streetlight customers are those with streetlight service consisting of company -owned
luminaries mounted on existing distribution poles and billed under a flat rate schedule approved by
the ERC.

No single customer group or industry dominates the Company’s sales. Based on standard industry
classifications and as measured by GWh sales, Meralco’s five (5) largest customer groups are: real
estate, electrical machinery, food and beverage manufacturing, retail trade and rubber and plastics.

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For the year ended December 31, 2012, these groups purchased 2,762 GWh, 2,551 GWh, 1,783 GWh,
1,528 GWh and 1,273 GWh, respectively, out of total electricity sales of 32,771 GWh.

The following table breaks down each class of Meralco’s customers’ as a per centage of total sales:

Years Ended December 31

2010 2011 2012


Residential……………………………………………. 31.5% 30.6% 29.8%
Commercial…………………………………………... 39.1% 39.3% 38.9%
Industrial……………………………………………... 28.9% 29.7% 30.9%
Streetlights…………………………………………… 0.5% 0.4% 0.4%
Total…………………………………………………. 100.0% 100.0% 100.0%

Total energy sold for the year ended December 31, 2012 was 32,771 GWh. This included sales to
industrial customers of 10,111 GWh, to commercial customers of 12,749 GWh and to residential
customers of 9,779 GWh, with the remaining usage attributable to streetlights.

Meralco serviced over 5.2 million billed customers as at December 31, 2012. Residential customers,
while accounting for only 30% of the total energy sold, represent over 91% of its total 5.2 million
customers. Commercial customers, totaling 440,000, accounted for 40% of total energy sold.
Approximately 10,000 industrial customers accounted for 31% of total energy sold.

The following table summarizes Meralco’s customer count as at December 31, 2010, 2011 and
2012 and the corresponding electric consumption per customer class for the years ended December
31, 2010, 2011 and 2012:

Number of Customers Electricity Sales

Customer Class 2010 2011 2012 2010 2011 2012

(in thousands) (in GWh)


Residential . . . . . . 4,412 4,580 4,735 9,54040 9,344 9,779
Commercial . . . . . 421 433 440 11,830 12,027 12,749
Industrial . . . . . . . 10 10 10 8,734 9,080 10,111
Streetlights . . . . . 4 4 4 143 141 132

Total . . . . . . . . . . 4,847 5,027 5,189 30,247 30,592 32,771

In 2012, pass-through charges accounted for 82% of Meralco’s total electricity revenue (excluding
other bill components, namely VAT, local franchise taxes and universal charges, which are non-
revenue items), with generation charges accounting for 65%, transmission representing 11% and
system loss charge at 6%. Distribution revenues, excluding billings for taxes, lifeline and inter -class
subsidy under-recoveries, comprised 18% of the total power bill.

Meralco has implemented an institutionalized system loss management program in order to


improve performance. The Company’s 12-month moving average system loss rate in 2012 was
7.04% and CEDC’s system loss rate was 3.75%.

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Description of Business

Distribution Network

Meralco and CEDC each owns a distinct electricity distribution network. Meralco and CEDC’s
distribution businesses consist of the distribution of electricity from electricity generators to
customers within their franchise areas in the Philippines. Meralco and CEDC maintain distinct
distribution networks that enable transportation of electricity from electricity generation plants to
consumers in an economical, efficient, safe and timely manner while meeting the ERC’s
performance standards. The following table summarizes Meralco’s distribution network assets as of
September 30, 2013:

Meralco Electric Distribution Data September 30,


2013

Count of Substations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114


..
Delivery Point (230 kV) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
..
Major (115 kV and 69 kV) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
..
Distribution (34.5kV and below). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
.
Substation Aggregate Capacity (MVA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,026
..
Circuit Length (ckt-km) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,161
..
Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,271
....
Sub-transmission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 890
....
Overhead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,483
....
Underground . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318
....
% Underground . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0%
....
Count of Circuits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 855
..
Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 752
....
Sub-transmission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
....
Distribution Transformers in Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,621
...
Distribution Transformer Capacity (MVA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,136
...
Poles in Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 726,794
...
Meralco Peak Demand (MW) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,928

The primary components of Meralco’s distribution network assets include:

• Poles and Cables. Meralco’s and CEDC’s primary network assets are poles and electricity
distribution cables. Meralco’s electricity distribution network is almost entirely overhead. A
relatively small portion of Meralco’s distribution network is located underground, primarily
serving certain large customers and some commercial or exclusive residential areas. Meralco
has 724,010 poles in service, and rents pole attachment spaces to the Philippine Long Distance
Telephone Company and other telecommunications and cable television companies for use i n
their businesses.

• Substations, Switchgear and Transformers. Substations are facilities that step-down electricity
voltage between NGCP’s transmission network and Meralco’s distribution networks. At
substations, various circuits of the transmission and d istribution network are connected
together by high voltage switchgear that automatically disconnect faulty transmission or

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distribution equipment in order to isolate and minimize damage to network assets and
disruption of electric service to customers. The high voltage switchgear found at substations
also permits the division of the transmission and distribution network into small sections
enabling maintenance to be carried out or supply to be restored locally following a fault. As at
September 30, 2013, Meralco had 114 substations in its franchise area and 160,621 distribution
transformers in its distribution network.

• Meters. Meralco owns all meters used to measure the amount of electricity consumed by its
customers for revenue billing. Most of Meralco’s meters are manually read except for those
meters, which are remotely read via communication links such as telephone lines. Meralco
maintains meters at consumer premises.

As at September 30, 2013, the Meralco group’s sub-transmission and distribution system, including
substations, transformers, poles, wires and other equipment, represented utility plant with a net
book value of P83,643 million, representing approximately 37% of the Meralco’s total consolidated
assets.

In the event of a serious network fault, automatic safeguards are in place to contain the effect of
the fault and protect the network assets from serious damage or disruption. In the event of
generator outage causing a sudden shortage of electricity supply and a decrease in system
frequency, automatic schemes are in place to disconnect load in selected areas to normalize system
frequency, thereby regaining the balance of supply and demand and maintaining system stability.

In addition, Meralco has taken a number of preventive measures to protect its key network
installations from terrorist attacks. To complement its existing round -the-clock security manning of
its vital installations, Meralco also deploys CCTVs at strategic locations. Meralco has also adopted
state-of-the-art gas insulated switchgear designs for its critical substations serving commercial
business districts within its franchise, which securely encloses these facilities inside a building while
protecting its transformers with firewalls.

Meralco

The franchise area of Meralco is a total of 9,337 square kilometers, covering 34 cities and 77
municipalities. This includes Metro Manila, industrial estates, and suburban and urban areas of the
adjacent provinces. As at September 30, 2013, Meralco’s distribution and sub-transmission network
had a circuit length totaling approximately 17,161 circuit-kilometers, with 114 substations. The
aggregate substation capacity of the sub-transmission and distribution network at that date was
approximately 16,026 MVA. Meralco’s primary distribution system consists of 855 circuits
connected to the substations with transformers which convert electricity to the different voltage
levels within the system. The Company’s network carries electricity principally at 34.5 kV and 13.8
kV.

Nearly all of Meralco’s power requirement is delivered to its franchise through NGCP’s facilities at
various delivery points at voltages of 230 kV, 115 kV or 69 kV. From these various delivery points,
the electricity is further transmitted to Meralco’s sub-transmission system and converted down to
primary distribution voltages of 34.5 kV and 13.8 kV through distribution substations. The
secondary distribution system converts the power from the primary distribution voltages into 460
or 230 volt service voltages. Electricity is converted to lower voltages by means of transformers at

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different locations within the Company’s sub-transmission and distribution systems. As at


September 30, 2013, Meralco owned 115 substation transformer banks with an ag gregate capacity
of approximately 16,026 MVA and 160,621 distribution transformers with an aggregate capacity of
13,104 MVA. High capacity power transformers are generally ground-mounted and are located at
substations, while lower capacity distribution transformers are either pole-mounted, pad-mounted
or ground-mounted situated within customer-owned vaults or premises.

Meralco’s distribution system consists principally of overhead lines, which make up 9 8% of its
distribution network. Underground lines are sometimes used in commercial or exclusive residential
areas, but represent 2% of the Company’s primary distribution system.

CEDC

Clark Electric Distribution Corporation, organized on February 19, 1997 , is 65%-owned by Meralco
and 35%-owned by J Ten Equities, Inc., the holding company of Angeles Electric Corporation. It is a
private distribution utility, which holds a franchise issued by Clark Development Corporation for the
exclusive distribution of electricity within the Clark Economic Zone. As of September 30, 2013,
CEDC’s distribution facilities include three substations with a total capacity of 131 MVA and 1,3 53
distribution transformers. Its distribution network consists of 23 ckt -km of primary lines and 131
ckt-km of secondary lines.

Tariffs

Meralco and CEDC are involved in the distribution and supply of electricity and are subject to the
rate-making regulations and regulatory policies of the ERC. Billings to all customers are itemized or
“unbundled” into a number of bill components that reflect the various costs incurred in providing
electric service. The main bill component charges are (i) generation, (ii) transmission, distribution,
(iv) system loss, and (v) taxes, subsidies and other charges. T he following table breaks down the
components of customer bills by year:

Years Ended December 31


2010 2011 2012
(P/kWh) % (P/kWh) % (P/kWh) %

Generation . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.19 58 5.12 56 5.61 58


Transmission . . . . . . . . . . . . . . . . . . . . . . . . 0.87 10 1.06 12 0.98 10
Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 1.44 16 1.59 17 1.56 16
System loss . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.55 6 0.52 6 0.52 5

1
Taxes, subsidies and othercharges ......... 0.90 10 0.85 9 0.97 11

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.95 100 9.14 100 9.64 100


1 Includes universal charges.

Meralco’s electricity distribution revenues are grouped under the “distribution” component of its
customers’ electric bills. The RDWR for privately -owned DUs entering Performance-Based
Regulation (“PBR”) currently govern the determination of Meralco’s distribution, supply, and

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metering charges for the third Regulatory Period. Rate -setting under PBR is governed by the RDWR.
The PBR scheme sets tariffs based on a distribution utility’s asset base, the allow ed return and the
required operating and capital expenditures for the four -year regulatory period, to meet a level of
operational and service level performance approved by the ERC. The PBR scheme also employs a
mechanism that rewards or penalizes a DU depending on its network and service performance.

Meralco was among the first entrants to the PBR scheme, together with Dagupan Electric
Corporation and Cagayan Electric Power and Light Company, Inc. CEDC has also entered the PBR
scheme.

Rate resets are done on a regulatory period basis, with adjustments made each regulatory year
through the Maximum Average Price (“MAP”) verification and translation process. One Regulatory
Period consists of four Regulatory Years. Meralco’s current regulatory period is from J uly 1, 2011 to
June 30, 2015. CEDC’s current Regulatory Period began on October 1, 2011 and ends on September
30, 2015. The ERC fixed the weighted average cost of capital for Meralco at 14.97% for the current
Regulatory Period.

The distribution tariffs Meralco may charge customers are set by the ERC, upon review of annual
applications made by Meralco. The distribution tariffs are set on a maximum average price per kWh
basis. Meralco’s provisionally approved MAP for Regulatory Years 2013 and 2014 were computed at
P1.6303 per kWh and P1.6474 per kWh, respectively. Meralco’s maximum average prices for
Regulatory Years 2010, 2011, and 2012 were P1.4917 per kWh, P1.6464 per kWh and P1.6012 per
kWh, respectively. CEDCs’s maximum average prices for the Regulatory Year 2012 was P0.8527.

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Operations

System Reliability

System reliability refers to the ability of power system components to deliver electricity to all points
of consumption, in the quantity and of the quality demanded by the customer. Reliability is often
measured by the frequency and duration of power system disturbances and outages. Under the
current Performance-Based Regulation rules, Meralco uses customer-based measures of system
reliability—System Average Interruption Frequency Index (“SAIFI”) and System Average Interruption
Duration Index (“SAIDI”). SAIFI is the measure of the average number of sustained interruptions
experienced per customer over the measurement period while SAIDI is the measure of the average
duration of sustained interruptions per customer over the measurement period.

The following table sets forth Meralco’s SAIFI and SAIDI for the periods indicated:

Nine Months Ended


Years Ended December 31 September 30

Category 2010 2011 2012 2012 2013

System Average Interruption Duration


Index or SAIDI (number of minutes) . . . . . . . . . . . . . . 1,197.69 611.51 439.09 338.74 404.44
Unplanned SAIDI. . . . . . . . . . . . . . . . . . . . . . . 827.27 479.95 326.73 259.20 211.40
Planned SAIDI . . . . . . . . . . . . . . . . . . . . . . . . . 93.81 80.05 76.15 48.16 45.39
Generation/Transmission-related SAIDI . . . . . . 276.61 51.51 36.21 31.38 147.65
System Average Interruption Frequency Index or SAIFI
(number of times) . . . . . . . . . . . . . . . . 10.90 6.22 5.20 4.05 4.47
Unplanned SAIFI . . . . . . . . . . . . . . . . . . . . . . . 5.71 4.07 3.29 2.63 2.43
Planned SAIFI . . . . . . . . . . . . . . . . . . . . . . . . . 0.81 0.73 0.61 0.40 0.33
Generation/Transmission-related SAIFI . . . . . . 4.38 1.42 1.30 1.02 1.71

Periods during which electricity is not available to customers result from a number of causes,
including generation plant-related outages, transmission line failures, distribution line outages
resulting from actions of the public (e.g. vehicles hitting Meralco poles, debris from building under
construction, etc.) equipment breakdowns, repairs and scheduled construction or maintenance
within Meralco’s distribution system.

Meralco maintains a computer-based Supervisory Control and Data Acquisition System, (“SCADA”).
This system allows system control engineers to monitor electric system data within the distribution
system on a real-time mode from a central location, facilitates faster restoration of electricity
supply following a power outage and better planning for system loss reduction. Meralco has also
installed equipment condition monitoring devices within its substations that are expected to
enhance data gathering capabilities. Meralco has likewise installed several remote -controlled line
switches, reclosers and fault indicators that aid in locating and isolating line troubles remotely.
These upgrades have facilitated operational decisions resulting in faster service restoration and
have contributed to Meralco’s efforts to reduce system loss. Meralco has also installed an Operating
Trouble Management System (“OTMS”), in its customer assistance center and in its sector and
branch offices. The OTMS is designed to respond more promptly to customer inquiries and
complaints, facilitate the isolation of the source of power trouble and provide information to

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Description of Business

expedite the restoration of power. The mobile data system automatically locates crew vehicles,
provides accurate information to field crews, improves work distribution and ha stens emergency
restoration.

Under PBR, Meralco is subject to certain Guaranteed Service Level (“GSL”) standards, which cap the
number and duration of service interruptions that the customers of DUs may experience. Over the
past three (3) regulatory years, Meralco has consistently outperformed the GSL standards set by the
ERC. The following table shows Meralco’s GSL performance for Regulatory Years 2010, 2011, 2012
and 2013.

Regulatory Years ended June 30

GSL Category 2010 2011 2012 2013

Violations Cap Violations Cap Violations Cap Violations Cap


GSL 1 1 . . . . . 332,139 555,111 159,505 555,111 58,499 373,658 34,286 373,658
GSL 2 2 . . . . . 13,936 127,279 4,575 127,279 482 18,989 107 18,989
3
GSL 3 . . . . . 188,999 646,827 94,444 646,827 42,916 234,439 14,129 234,439
GSL 4 4 . . . . . 239,785 169,235 116,381 169,235 82,087 163,995 30,889 163,995

1
GSL 1 represents customers experiencing a total duration of sustained service interruptions in a Regulatory Year that exceeds a
35 hour threshold
2
GSL 2 represents customers experiencing a number of sustained service interruptions in a Regulatory Year th at exceeds a limit
of 25
3
GSL 3 represents incidents where restoration of supply to customers after a fault on the secondary distribution network took
longer that the threshold time of 15 hours
4
GSL 4 represents customer connections not provided on the day agreed with the customers (no. of total days delayed)

System Efficiency

One measurement of the efficiency of the distribution system is system loss, which refers to the
electrical energy lost either through technical loss or pilferage. System loss ma y be expressed as a
percentage, calculated as the difference between energy input to the distribution system of the
Company and energy sold and used by the Company, divided by the energy by the Company. ERC
measures its system loss on a 12-month moving average basis.

Technical loss occurs when electrical energy is lost during the process of voltage transformation and
as electric current flows through the transmission and distribution lines. Meralco has invested in
electric capital projects to reduce technical loss by reducing both primary and secondary line losses.
Primary line loss reduction is achieved through the installation of equipment on distribution lines
that improves the power factor of circuits and installation of more substation and distributi on
facilities to ensure adequate system capacity and to shorten the lengths of the medium voltage
distribution lines between substations and consumers since longer lines dissipate higher line losses.
Power factor is the ratio between the real power (in wat ts) to apparent power (volts times
amperes). A higher power factor means that losses are lower compared with a circuit with a lower
power factor. Secondary line loss reduction is accomplished through the upgrading and
rehabilitation of lines, replacement of overloaded facilities and correction of overheating
components.

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Description of Business

The “Anti-Electricity and Electric Transmission Line/Materials Pilferage Act of 1994” (“RA 7832”),
imposes heavy penalties on electricity pilferers, and gives electric utilities such as M eralco the
immediate right to disconnect the electric service of a customer caught stealing electricity after
having served written notice to the pilferer. Pilferage is a crime punishable by imprisonment and
heavy fines. Utilities may also impose a surcharge of up to 100% of current monthly bill for third
and subsequent apprehensions in addition to the value of the electricity pilfered. Meralco actively
pursues the prosecution of violators of RA No. 7832.

RA No. 7832 also established limits to the system losses that electric distributors may recover in
their rates, giving them an incentive to control both the technical loss and pilferage components of
system loss. These limits were subsequently revised in January 2010 through ERC Reso lution 17,
Series of 2008 (A Resolution Adopting a New System Loss Cap for Distribution Utilities). The
following table sets forth Meralco’s system losses and the limits set by the ERC for the periods
indicated:
12 Months Ended
Years Ended December 31 September 30

Category 2010 2011 2012 2012 2013

Technical loss (%) . . . . . . . . . . . . . . . . . . . . . . 7.13 6.70 6.09 6.10 6.12


Non-technical loss (%) . . . . . . . . . . . . . . . . . . . 0.81 0.65 0.95 1.09 0.58
Total system loss (%). . . . . . . . . . . . . . . . . . . . 7.94 7.35 7.04 7.19 6.71
System Loss Cap (%) . . . . . . . . . . . . . . . . . . . . 8.50 8.50 8.50 8.50 8.50

Figures are on a 12-month moving average basis and exclude CEDC

Meralco continues to reap the benefits of its institutionalized system loss management programs
resulting in further improvements in performance. The 12 -month moving average system loss rate
as of September 30, 2013 is 6.71%. CEDC’s system loss rate is at 4.09% for the same period,
significantly below the limits set by the ERC.

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Description of Business

Electricity Supply

Meralco does not currently operate its own generation plants. Instead, it purchases all of the power
it distributes from IPPs (through independently contracted Power Purchase Agreements and PSAs),
the privatized plants and residual plants of the NPC/PSALM under a Transition Supply Contract
(“TSC”) and the WESM. The WESM is a venue where suppliers and buyers trade electricity as a
commodity. For the year ended December 31, 2012, Meralco purchased 40% of its requirements
from IPPs, 54% from the privatized plants of the NPC successor generating companies, and 6% from
the WESM.

The following table presents the details of Meralco’s power sourcing for the years ended December
31, 2010, 2011 and 2012:

Years Ended December 31


2010 2011 2012
First Gas Power Corporation and FGP Corp. . . . . . . . . . . . . . . . . .
34.50% 36.97% 31.37%
.
South Premier Power Corporation (“SPPC”) . . . . . . . . . . . . . . . . . 4.29% 20.82% 23.41%
Quezon Power (Phil.) Ltd. . .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . 10.29% 9.87% 8.39%
Therma Luzon, Inc. (“TLI”). . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . 6.04% 6.92% 8.38%
Masinloc Power Partners Co. .Ltd. . . . (“MPPCL”).
.. ................ 4.05% 5.88% 6.45%
. . . . . . . . .
Philippine Electricity Market Corporation – Wholesale Electricity
Spot Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.02% 7.31% 6.42%
AP Renewables, Inc. (“APRI”). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.27% 2.23% 5.94%
Sem-Calaca Power Corporation . . .(“SCPC”)
.... .................... 2.38% 2.87% 4.51%
San Miguel Energy Corporation . . . (“.(“SMEC”).
.... .................. 1.91% 3.25% 4.07%
National Power Corporation. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . 20.20% 3.50% 0.88%
TeaM (Philippines) Energy Corporation .. ..................... 0.00% 0.25% 0.09%
Montalban Methane Power Corporation . .................... 0.04% 0.10% 0.06%
Bacavalley Energy, Inc. . . . . . . .. .. . . . . . . . . . . . . . . . . . . . . . . . . . 0.00% 0.02% 0.02%
Philippine Power Development Corporation . ................. 0.01% 0.01% 0.01%
..
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00% 100.00% 100.00%

Electricity Supply Contracts

Meralco, PSALM and the NPC have agreed to extend the TSC between Meralco and NPC, through
June 25, 2013 with a contracted monthly energy volume ranging from 112.846 GWh to 159.966
GWh.

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Description of Business

The following table shows the PSAs entered into by Meralco:

Plant/ Contracted
Date Power Supplier Capacity Terms of PSA
August 12, 1994 Quezon Power Based on kWh Term of 25
(Philippines) requirements years, expiring
Limited July 12, 2025
Company
March 14, 1995 First Gas Power Nominal contract Term of 25
Corporation capacity is 1,000 years, expiring
MW; exact figure August 17, 2025
varies semi-annually
as net electrical
output of the plant is
estimated to be
between 900 MW
and 1100 MW
July 22, 1999 FGP Corp. Nominal contract Term of 25
capacity is 500 MW; years, expiring
exact figures varies October 1, 2027
semi-annually as net
electrical output of
the plant is
estimated to be
between 450 MW
and 550 MW
December 12, South Premier Ilijan Power Plant in Implemented
2011 Power Batangas, for the full beginning
Corporation 1,180 MW net February 26,
capacities 2013. Under the
PSA, Meralco
will procure
power from
SPPC until
December 25,
2019, with an
option to extend
the term for
another three
(3) years.

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December 21, Masinloc Power The initial contracted The PSA has a
2011 Partners Co., capacity is 330 MW, term of seven
Ltd. (“MPPCL”) to increase to 430 (7) years and
MW by December may be
26, 2015 extended by the
parties for
another three
(3) years. Under
the agreement,
the terms of the
NPC-Meralco
TSC will govern
the supply by
MPPCL to
Meralco until
final regulatory
approval of the
PSA is granted.

December 20, Sem-Calaca The initial contracted Term of seven


2011 Power capacity is 210 MW (7) years, which
Corporation and will be increased may be
to 420 MW upon the extended by the
commercial operation parties for
of the plant’s Unit 1. another three
(3) years.
February 29, Therma Luzon, Pagbilao coal-fired Term of seven
2012 Inc. power plant with (7) years, which
contracted capacity may be
of 350 MW extended for
three (3) years
upon agreement
of parties
June 25, 2012 San Miguel Sual coal-fired power Term of seven
Energy plant with initial (7) years, which
Corporation contracted capacity may be
of 200 MW to extended up to
increase to 500 MW five (5) years
by December 26, upon agreement
2012 of parties

Meralco’s PSAs contracted in 2012 have no minimum contracted energy offtake. Instead, Meralco
pays certain fixed capacity and fixed operation and maintenance fees. The electricity fees paid
under the Power Purchase Agreements and the PSAs are set by formulas. These formulas take into
account capital recovery costs, fixed and variable operation and maintenance costs, fuel costs and
other allowance costs.

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Description of Business

The Power Purchase Agreements and the PSAs also contain provisions that allow a specified number
of downtime days for power plant maintenance and emergency outages. The Power Purchase
Agreements and the PSAs also provide for interest penalties for late payment of fees as well as
liquidated damages in case of termination for breach of the contra cts. The PSAs allow Meralco to
assign any excess contract capacity to its local RES or, with the consent of the power supplier, to a
third party, to prevent any overhang under the PSA.

Meralco has also signed certain contracts with renewable energy generation facilities. These inclu de
Contracts for the Supply of Electricity with Montalban Methane Power Corporation and Bacavalley ,
Energy Inc. These companies operate renewable energy generating facilities utilizing landfill gas of 8
MW and 4 MW capacity, respectively. The contracts are on “take and pay” terms, without a
minimum energy volume. Energy is billed to Meralco on an hourly basis at the ERC -approved NPC
time-of-use rate, plus certain pre-agreed cost components.

On March 1, 2012, Meralco executed an Interconnection Agreement with Alternergy Wind One
Corporation (Alternergy) for the interconnection and parallel operation of Alternergy’s proposed
wind farm in Pililla, Rizal with an installed capacity of up to 90 MW with Meralco’s distribution
system. This is the first interconnection agreement for Meralco with a wind -powered renewable
energy plant. Interconnection will be at Meralco’s existing Malaya -Teresa 115-kV line. Alternergy
will be constructing a 115kV line to connect to Meralco distribution system which will be subject to
the approval of the ERC.

On March 20, 2013, CEDC signed a PSA with SMEC, for a total capacity of 70 MW.

On September 27, 2013, Meralco signed a PSA with TMO for the output of the barge-mounted,
bunker oil-fired diesel engines which are moored at the Fishport Complex in Navotas, Manila. On
November 4, 2013, the ERC provisionally approved the Meralco-TMO PSA.

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Description of Business

Power Generation

In 2010, Meralco made a strategic decision to re -enter the power generation business through
Meralco PowerGen Corporation. Meralco intends to develop a power generation portfolio of up to
3,000 MW. Presence in power generation is intended to enable Meralco to (i) enhance the provision
of adequate, reliable and reasonably-priced power to its millions of customers, (ii) compete
profitably in the retail electricity supply market as RCOA is introduced and ramped up in phases,
and (iii) generate positive returns and cash flows.

Meralco believes its domestic projects will provide it with leverage in negotiating of PSAs with IPPs
and help to ensure a ready and affordable supply of power to its customers. Meralco also believes
that its acquisition of an interest in an LNG-fired power plant currently expected to be in
commercial operation by end of January 2014 at Jurong Island, Singapore will support this strategic
objective, by providing Meralco with the opportunity to generate cash flow as well as advance
experience operating an LNG-fired power plant and selling electricity in a highly competitive retail
market.

Domestic

Subic Bay Project

Meralco is re-entering the power generation market through MGen. In 2011, MGen acquired a 47%
interest in RP Energy, which is developing a 2x300 MW CFB coal-fired power plant in the Subic Bay
Freeport Zone. Meralco has undertaken pre-development and construction at the Subic Bay site and
as at September 30, 2013 has invested P811 million on this project. On March 22, 2013, RP Energy
entered into two conditional engineering, procurement and construction contracts with Hyundai
Construction and Engineering Co. Ltd. for the construction of RP Energy’s Subic Bay project. The
boiler will be built by Foster Wheeler and the steam turbine generator will be provided by Toshiba
Corporation. This contract is conditional on the close of financing for the p roject, which in turn is
conditioned on the successful outcome of litigation surrounding the proje ct. For more information,
see “Legal Proceedings” and “Risk Factors—Litigation may result in the delay or cancellation of RP
Energy’s power generation project at Subic Bay.” Meralco intends to enter into a 10 to 15 year
contract to source the coal for the plant from East Kalimantan, Indones ia and is coordinating with
NGCP to arrange for transmission of the power generated by the Subic Bay project. This projec t is
expected to distribute power through Meralco’s network and to supply power to Meralco for sale
to its customers or through its retail electricity supply business. Meralco currently expects the
project to come online in 2017 and plans for the project to be managed and operated by RP Energy.
However, the validity of the original and the first two amendments thereof, as well as the validity of
the original Lease and Development Agreement with the Subic Bay Metropolitan Authority, the
Environmental Compliance Certificate for this project are the subject of ongoing litigation. For more
information, see “Certain Legal Proceedings.”

LNG Projects

MGen is also undertaking economic and technical feasibility studies of LNG -fired combined cycle gas
turbine generation plant projects and related facilities in the provinces of Quezon or Batangas with
potential partners such as Chubu Electric Power Corpora tion and Shell Philippines Exploration,
respectively. If Meralco decides to move forward with these projects, they may be expected to

125
Description of Business

come online in phases starting from 2015 for a renewable energy project, 2017 for another coal -
fired power plant and 2018 for an LNG-fired power plant. It is expected that this project will
distribute their power through Meralco’s network and to supply power to Meralco for sale to its
customers or through its Retail Electricity Supply business.

Renewable Energy Projects

Meralco is currently in discussions to develop renewable energy projects, including wind and solar,
but is waiting for more definitive feed-in tariff policy. However, renewable capacity would not
account for a significant portion of the generation portfolio i n the near term.

Overseas

In March 2013, FPM Power Holdings Limited, a 40-60% joint venture company between MGen and
First Pacific Company Limited, acquired a 70% stake in PacificLight Power, which is in the final
construction phase of a 2x400 MW LNG-fired power plant at Jurong Island, Singapore with a project
cost of US$965 million, giving Meralco a 28% effective interest in the project. The remaining 30%
shareholder of Pacific Light Power is Petroliam Nasional Berhad (PETRONAS) of Malaysia. The off-
take of this project is a combination of vesting contracts, retail contracts and merchant contracts.
The Jurong Island plant will distribute power through the distribution network of the Singapore
Energy Market Authority’s Power System Operator and is expected to be operational by end of
January 2014.

Beyond the benefits of near-term income and cash flow generation, Meralco believes that
PacificLight Power will provide it with valuable exposure to the construction and operation of LNG -
fired power plants, which are part of Meralco’s longer -term generation investment plan. Meralco
further believes that experience in the competitive Singapore retail market will strengthen its
expertise in contestable markets.

126
Description of Business

Retail Electricity Supply

Under RCOA, Retail Electricity Suppliers are allowed to source and sell electricity to Contestable
Customers. Starting in June 2013, Contestable Customers whose average electricity demand over
the preceding 12 months is at least 1 MW were allowed to enter into electricity contracts with
Retail Electricity Suppliers. In December 2013, such Contestable Customers will be required to
source their electricity from Retail Electricity Suppliers. Meralco has been authorized by the ERC to
operate as a Retail Electricity Supplier upon the commencement of RCOA, and sources electricity
under its existing PSAs and resells it to Contestable Customers under the brand, MPower. MPower
has been assisting customers in preparing for the commencement of RCOA. Meralco currently
serves over 600 Contestable Customers that account for approximately 28% of its sales volume as at
December 31, 2012, and has signed several retail electricity supply contracts with various
customers. In accordance with the ERC’s “Transitory Rules for the Initial Implementation of Open
Access and Retail Competition”, commercial operations of RCOA began on June 26, 2013 on a
voluntary basis, following a six-month transition period.

127
Description of Business

Nineteen (19) Retail Electricity Suppliers were licensed by the ERC to provide competitive retail
supply service to eligible Contestable Customers, or end -users with an average peak demand of at
least 1 MW for the past twelve (12) months. Within the Meralco franchise, 237 customers or 37% of
the total number of eligible customers certified by the ERC opted for con testability and are now
being supplied by competitive Retail Electricity Suppliers .

Other Services

Subsidiary companies were created to meet the Company’s specific needs for support, service, or
enhancement that may either add value, savings, and profitability to, or improve the efficiency of,
the core business. Separately, these subsidiaries also provide services to non -related entities. The
following subsidiaries of Meralco provide other value-added services:

• Meralco Industrial Engineering Services Corporation (“MIESCOR”) is 99% -owned by Meralco. It


was incorporated on December 5, 1973 and holds a Category “AAA” contractor license since 1982.
Miescoris engaged in electro-mechanical engineering, construction maintenance activities and
technical services related to power generation, transmission and distribution, as well as industrial
plants, water resources and telecommunications.

• Corporate Information Solutions, Inc. (“CIS”) is a wholly owned subsidiary of Meralco, and was
incorporated in 1974 to provide information technology services and integrated business
solutions to enterprise clients. In 1997, CIS introduced the bills pa yment business as a separate
business segment. In 2006, CIS spun off its bills payment collection business to a subsidiary, CIS
Bayad Center, Inc. (“CIS Bayad Center”). CIS Bayad Center has a network of bill payment
collection centers nationwide, which operates under the brand name “Bayad Center.” CIS Bayad
Center is a leading provider of outsourced over-the-counter payment collection in the Philippines.
CIS Bayad Center accepts payments for 162 biller brands throu gh its more than 2,000 branches
and franchises nationwide, and its U.S.-based online payment facility. To complement its bill
payment business, Bayad Center also offers facilitation of compulsory third -party liability
insurance sales through electronic wallet services, prepaid loading, service applications
acceptance and remittance pay-out. CIS Bayad Center provides outsourced teller services through
its wholly owned subsidiary, Customer Frontline Solutions, Inc.

• Meralco Energy, Inc. (“MEI”) operates under the trade name, MServ. It is a wholly owned
subsidiary of Meralco, which was incorporated in June 2000. MEI is an Energy Service Company
(“ESCO”), which provides beyond the meter (customer-owned facilities) energy services. MEI also
provides power factor and quality improvement, advanced metering infrastructure, efficiency
audits and retrofitting lighting, Heating, Ventilation and Air Conditioning (“HVAC”) and motor
efficiency, power facilities operation and maintenance and renewable energy solutions.

• e-Meralco Ventures, Inc. (“e-MVI”) is a wholly owned subsidiary of Meralco established in June
2000. Its wholly owned subsidiary, Paragon Vertical, Inc. owns Radius Telecoms, Inc. (“Radius”),
which, in turn, holds a congressional telecommunications franchise to construct, install, establis h,
operate and maintain for commercial purposes and in the public interest, the business of
providing basic and enhanced telecommunications services in the Philippines and between the
Philippines and other countries and territories. Radius operates and ma intains approximately
2,000 kilometers of fiber-optic cables and telecommunications infrastructure. Through such
facilities, it provides data connectivity solutions, high capacity services, and managed services to

128
Description of Business

local and international carriers, internet service providers, data centers and corporate clients in
select industries. The carrier ethernet service of Radius is certified by Metro Ethernet Forum, an
international organization of carrier ethernet users, as compliant with global standards.

• Republic Surety and Insurance Company, Inc. (“RSIC”) is a professional non -life insurance
company, which Meralco acquired in 2007 as a wholly owned subsidiary to assist in managing its
risk exposure. RSIC manages an insurance program that provides coverage to Mera lco’s
transmission and distribution assets. RSIC’s current capital stock of P250 million is in compliance
with the minimum capitalization requirement of the Department of Finance Order 27 -06. RSIC is
licensed to write all lines of non-life insurance and surety business, both on a direct and
reinsurance basis. Its primary market consists of corporate conglomerates, focusing on affiliated
companies of Meralco’s principals. The proportion of its direct business and reinsurance assumed
business is 67.5% and 32.5%, respectively.

• Lighthouse Overseas Insurance Company, Limited (“LOIL”) is a wholly owned subsidiary and
captive reinsurer of Meralco. LOIL was incorporated in Bermuda on August 24, 2007. It is
registered as a Class 1 insurer under The Bermuda Insurance Act 1978 and related regulations and
received its license to operate in the territory in March 2008. LOIL, together with RSIC serves as
the vehicle to reinsure Meralco’s major catastrophic risk exposure.

In 2010, 2011 and 2012, Meralco’s gross revenues contributed by Meralco’s subsidiary businesses
(excluding CEDC) was 1% in each of the three (3) years.

Competition

Meralco has an exclusive franchise to distribute electricity in the areas covered by its franchise.
Currently, Meralco contends only with consumers within its franchise area that self -generate or
customers that are directly connected to the transmission network supplied directly by generators.
Meralco expects to face competition as a RES from other RESs in respect of the sourcing and supply
of electricity which is currently a pass-through, zero margin business. However, Meralco’s exclusive
franchise to distribute electricity in its franchise area remains in place and is not affected by RCOA.
To date, nineteen (19) RESs and seven (7) local RESs have been authorised by the ERC. RCOA will be
implemented in phases determined by customer demand. Phase 1, which took effect on June 26,
2013, covers customers whose demand over the preceding 12 months is at least 1 MW. Certificates
of Contestability are being issued by the ERC to determine which customers are eligible to contract
with their supplier of choice. By December 2013, all Contestable Customers will be required to
contract with a RES. Otherwise they will be served by a supplier of last resort (“SOLR”), who shall
supply customers at WESM prices plus a 10% markup. A number of Contestable Customers have
already contracted with RESs. Phase 2 is expected to be implemented two (2) years thereafter,
covering customers with demand of 750 kW and up, plus customers who decide to aggregate their
demand. The rules and guidelines regarding customer aggregation are still to be drafted. Further
levels of contestability are to be determined by the ERC. See “Risk Factors —Risks relating to
Meralco and its businesses—Meralco operates in a highly regulated industry, which is undergoing
significant change.”

129
Description of Business

Employees and Labor Relations

As at December 31, 2012, Meralco had a total of 5,960 regular employ ees. The table below
summarizes the employee count in the different business groups of the Company:
Regular
Employee
Business Group Count as of
December 31,
2012
Networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,333
Customer Retail Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,639
Shared Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 988
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,960

Of the total employee population, 10% are in management positions while the remaining 90%
perform various tasks in professional, technical, office operations, administrative and skilled trade
roles. The following table shows the distribution by job function:
2012
Regular
Employee
Classification Definition Count %
Top Management President, Chief Executive Officer and 13 0.20%
Function Heads
Middle Management Sub-Function Heads, Area Managers and 386 6.50%
selected Officer positions
Junior Management Other Officer Positions and selected Area 194 3.30%
Manager positions
Employees who carry out professional 1,851 31.00%
Professional-Technical functions in Engineering, Legal, Finance,
Human Resources, Education, and other
fields
Office Operations Employees who provide direct support to 983 16.50%
the operations/work processes of the
organization
General Administrative Employees who provide 291 4.90%
administrative/clerical support to the
resource management function of the
Office of the Head
Skilled Trade Employees who are engaged in tasks using 2,242 37.60%
and operating hand tools and motorized
equipment to fabricate, construct,
process, install or repair materials,
equipment and structural parts utilizing
special techniques, training and
experience
Total 5,960 100.00%

130
Description of Business

In addition to Meralco’s employees, it also utilizes third -party contractors for various parts of its
operations. Meralco maintains high health and safety standards for its employees and requires
similar standards from its third-party contractors. Meralco’s rank-and-file and management and
supervisory employees are represented by their respective unions, Meralco Employees and
Workers Association (“MEWA”) and the First Line Association of Meralco Supervisory Employees
(“FLAMES”), which are independent of each other and have separate collective bargaining
agreements with the Company. The collective bargaining agreement with FLAMES for the period
from December 1, 2012 to November 30, 2017, was signed on December 20, 2012 and the
collective bargaining agreement with MEWA for the period from December 1, 2010 to November
30, 2015 was signed on December 6, 2010. The economic provisions of the respective collec tive
bargaining agreements will be renegotiated at the end of the third year thereof. Meralco considers
its present relationship with its employees to be satisfactory.

Meralco and Miescorhave distinct, funded, noncontributory defined benefit retirement plans
covering all permanent employees. Meralco’s retirement plan provides for post -retirement benefits
in addition to a lump sum payment to employees hired up to December 31, 2003. Retirement
benefits for employees hired commencing January 1, 2004 were am ended to provide for a defined
lump sum payment only. Meralco also has a contributory provident plan introduced in January 2009
in which employees hired commencing January 1, 2004 may elect to participate.

Environmental Protection

Meralco is committed to taking action and responsibility regarding climate change by preventing
pollution by optimizing its use of natural resources, minimizing wastes generated by its processes
and being an active partner in reforestation. It has also committed to continually i mprove its
environment, safety and health management system to be at par with global best practices.
Meralco is committed both to implementing an environmentally friendly value chain and to
complying with all applicable environmental laws. Specific progra ms such as solid waste
management, water conservation, air pollution control, and wastewater management have been
implemented by Meralco to ensure compliance with environmental laws and preservation of
natural resources throughout its franchise area. One s uch program is the proper management of
treated wastewater, which is currently being re -used for the cooling towers at Meralco’s main
headquarters. Another program is the protection and management of the 927 hectare Meralco Tree
Farm located in Rodriguez, Rizal. Meralco also implements a Clean Fleet Management Program,
which has resulted in a total of 100 tons of CO 2 avoidance because of the improvement in vehicle
fuel efficiency.

131
Description of Business

Certain Relationships and Related Transactions

Meralco and its subsidiaries, in their ordinary course of business, engage in transactions with their
associates as well as various subsidiaries of its major shareholders. Meralco’s policy with respect to
related-party transactions is to ensure that these transactions are entered into on an arm’s-length
basis and on terms comparable with those available from unrelated third parties.

The Meralco’s major related-party transactions include:

Pole Attachment Contracts with Philippine Long Distance Telephone Co mpany

Meralco has a pole attachment contract with Philippine Long Distance Telephone Company
(“PLDT”) similar to third party pole attachment contracts of Meralco with other telecommunication
and cable television companies. Under the pole attachment contract, PLDT shall use the contracted
cable position exclusively for its telecommunication cable network facilities.

Sale of Electricity under Various Service Contracts

Meralco sells electricity to related party shareholder groups such as PLDT, Metro Pacific Investment
Corporation (“MPIC”) and San Miguel Corporation and their respective subsidiaries, and to affiliates
for the latters’ facilities within Meralco’s franchise area. The rates charged to related parties are
the same ERC-mandated rates applicable to customers within the franchise area.

Purchase of Telecommunication Services from PLDT and Subsidiaries

Meralco’s primary telecommunications carriers are PLDT for its wireline and Smart
Telecommunications, Inc. for its wireless services. The Meralco group also purchases its wireline
services from Digitel Mobile Philippines, Inc., which became a subsidiary of PLDT in 2011. These
services are covered by standard service contracts between the telecommunications carriers and
each legal entity within the Meralco group.

Purchase of Goods and Services

In the ordinary course of business, Meralco purchases goods and services from its affiliates and
sells power to such affiliates. All transactions among Meralco’s various subsidiaries and joint -
ventures are conducted at arm’s length and Meralco does not have any transfer pricing
arrangements.

132
Description of Business

Following is the summary of related party transactions for the nine months ended September 30,
2012 and 2013 and the outstanding balances as at December 31, 2012 and September 30, 2013:

Amount of Transactions Outstanding Receivable


For the Nine Months Ended (Liability) as at
September 30
Category 2012 2013 December 31, September Terms Conditions
2012 30, 2013
(unaudited) (audited) (unaudited )
(in P millions)

Sale of Electricity
PLDT Group 2,245 2,015 268 107 10-day; non-interest bearing Unsecured, no
impairment
SMC Group 823 686 83 52 10-day; non-interest bearing Unsecured, no
impairment
Metro Pacific Group 539 304 54 13 10-day; non-interest bearing Unsecured, no
impairment
Purchases of IT Services
Indra Philippines 266 399 - (7) 30-day; non-interest Unsecured
bearing
Purchases of meters and
Devices
GEPMIC 200 585 - (8) 30-day; non-interest bearing Unsecured
Revenue from pole -
attachment
PLDT 690 720 - 12 Advance Payment Unsecured, no no
impairment
Purchases of Wireline
and Wireless Services
PLDT Group 64 87 - (3) 30-day; non-interest bearing Unsecured
Purchase of Power
SPPC 30,678 26,615 - (3,153) 30-day; non-interest bearing Unsecured
SMEC 4,552 9,301 - (663) 30-day; non-interest bearing Unsecured

Transaction with Meralco Pension Fund

The Meralco Pension Fund holds 6,000 common shares of RP Energy at P100 par value per share,
with total carrying amount of P600,000, equivalent to a 3% equity interest in RP Energy. The fair
value of RP Energy’s common shares cannot be reliably measured as these are not traded in the
financial market. As at September 30, 2013, the fair value of the total assets being managed by
Meralco Pension Fund amounted to P35.8 billion.

For further information on Meralco’s related-party transactions, see Note 24 to Meralco’s


consolidated financial statements, which are included in this Prospectus.

133
DESCRIPTION OF PROPERTIES

Meralco’s assets include utility plant assets (which are part of its regulatory asset base) and non -
electric capital assets. In addition, it has investment properties consisting of assets held for future
substation or branch sites or retired office or sector sites, among others.

Meralco’s facilities in Pasig City host the SCADA networks system, which is the heart of the electric
distribution operations, the data center with core infrastructure such as data, telecommunications
and trunk radio systems, logistics process, customer retail services and other support services
organizations.

As at September 30, 2013, in addition to the head office, Meralco has 10 network sector offices, one
subtransmission and substation office, 30 branches and 7 auxiliary offices. Its network facilities
consist of 114 substations (total capacity of 16,026 MVA), 855 circuits (total of 17,161 ckt-km),
160,621 distribution transformers and approximately 724,010 poles in service.

Separately, CEDC’s facilities consist of subtransmission and distribution assets and buildings and
improvements located in the Clark Special Economic Zone.

MGen, through its subsidiaries, Calamba Aero Power Corporation and Atimonan Land Ventures
Development Corporation, own several parcels of land for the potential development of a peaking
plant (in Calamba, Laguna) and a LNG, plant (in Atimonan, Quezon), respectively.

Radius, Meralco’s telecommunications subsidiary, owns approximately 2,000 kilometers of fibre


optic cables and telecommunications infrastructure.

CIS Bayad Center has 21 leased branches for its bills payment, e -purse loading and remittance
services.

The properties of Meralco and its subsidiaries are free from any mortgage, charge, pledge, lien or
encumbrance.

The Meralco group also has various lease contracts as lessee for periods ranging from one year to 15
years covering certain office spaces, payment offices and substation sites and towers.

Insurance

Meralco maintains, among other insurance policies, a property insurance policy insuring its
buildings, machinery and equipment against fire, lightning, earthquake, typhoon and flood,
including loss due to theft. In addition, Meralco maintains a comprehensive general liability policy
covering injury, including loss of life or damage to property. Necessary defense and litigation
expenses are likewise insured under the comprehensive general liability policy . A comprehensive
motor insurance policy is also in place. Marine cargo insurance is purchased to cover Meralco
properties that are in transit. Meralco believes these policies are customary for distribution
utilities in the Philippines.

134
Description of Properties

In addition to the foregoing, Meralco’s transmission and distribution assets consisting of towers and
poles, overhead lines and equipment are insured against damage resulting from fire and lightning,
windstorm, storm, typhoon, flood and earthquake. This risk exposure is underwritten by Meralco’s
wholly-owned subsidiary, RSIC. A reinsurance panel that includes an offshore captive reinsurer, LOIL,
and other local and international reinsurance companies, has been organized to assume the risk of
damage due to catastrophic events. See “Risk Factors—Risks relating to Meralco and its
businesses—Meralco’s insurance coverage may not be adequate.”

For more information on these properties, see Note 8 –Utility Plant and Others to the accompanying
audited consolidated financial statements

135
CERTAIN LEGAL PROCEEDINGS

In accordance with the Securities Regulation Code Implementing Rules and Regulations or SRC -IRR,
the following are the material legal proceedings to which Meralco or its subsidiaries is a party, or
to which any of their property is a subject, including pending claims for damages against the
registrant exceeding 10% of its current assets:

NPC Settlement Agreement

In the early 1990s, the NPC embarked on a power dev elopment program, which consisted of
contracting generating capacities and the construction of its own, as well as private sector,
generating plants, following a crippling power supply crisis. To address the concerns of the
creditors of NPC, namely, Asian Development Bank and the World Bank, the DOE required Meralco
to enter into a long-term supply contract with NPC. Accordingly, on November 21, 1994, Meralco
entered into a 10-year Contract for Sale of Electricity (“CSE”) with NPC to commence on January 1,
1995. As a result of the 1997 Asian financial crisis, the Philippines experienced a significant
curtailment of energy demand and Meralco was unable to offtake the volume of energy it had
initially contracted for with the NPC. While Meralco provided the NPC with a good-faith
notification that it would be unable to offtake these volumes due to events beyond its control, the
NPC was unwilling to modify the CSE, and proceeded to bill Meralco for electricity NPC did not
supply due to reduced demand. Meralco disputed NPC’s billing and made several other complaints
against NPC for breaches of the CSE. Subsequently, both parties agreed to enter into mediation.

The mediation resulted in the signing of a settlement agreement between the parties on July 15,
2003, under which Meralco was to pay NPC a settlement amount of P14,320 million, representing
the agreed net value of the various claims made by NPC and Meralco against one another,
adjusted by the excess power purchased by Meralco from NPC during a subsequent perio d
compared with a stipulated baseline. The settlement agreement was submitted to the ERC for its
approval on January 19, 2006. Subsequently, the Office of the Solicitor General (“OSG”) moved to
invalidate the settlement agreement. As a result, Meralco sought judicial clarification with the
Regional Trial Court—Pasig Branch (“RTC-Pasig”). Pre-trials were set, which Meralco complied with
and attended. However, the OSG refused to participate in the pre -trial, and was subsequently
found to be in default by RTC-Pasig. As a result, the OSG filed a petition with the Court of Appeals
seeking the dismissal of the case at RTC-Pasig and to stop the RTC-Pasig from continuing with the
proceedings. The Court of Appeals denied this petition and a subs equent motion for
reconsideration. The OSG subsequently filed a Petition for Certiorari with the Supreme Court,
which required Meralco to file a Comment, which it did on October 29, 2012. The Supreme Court
then ordered the OSG to file a Reply. On February 19, 2013, the OSG filed a motion for extension
to file a Consolidated Reply, which Meralco has yet to receive.

Meanwhile, on May 29, 2012, RTC-Pasig declared the settlement agreement, independent of a
provision providing for the pass-through for the settlement amount (which is subject to approval
by the ERC) valid and binding. This decision has been appealed by the OSG and is now awaiting
decision by the Court of Appeals. The OSG argues that: (a) the settlement agreement was neither
submitted nor reviewed by the OSG in violation of the Administrative Code of 1987, (b) the NPC
Board breached its authority when it waived its claims under the CSE thus making NPC’s act ultra

136
Certain Legal Proceedings

vires for being prejudicial to the interest of the Government, (c) the pass -on provision in the
settlement agreement imposes an additional burden on the consumers and is contrary to law,
morals, public interest and public policy; and (d) the settlement agreement is grossly
disadvantageous and prejudicial to the government. For its part, Meralco explains t hat: (a) no law
requires the NPC to obtain OSG approval for the compromise or settlement agreement and the
OSG is merely limited to supervising the handling of NPC’s court cases but has no authority to
decide on NPC’s corporate decisions. In fact, there wa s no court case or litigation in which the
supervision of the OSG could have been called in, (b) there is no law which precludes NPC and
Meralco form undergoing mediation rathe than arbitration, (c) there is no need for the
Commission on Audit to settle the claim since, at the time of the execution of the settlement
agreement, the claim was not yet settled, (d) the settlement agreement was a valid exercise of the
powers of the NPC Board, and (e) the interests of the government were validly protected during
the negotiations for the settlement agreement.

Subic Bay Project

A Writ of Kalikasan (Environmental Protection Order) case was filed with the Supreme Court of the
Philippines upon a complaint filed on July 20, 2012 by certain special interest groups in opposition
to RP Energy’s Subic Bay project. The case was remanded by the Supreme Court of the Philippines
to the Court of Appeals for hearing on the merits thereof. A decision has been issued by the Court
of Appeals denying the Writ of Kalikasan. The Court of Appeals, however, noted that certain
procedural deficiencies in respect of the Department of Environment and Natural Resources’
(“DENR”) issuance of the original Environmental Compliance Certificate for the power plant and
the Subic Bay Metropolitan Authority’s (“SBMA”) conclusion of the original Lease and
Development Agreement with RP Energy. The Court of Appeals thereby declared the original
Environmental Compliance Certificate and the original Lease and Development Agreement invalid.
The DENR, SMBA and RP Energy each filed motions for reconsideration with the Court of Appeals,
asserting the legality and validity of the original Environmental Compliance Certificate and Lease
and Development Agreement. On May 22, 2013, the Court of Appeals denied the Motions for
Reconsideration and maintained that the Environmental Compliance Certificate and the Lease
Development Agreement are invalid. Meralco has filed a Petition for Review on Certiorari with the
Supreme Court of the Philippines. DENR, SBMA and RP Energy have filed similar petitions with the
Supreme Court of the Philippines. The petitions are currently pending.

Real Property Tax Assessment

Several Local Government Units (“LGUs”) have claimed Meralco is deficient in paying real property
taxes on certain of its assets, including electric poles, wires, insulators, and transformers, issuing
assessments in 2002, 2006, 2010, 2011 and 2012. Of these LGUs, one has secured a favorable
decision from the Court of Appeals. This decision was appealed by Meralco to the Supreme Court
of the Philippines, where it is now awaiting resolution. The other cases are pending with the
respective local administrative bodies or government offices.

Meralco also filed a case on December 27, 2012, against the City of Manila befor e RTC-Pasig to
enjoin the collection of real property taxes on the company’s transformers and poles and nullify
the real property tax assessments made thereon based on the argument that these are not within
the ambit of the definition of real property under the LGC. The case is set for mediation after the

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City of Manila filed its comment on Meralco’s petition. In the event that the assessments are
sustained by the Supreme Court, Meralco will file for the recovery of any resulting real property
tax payments from customers in the area administered by the relevant local government unit
through applications with the ERC. However, approval of recovery cannot be guaranteed and any
such recovery will be amortized over an extended period of time.

Sucat-Araneta Transmission Line

The NPC’s 230kV transmission line (the “Sucat-Araneta line”), which transmits power for
distribution by Meralco to certain customers within its franchise area, predominantly those
located in the vicinity of Makati City, Metro Manila has been the subject of claims brought by
certain residents of Dasmariñas Village, Makati City. In 2000, these residents brought a case
against NPC, alleging that electromagnetic emissions from the Sucat -Araneta line have caused
cases of cancer and sought to have the line taken out of service. The Regional Trial Court —Makati
Branch (“RTC-Makati”) issued a preliminary injunction to de-energize the line, which was
subsequently overturned by the Court of Appeals. However, the Supreme Court of the Philippines
subsequently overruled the Court of Appeals in October 2008 and remanded the case to RTC -
Makati for a trial on the merits. In November 2008, Meralco and certain other parties intervened
in the case and moved for the dissolution of the injunction. Attempts at mediation have failed and
litigation is ongoing. If the Sucat-Araneta line were de-energized, the supply of power available to
Meralco for distribution to customers in the vicinity of Makati City, Metro Manila would be
significantly reduced and Meralco would not be able to ensure adequate electric service unless a
replacement transmission line were to be constructed. In its Order dated February 5, 2013, the
RTC-Makati granted plaintiffs’ motion and directed the re-raffle of the case to another court after
the judicial dispute resolution failed.

Zapote Substation

In May 2011, a complaint was filed by a private citizen alleging that she is the registered owner of
two parcels of land on which one of Meralco’s 115kV substations (the “Zapote Substa tion”) has
been constructed. The plaintiff claimed that the land was obtained from the Department of
Environment and Natural Resources. The Public Estate Authority (now the Philippine Reclamation
Authority (“PRA”) had granted Meralco use rights to the land in 1993. Trial of the case is ongoing.
The Zapote Substation is a major delivery point through which the NGCP delivers the bulk of the
power requirements to Meralco for use by its customers in various areas of Metro Manila. Should
the operations of this substation be disrupted or discontinued, power would have to be rerouted
to other substations, potentially leading to overload and rotating brownouts in Metro Manila.

Overpayment of Income Tax related to SC Refund

With the decision of the SC for Meralco to refund P0.167 per kWh to covered customers during the
billing period February 1994 to May 2003, Meralco overpaid income tax in the amount of P7,107
million for taxable years 1994 to 1998 and 2000 to 2001. Accordingly, Meralco filed a claim on
November 27, 2003 for the recovery of such excess income taxes paid. After examination of the
books of Meralco for the covered periods, the BIR determined that Meralco had in fact overpaid
income taxes in the amount of P6,690 million. However, the BIR also maintained that Meralco is
entitled to a refund amount of only P894 million, which pertains to taxable year 2001, claiming

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Certain Legal Proceedings

that the period for filing a claim had prescribed in respect of the difference between Meralco’s
overpayment and the refund amount Meralco is entitled to.

The BIR then approved the refund of P894 million for issuance of tax credit certificates or TCCs,
proportionate to the actual refund of claims to utility customers. The BIR initially issued TCCs
amounting to P317 million corresponding to actual refund to customers as at August 31, 2005.

As at September 30, 2013 and December 31, 2012, the amount of unissued TCCs amounting to
P577 million refund entitlement is presented as part of “Other noncurrent asset s” account in the
consolidated statements of financial position.

Meralco filed a Petition with the Court of Tax Appeals (“CTA”) assailing the denial by the BIR of its
income tax refund claim of P5,796 million for the years 1994 - 1998 and 2000, arising from the SC
decision (net of P894 million as approved by the BIR for taxable year 2001). In a decision dated
December 6, 2010, the CTA’s Second Division granted Meralco’s claim and ordered the BIR to
refund or to issue tax credit certificate in favor of Meralco in the amount of P5,796 million in
proportion to the tax withheld on the total amount that has been actually given or credited to its
customers.

On appeal by the BIR to the CTA En Banc, Meralco’s petition was dismissed on the ground of
prescription in the Decision of the CTA En Banc dated May 8, 2012. On Motion for Reconsideration
by Meralco of the said dismissal, the CTA En Banc partly granted M eralco’s motion and issued an
Amended Decision dated November 13, 2012, ruling that Meralco’s claim was not yet barred by
prescription and remanding the case back to the CTA Second Division for further reception of
evidence.

The BIR filed a Motion for Reconsideration of the above Amended Decision, while M eralco filed its
Motion for Partial Reconsideration or Clarification of Amended Decision. Both parties filed their
respective Comments to the said motions, and these were submitted for resolution at the CTA En
Banc.

In a Resolution promulgated on May 22, 2013, the CTA denied the said motions of the BIR and
Meralco, and the CTA Second Division was ordered to receive evidence and rebuttal evidence
relating to Meralco's level of refund to customers, pertaining to the excess charges it made in
taxable years 1994-1998 and 2000, but corresponding to the amount of P5,796 million, as already
determined by the Court of Appeals.

On July 12, 2013, the BIR appealed the CTA En Banc's Amended Decision dated November 13, 2012
and Resolution dated May 22, 2013 via Petition for Review with the SC.

Overpayment of Income Tax Related to Change in Tax Basis

On February 4, 2008, the Supreme Court of the Philippines (“SC”) denied with finality a motion for
reconsideration filed by the Commissioner of Internal Revenue (“CIR”), against Meralco, with
respect to the issue on excess income tax paid by the latter. The SC affirmed a CA decision and
ordered the CIR to refund or issue a Tax Credit Certificate (“TCC”) in favor of Meralco for P107
million representing overpaid income taxes for taxable years 1987 and 1988. The overpayment is
in accordance with the effectivity of Executive Order No. 72, which subjected Meralco to regular

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corporate income tax instead of 2% franchise tax based on gross receipts it was previously liable
for. On February 5, 2013, Meralco filed a Motion for Issuance of a Writ of Execution with the CTA
to enforce the judgment of the SC. On February 14, 2013, the CTA promulgated a Resolution
ordering the CIR and the Office of the Solicitor General to comment on the Motion filed by
Meralco. On March 14, 2013, the CTA promulgated a Resolution granting the Motion of MERALCO
and directed the issuance of corresponding Writ of Execution.

Local Franchise Tax Assessments of Municipalities

Certain municipalities have served assessment notices on MERALCO for LFT. As provided in the
Local Government Code or LGC, only cities and provincial governments may impose taxes on
establishments doing business in their localities. On the basis of the foregoing, MERALCO and its
legal counsel believe that MERALCO is not subject or liable for such assessments.

Petition for Dispute Resolution against PEMC. TransCo, NPC and PSALM

On September 9, 2008, Meralco filed a Petition for Dispute Resolution, against PEMC, TransCo,
NPC and PSALM with the ERC as a result of the congestion in the transmission system of TransCo
arising from the outages of the San Jose-Tayabas 500kV Line 2 on June 22, 2008, and the 500kV
600 Mega volt-ampere Transformer Bank No. 2 of TransCo’s San Jose, Bulacan substa tion on July
11, 2008. The Petition seeks to, among others, direct PEMC to adopt the NPC Time-of-use (“TOU”)
rate or the new price determined through the price substitution methodology of PEMC as
approved by the ERC, as basis for its billing during the period of the congestion and direct NPC and
PSALM to refund the transmission line loss components of the line rentals associated with
NPC/PSALM bilateral transactions from the start of WESM operation on June 26, 2006.

In a Decision dated March 10, 2010, the ERC granted Meralco’s petition and ruled that there is
double charging of the Transmission Line Costs billed to Meralco by NPC for the TSC quantities to
the extent of 2.98% loss factor, since the start of the TSC in November 2006. Thus, NPC was
directed to refund/collect line rental adjustment to/from Meralco. In the meantime, the ERC
issued an Order on May 4, 2011 directing PEMC to submit an alternative methodology for the
segregation of line rental into congestion cost and line losses from the start of the WESM. PEMC
has filed its compliance submitting its alternative methodology.

On September 8, 2011, Meralco received a copy of PEMC’s compliance to ERC’s directive and on
November 11, 2011, Meralco filed a counter-proposal which effectively simplifies PEMC’s
proposal.

On November 11, 2011, Meralco filed its Motion to Implement the Decision dated March 10, 2010
By Immediately Effecting the Refund/ (Collection) of Line Rental Adjustments to Consumers. On
December 21, 2011, PSALM filed its comment on Meralco’s said Motion. Then, in an Order dated
January 24, 2012, the ERC directed PEMC, Transco and NPC to submit their respective comments
on Meralco’s motion within five days from receipt.

In an Order of the ERC dated June 27, 2012, Meralco was directed to submit its computation of the
amount of the double charging of line loss on a per month basis from June 26, 2006 up to the
present. On July 4, 2012, Meralco filed its Compliance to the said Order. Thereafter, the ERC
issued an Order directing the parties to comment on Meralco’s submissions.

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In an Order dated March 4, 2013, the ERC approved the methodology proposed by Meralco and
PEMC in computing the double charged amount on line losses by deducting 2.98% from the NPC
TOU amount. Accordingly, the ERC determined that the computed double charge amount to be
collected from NPC is P5.2 billion, covering the period November 2006 to August 2012 until actual
cessation of the collection of the 2.98% line loss charge in the NPC -TOU rates imposed on Meralco,
while the amount to be collected from the Successor Generating Companies (“SGCs”) is P4.7
billion. Additionally, Meralco was directed to file a petition against the following SGCs: MPPCL,
APRI, TLI, SMEC and SCPC, within 30 days from receipt thereof, to recover t he line loss collected
by them. Meralco filed a motion for clarification with the ERC regarding the directives contained in
the March 4, 2013 Order. On April 30, 2013 and May 8, 2013, PSALM and NPC, respectively, filed
motions seeking reconsideration of the March 4, 2013 Order.

In an Order dated July 1, 2013, the ERC issued the following clarifications/resolutions: 1) SPPC
should be included as one of the SGCs against whom a petition for dispute resolution should be
filed by Meralco; 2) Amount to be refunded by NPC is not only P = 5.2 billion but also the subsequent
payments it received from Meralco beyond August 2012 until the actual cessation of the collection
of the 2.98% line loss charge in its TOU rates; 3) Petition to be filed by Meralco against the SGCs
should not only be for the recovery of the amount of P = 4.7 billion but also the subsequent
payments beyond August 2012 until the actual cessation of the collection of the 2.98% line loss
charge in its TOU rates. ; 4) "SCPC Ilijan" pertains to SPPC instead. Thus, the refundable amount of
= 706 million pertaining to "SCPC Ilijan" should be added to SPPC's refundable amount of P
P = 1.1
billion. 6) Grant the "Motion for Extension" filed by Meralco and was directed to file a petition
against the following SGCs: MPPCL, APRI, TLI, SMEC, SCPCand SPPC otherwise, it shall be the one
liable to refund the subject amount to its customers; and 7) deny the respective "Motions for
Reconsideration" filed by NPC and PSALM.

On September 12, 2013, Meralco filed a Manifestation with Motion with the ERC seeking approval
of its proposal to offset the amount of P = 74 million against some of its monthly remittances to
PSALM. PSALM and NPC filed their comment ad cautelam on Meralco’s Manifestation and Motion.
Meralco is awaiting the resolution of the ERC on its Manifestation and Motion.

On October 24, 2013, Meralco received PSALM’s Petition for Certiorari with the Court of Appeals
(with Urgent Temporary Restraining Order and/or Writ of Preliminary Mandatory Injuncti on
Applications) to question the March 4, 2013 and July 1, 2013 orders of ERC.

Petition for Dispute Resolution against SPPC, MPPCL, APRI, TLI , SMEC and SCPC

On August 29, 2013, Meralco filed a Petition for Dispute Resolution against SPPC, MPPCL, APRI,
TLC, SMEC and SCPC. Said Petition seeks the following: (a) refund of the 2.98% transmission line
losses in the amount of P5.4 from said SGCs; and (b) approval of Meralco’s proposal to
correspondingly refund to its customers the aforementioned line loss amounts, as and when the
same are received from the SGCs, until such time that the said over -recoveries are fully refunded,
by way of automatic deduction of the amount of refund to the computed monthly generation rate.
On September 20, 2013, Meralco received the SGC’s Joint Motion to Dismiss. On October 7, 2013,
Meralco filed its Comment on the said Joint Motion. Meralco is awaiting the ERC’s resolution of
the SGC’s Joint Motion.

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Certain Legal Proceedings

PSALM versus PEMC and Meralco

Due to the unusually large increases in WESM prices during the 3rd and 4th months of the WESM
operations, Meralco raised concerns with the PEMC to investigate whether WESM rules were
breached or if anti-competitive behavior had occurred.

While resolutions were initially issued by the PEMC directing adjustments of WESM settlement
amounts, a series of exchanges and appeals with the ERC ensued. ERC’s decision directing the
WESM settlement price for the 3rd and 4th billing months to be NPC -TOU rates prompted PSALM
to file a Motion for Reconsideration with the Court of Appeals, which was denied on November 6,
2009. In December 2009, PSALM filed a Petition for Review on Certiorari with the S upreme Court
of the Philippines.

As at September 30, 2013, PSALM’s petition for review is pending resolution by the SC.

Petition for Dispute Resolution with NPC on Premium Charges

On June 2, 2009, Meralco filed a Petition for Dispute Resolution against NPC and PSALM with
respect to NPC’s imposition of premium charges for the alleged excess energy it supplied to
Meralco covering the billing periods May 2005 to June 2006. The premium charges amounting to
P315 million during the May-June 2005 billing periods have been paid but are the subject of a
protest by Meralco, and premium charges of P318 million during the November 2005, February
2006 and April to June 2006 billing periods are being disputed and withhel d by Meralco. Meralco
believes that there is no basis for the imposition of the premium charges. The hearings on this
case have been completed and Meralco is now awaiting the resolution of the ERC on the petition.

Meralco does not believe that any cases other than those summarized in the foregoing, if
determined adversely to the Company, would have a material adverse effect on Meralco’s
financial position or financial performance.

142
MARKET PRICE OF AND DIVIDENDS ON MERALCO ’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

(1) Market Information

The principal market where Meralco’s common equity is traded is the Philippine Stock Exchange
(“PSE”). The quarterly high and low sales prices for the years ended 2011, 2012, and nine months
ended September 30, 2013 follow below:
MER
FROM TO HIGH LOW
01/01/11 03/31/11 P290.00 P215.00
04/01/11 06/30/11 278.00 235.00
07/01/11 09/30/11 284.00 220.00
10/01/11 12/31/11 253.00 220.40
01/01/12 03/31/12 279.80 252.00
04/01/12 06/30/12 275.00 218.82
07/01/12 09/30/12 276.00 240.00
10/01/12 12/31/12 291.20 248.00
01/01/12 03/31/13 330.00 260.60
04/01/13 06/30/13 395.00 307.00
07/01/13 09/30/13 330.80 260.00

As at November 28, 2013, the price for Meralco stocks is P272.40.

(2) Holders

The total number of stockholders as of September 30, 2013 is 46,679.

Top 20 Stockholders as of September 30, 2013


Rank Stockholder Name Number of Shares Percent
1 Beacon Electric Asset Holdings, Inc. 563,124,042 49.96%
2 PCD Nominee Corporation (Filipino) 202,430,938 17.96%
3 San Miguel Corporation 91,872,280 8.15%
4 SMC Global Power Holdings Corporation 69,059,538 6.13%
5 San Miguel Purefoods Company, Inc. 59,090,909 5.24%
6 PCD Nominee Corporation (Foreign) 46,177,398 4.10%
7 First Philippine Holdings Corporation 44,382,436 3.94%
8 Board of Adminstrators—ESOP 5,892,754 0.52%
9 Manuel M. Lopez and/or Ma. Teresa L. Lopez 1,449,293 0.13%
10 Manuel M. Lopez 795,957 0.07%
11 Concepcion and/or Araneta 774,257 0.07%
12 Lucio W. Yan 403,208 0.04%
13 Charlotte Cua Cheng 314,534 0.03%
14 Avesco Marketing Corporation 284,427 0.03%
15 B.P. Insurance Agency, Inc. 281,079 0.02%
16 Regina Capital Development Corporation 270,000 0.02%
17 Jesus P. Francisco 257,480 0.02%
18 Makati Supermarket Corporation 240,308 0.02%
19 Simeon Y. Tan 162,800 0.01%
20 Jose Ignacio A. Carlos 161,687 0.01%

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Market Price and Dividends

(3) Dividends

The following are the cash dividends declared by Meralco’s Board in favor of holders of Meralco
common shares for the two (2) most recent years ended 2011 and 2012, and nine months ended
September 30, 2013:

Dividend Declaration Date Record Date Payment Date


Year Per Share
2011 P2.65 February 28, 2011 March 28, 2011 April 20, 2011
P3.45 July 25, 2011 August 17, 2011 September 13, 2011
P1.70 November 2, 2011 December 2, 2011 December 27, 2011

2012 P4.10 February 27, 2012 March 23, 2012 April 23, 2012
P4.00 July 30, 2012 August 29, 2012 September 24, 2012

2013 P6.10 February 25, 2013 March 26, 2013 April 24, 2013
P4.10 July 29, 2013 August 27, 2013 September 20, 2013

Meralco’s loan agreements contain restrictions on payments of cash dividends to common


stockholders subject to meeting certain financial measures, which Meralco complied with.

Meralco strictly implements its dividend policy, approved by the Board, in 2010, which prescribes
the regular payment of dividends equivalent to 50% of consolidated core net income. In 2012,
Meralco paid cash dividend of P8.10 per share to all its shareholders. In addition, the Board
approved the distribution of Meralco’s investment in Rockwell Land as property dividend of to all
shareholders of record as at March 23, 2012. The declaration entitles each shareholder 2.82
Rockwell Land shares for each Meralco common share held. The property dividends were
distributed on May 14, 2012, which was within five (5) trading days after approval of the property
dividends by the SEC.

144
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND FINANCIAL PERFORMANCE

The following is a discussion and analysis of Meralco’s financial position and financial performance
and certain trends, risks and uncertainties that may affect its busin ess. The critical accounting
policies section discloses certain accounting policies and management judgments that are material
to Meralco’s financial performance and financial position for the periods presented in this report.
The discussion and analysis of Meralco’s financial performance are prepared in three comparative
sections: the nine months ended September 30, 2013 compared with the nine months ended
September 30, 2012, the year ended December 31, 2012 compared with the year ended December
31, 2011 and the year ended December 31, 2011 compared with the year ended December 31, 2010.
Comparative financial information presented on a business segment basis includes inter -segment
transactions. These transactions are eliminated in Meralco’s consolidated fi nancial statements.
Disclosure relating to the liquidity and financial position and the trends, risks and uncertainties that
have had or that are expected to affect revenues and income complete the management’s discussion
and analysis.

Prospective investors should read this discussion and analysis of Meralco’s consolidated financial
position and financial performance in conjunction with the consolidated financial statements and the
notes thereto set forth elsewhere in this Prospectus.

This discussion contains forward-looking statements and reflects the current views of Meralco with
respect to future events and financial performance. Actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors such as those set
forth in the section entitled “Risk Factors” and elsewhere in this Prospectus.

145
Management’s Discussion and Analysis

Overview

Meralco is the Philippines’ largest electric power distribution company, with a franchise area
covering 9,337 square kilometers. It provides power to over five million residential, commercial
and industrial customers in 34 cities and 77 municipalities, including Metro Manila, the provinces
of Rizal, Cavite and Bulacan, and parts of the provinces of Pampanga, Batangas, Laguna and
Quezon. Turnover of business establishments in the franchise area accounted for approximately
50% of the country’s 2011 Gross Domestic Product, based on data from the National Statistical
Coordination Board.

Clark Electric Distribution Corporation (“CEDC”), a 65%-owned subsidiary of Meralco, holds the
power distribution franchise for the Clark Special Economic Zone in Clark, Pampanga. CEDC’s
franchise area covers 320 square kilometers and services over 1,700 customers.

Meralco’s business is divided into two segments, namely, power, and other services. The power
segment, primarily power distribution, contributed 99% of Meralco’s revenues for the nine months
ended September 30, 2013 and 2012 and consists of operations of Meralco and CEDC. The other
services segment contributed 1% of Meralco’s revenues in 2013 and 2012.

Power

The power segment of Meralco’s business consists of (a) electricity distribution, (b) power
generation and (c) retail electricity supply. Electricity distribution is principally electricity
distribution and supply of power on a pass-through basis covering the Meralco franchise area and
the CEDC franchise area in the Luzon Grid. According to data from the Department of Energy, as of
2011, electricity distribution within the Meralco franchise area accounts for approximately 55% of
the electricity sales of the country and approximately 75% of the electricity sales in Luzon.
Meralco is also seeking opportunities to grow its distribution service in other are as of the
Philippines that are underserved due to the lack of reliable or reasonably -priced power.

In 2010, Meralco made a strategic decision to re-enter the power generation business through
Meralco PowerGen Corporation (“MGen”) through its investment in Redondo Peninsula Energy,
Inc. (“RP Energy”)... Presence in power generation is intended to enable Meralco to (i) enhance
the provision of adequate, reliable and reasonably-priced power to its millions of customers, (ii)
compete profitably in the retail electricity supply market as Retail Competition and Open Access
(“RCOA”) is ramped up in phases, and (iii) generate positive returns and cash flows from power
generation.

On July 22, 2011, MGen acquired a 47% interest in RP Energy, which is developing a 2 x 300MW,
circulating fluidized bed (“CFB”) coal-fired power plant in the Subic Freeport Zone. MGen is also in
various stages of pursuing potential joint development of other power generation projects,
including a recent acquisition of an effective 28% equity in PacificLight Power Pte Ltd. in Jurong
Island, Singapore, and 20% equity interest in Global Business Power Corporation .

On June 6, 2011, Meralco informed the Energy Regulatory Commission (“ERC”) of its intention to
become a local retail electricity supplier, consistent with the provisions of the Electricity Power
Industry Reform Act of 2001 (“EPIRA”). Meralco has entered into new Power Supply Agreements,
which include provisions enabling Meralco to supply electricity to qualified Contestable

146
Management’s Discussion and Analysis

Customers under RCOA. Meralco serves as a local Retail Electricity Supplier within its franchise
area under the brand, MPower. MPower signed contracts with a number of Contestable
Customers.

Other Services

The other services segment is involved principally in electricity -related services such as electro-
mechanical engineering, construction, consulting and related manpower, light rail -related
maintenance, bill payments collection and e-transaction, insurance and reinsurance, data
telecommunications carrier and energy efficiency and systems management.

Key Factors Affecting Financial Performance

The Company’s financial performance is affected by a variety of factors. Set out below are some of
the more significant factors that have affected the Company’s financial performance in the past,
as well as factors that are currently expected to affect its financial performance in the foreseeable
future. Other factors beyond those identified below may materially affect the Company’s financial
performance. See “Risk Factors.”

Regulated Rates and Cost Recoveries

The most significant determinants of Meralco’s and CEDC’s rate structure vis -à-vis operating
results are the regulatory asset base “allowable returns” and “permitted cost recoveries”. Rates
billed by Meralco and CEDC are approved by the ERC through the annual Maximum Average Price
mechanism and are set to allow a reasonable rate of retu rn on the Company’s regulatory asset
base investments. Meralco’s rates are set (with the approval of the ERC) to permit the Company to
earn a reasonable rate of return on investments it makes toward provision of electric service and
take into account operating and maintenance expenses, depreciation, taxes (other than income
tax) and allowable return based on industry Weighted Average Cost of Capital calculated by the
ERC. Meralco’s and CEDC’s billings to customers are itemized or “unbundled” into a number o f bill
components that reflect the various activities and costs incurred in providing electric service.
Billings consist of distribution charges (distribution, supply and metering),pass -through charges
(generation, transmission and system loss), subsidies, taxes and universal charges.

The pass-through charges covered by ERC-approved automatic recovery mechanisms allow


Meralco to automatically pass through its monthly fluctuating generation and transmission costs
for its electricity sales and system loss, up to the cap set by the ERC. Effects of Peso fluctuations
are captured in purchased power billings. Subsidies are revenue -neutral to Meralco as these are
cross-subsidies, with one group of customers shouldering the subsidy for another group of
customers. Corresponding taxes, including VAT and local franchise tax, but excluding income tax,
are likewise automatically passed on to consumers. Universal charges, consisting of environmental
charge, missionary electrification and NPC stranded contract cost are remitted to PSALM upon
collection from consumers.

See “Risk Factors—Risks relating to the Company and its business—Meralco is unable to
unilaterally determine the future prices for Meralco’s services, which could reduce Meralco’s
profitability if Meralco’s costs increase without the ERC authorizing a corresponding increase in
Meralco’s tariffs”.

147
Management’s Discussion and Analysis

Sales Volume and Philippine Economic Conditions

The sale of electric energy is driven mainly by prevailing economic conditions and the number of
customers being served by Meralco. Meralco’s franchise area accounts for an estimated 50% of
the Philippines’ gross domestic product or GDP, with 37% of Philippine GDP attributable to Metro
Manila, based on data from the National Statistical Coordination Board.

For the year ended December 31, 2012, the Meralco Group’s total energy sales volume was 32,771
GWh, 7% higher than its sales volume in 2011 of 30,592 GWh. Residential, commercial and
industrial sales grew by 5%, 6% and 11%, respectively, from 2011 to 2012. This gr owth was driven
by increased household disposable income, active real estate, transport and tourism sectors,
newly connected industrial customers and a higher average temperature in 2012. This growth was
further supported by the increase in remittances sent home by overseas Filipino workers, which
provided an impetus for increased domestic consumption and, consequently, growth in residential
and commercial energy volume. Meralco’s customer base grew by 3.2% to 5.2 million customers
as at December 31, 2012 largely on growth in the commercial and residential sectors. Peak
demand experienced by Meralco was 5,633 MW, which occurred on May 10, 2012.

Electricity Supply

Meralco does not currently operate its own generation plants and purchases all of the p ower it
distributes from Independent Power Producers (“IPP”), privatized plants, residual plants of
NPC/PSALM, and the WESM. WESM is a venue where suppliers and buyers trade electricity as a
commodity. The energy from its various suppliers is delivered to Meralco through the transmission
facilities of NGCP. Meralco is subject to the availability of electricity through its PPAs and PSAs to
meet the demand in its franchise area. The peak demand experienced by Meralco was 5,633 MW
in 2012, and peak demand as of May 2013 was 5,829 MW. For the year ended December 31, 2012,
40% of Meralco’s purchased power was sourced from IPPs, 54% from the privatized and residual
plants of NPC/PSALM, under the Transition Supply Contract with NPC, and 6% from the WESM.

Industry Restructuring

Since the enactment of the EPIRA, the Philippine power industry has been undergoing
fundamental restructuring.

These restructuring measures include:

• the deregulation of power generation and supply activities and pricing;

• the privatization of the NPC’s power generating assets and IPP contracts;

• the unbundling of the relative costs of the various segments of the power supply chain and
reflecting these in the bills to customers;

• the implementation of the Wholesale Electricity Spot Market; and

• removal of inter-grid, intra-grid, and inter-class cross-subsidies.

148
Management’s Discussion and Analysis

• freedom of consumers to choose electricity suppliers, with the phased introduction of Retail
Competition and Open Access, which commenced on June 26, 2013; and

• open and non-discriminatory access in the networks of distribution utilities, subject to the
fulfillment of certain conditions precedent.

As many of these initiatives are recent, it is uncertain what the effect of these changes will be on
Meralco’s financial performance. See “Risk Factors—Risks relating to Meralco and its businesses—
Meralco operates in a highly regulated industry, which is undergoing significant change.”

Income Statement Items

Revenues

Sale of electricity. Sale of electricity includes revenues of Meralco and CEDC from electricity
distribution. See “Business—Electricity Distribution.” Meralco and CEDC distribute electricity to
industrial, commercial and residential customers. Revenue from sale of electricit y is divided into
pass-through charges and distribution service charges. Revenue from power distribution is
recognized after power is supplied to customers and meter readings have been forwarded to
Meralco. Going forward, if revenues from MGen’s power gene ration projects and/or MPower’s
Retail Electricity Supply business reach at least ten percent of Meralco’s consolidated revenues,
generation and retail electricity supply will be presented as additional business segments. Certain
taxes which are pass-through items on customer bills are not included in revenue or in taxes, fees
and permits in Meralco’s income statement.

Sale of other services. Revenue from services and others principally includes revenue from
electricity-related services such as electro-mechanical engineering, construction, consulting and
related manpower as well as light-rail related maintenance services, e-transaction and bills
collection, insurance and e business development and energy systems management. See
“Business—Other Services.”

Costs and expenses

Purchased power. Costs of purchased power are those incurred by Meralco and CEDC for the
purchase of power from power suppliers. Actual purchased power costs are pass -through costs
and so do not directly affect the profitability of Meralco and CEDC.

Salaries, wages and employee benefits. These are personnel expenses incurred in the course of the
Meralco Group’s operation of its business. Salaries, wages and employee benefits include salaries,
wages and bonuses, pension expense, health, medical and related benefits, other long -term
incentive and post-employment benefits and employee stock purchase plan expense.

Provision for probable charges and expenses from claims. Provision for probable charges and
expenses from claims includes provisions made for expenses Meralco expects to incur in relation
to litigation, tax assessments and other disputes. Provision is made when Meralco believes the
incurrence of these expenses is more likely than not.

149
Management’s Discussion and Analysis

Depreciation and amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the relevant assets as follows:

Asset Type Estimated Useful Lives


Subtransmission and distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 10—50 years,
depending on the life of
the significant parts
Others:
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15—40 years
Communication equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 years
Office furniture, fixtures and other equipment . . . . . . . . . . . . . . 5 years
Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5—10 years
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5—20 years

Contracted services. Contracted services include costs for professional services and contractors for
outsourced services.

Provision for doubtful accounts net. Provision for doubtful accounts—net is made when Meralco
believes recovery of a receivable is unlikely. The majority of these provisions is made in respect of
sale of electricity.

Taxes, fees and permits. Taxes, fees and permits include expenses incurred by the Meralco Group
to governmental units in respect of operational permits and licenses needed for its operations.

Other expenses. Other expenses consist of costs incurred in respect of materials and supplies,
rents and utilities, transportation and travel, corporate expenses, insurance, advertising,
communication and others.

Other expenses (income)

Other expenses (income) consist primarily of interest and other financial charges recognized on
financial liabilities and bill deposits, along with interest income on cash and cash equivalents
together with carrying costs on ERC-approved under-recoveries.

Critical Accounting Policies

Critical accounting policies are those that are both (i) relevant to the presentation of Meralco’s
consolidated financial position and financial performance and (ii) require management’s most
difficult, subjective or complex judgments, often as a result of the need to make estimates about
the effect of matters that are inherently uncertain. As the number of variables and assumptions
affecting the possible future resolution of the uncertainties increases, those judgments become
even more subjective and complex. In order to provide an understanding of how Meralco’s
management forms its judgments about future events, including the variables and assumptions
underlying its estimates, and the sensitivity of those judgments to different circumstances,

150
Management’s Discussion and Analysis

Meralco has identified the critical accounting policies discussed below. While Meralco believes
that all aspects of its consolidated financial statements should be s tudied and understood in
assessing its current and expected financial position and financial performance, it believes that the
following critical accounting policies warrant particular attention. For more information, see Notes
4 and 5 to the Company’s consolidated financial statements included in this Prospectus.

Revenue Recognition

Meralco’s revenue recognition policies require the use of estimates and assumptions that may
affect the reported amounts of its revenues and receivables. Revenues from sale of electricity by
Meralco and CEDC are billed based on a customer-specific billing cycle cut-off date for each
customer, while recording of related power purchase cost in the financial statements is based on
calendar month as provided in the terms of the Power Purchase Agreements and the Power Supply
Agreements. The recognition of unbilled revenues for billing cycles with earlier than month -end
cut-off dates requires the use of estimates. The difference between the amount initially
recognized based on provisional invoices and the settlement of the actual billings by the
generators is taken up in the subsequent period. Management believes that such use of estimates
will not result in material adjustments in future periods.

Operating Lease Commitments

Meralco has several lease arrangements as both lessor and lessee. In cases where the Meralco
Group is acting as lessor, the lease agreements do not transfer ownership of the assets at the end
of the lease term nor give a bargain purchase option over the assets. I n cases where Meralco is
acting as lessee, it has not acquired any significant risks and rewards of ownership. Consequently,
the lease agreements are accounted for as operating leases.

Meralco’s Power Purchase Agreements with Independent Power Producers, qualify as leases on
the basis that Meralco and the Independent Power Producers have “take or pay” arrangements
where payments for purchased power are made on the basis of the availability of the power plant
and not on actual consumption. In determining the lease classification, it is judged that
substantially all the risks and rewards incident to the ownership of the Independent Power
Producers’ power plants are with the Independent Power Producers. Thus, the Power Purchase
Agreements are classified as operating leases. Accordingly, capacity fees, fixed operating and
transmission line fees that form part of purchased power expense are accounted for similar to a
lease.

Contingencies

Meralco has possible claims or obligations to other parties from past eve nts and whose existence
may only be confirmed by the occurrence or non-occurrence of one or more uncertain future
events not wholly within its control. Management has determined that the present obligations
with respect to contingent liabilities and claims with respect to contingent assets do not meet the
recognition criteria, and therefore has not recorded any such amounts.

Estimating Useful Lives of Utility Plant and Others, Intangible Assets with Finite Lives and
Investment Properties

151
Management’s Discussion and Analysis

Meralco estimates the useful lives of utility plant and others, intangible assets with finite lives,
and investment properties based on the periods over which such assets are expected to be
available for use. The estimate of the useful lives of the utility plant and ot hers, intangible assets
with finite lives and investment properties is based on management’s collective assessment of
industry practice, internal technical evaluation and experience with similar assets. The estimated
useful lives are reviewed at least at each financial year-end and are updated if expectations differ
from previous estimates due to physical wear and tear, technical or commercial obsolescence and
legal or other limitations on the use of such assets. It is possible, however, that future financial
performance could be materially affected by changes in estimates brought about by changes in the
factors mentioned in the foregoing. The amounts and timing of recorded expenses for any period
would be affected by changes in these factors and circumstances. A reduction in the estimated
useful lives of utility plant and others, intangible assets with finite lives and investment properties
would increase recorded operating expenses and decrease noncurrent assets.

Impairment of Nonfinancial Assets

PFRS requires that an impairment review be performed when certain impairment indicators are
present. These conditions include obsolescence, physical damage, significant changes in the
manner by which an asset is used, worse than expected economic performance, drop i n revenues
or other external indicators, among others. In the case of goodwill, at a minimum, such asset is
subject to an annual impairment test and more frequently whenever there is an indication that
such asset may be impaired. This requires an estimatio n of the value in use of the cash generating
unit to which the goodwill is allocated. Estimating the value in use requires preparation of an
estimate of the expected future cash flows from the cash generating unit and choosing an
appropriate discount rate in order to calculate the present value of those cash flows.

Realizability of Deferred Tax Assets

Meralco reviews the carrying amounts of deferred tax assets at the end of each reporting period
and reduces these to the extent that it is no longer probable that sufficient taxable income will be
available to allow all or part of the deferred income tax assets to be utilized. Assessment on the
recognition of deferred tax assets on deductible temporary differences is based on the level and
timing of forecasted taxable income for the subsequent reporting periods. This forecast is based
on past results and future expectations on revenues and expenses as well as future tax planning
strategies. Management believes that sufficient taxable profit will be generated to allow all or part
of the deferred tax assets to be utilized. The amounts of the deferred tax assets considered
realizable could be adjusted in the future if estimates of taxable income are revised.

Estimating Allowance for Doubtful Accounts

If there is objective evidence that an impairment loss has been incurred in the trade and other
receivables balance of Meralco, an estimate of the allowance for doubtful accounts related to
trade and other receivables that are specifically identified as do ubtful of collection is made. The
amount of allowance is evaluated by management on the basis of factors that affect the
collectibility of the accounts. In such case, use of judgment based on the best available facts and
circumstances, including but not limited to, the length of Meralco’s relationship with the customer
and the customer’s credit status based on third party credit reports and known market factors, to
record specific reserves for customers against amounts due in order to reduce Meralco’s

152
Management’s Discussion and Analysis

receivables to amounts that management expects to collect is applied. These specific reserves are
reevaluated and adjusted as additional information received affect the amounts estimated.

In addition to specific allowance against individually significant receiv ables, an assessment for
collective impairment allowance against credit exposures of the customers, which were grouped
based on common credit characteristics, although not specifically identified as requiring a specific
allowance, have a greater risk of default than when the receivables were originally granted to
customers is done. This collective allowance is based on historical loss experience using various
factors, such as historical performance of the customers within the collective group, deterioration
in the markets in which the customers operate, and identified structural weaknesses or
deterioration in the cash flows of customers.

Estimation of Retirement Benefit Costs

The cost of providing benefits under Meralco’s defined benefit plans is actuarial ly determined
using the projected unit credit method. Defined benefit costs comprise the following:

• Service cost

• Net interest on the net defined benefit liability or asset

Service costs which include current service costs, past service costs and gains or l osses on non-
routine settlements are recognized as expense in profit or loss. Past service costs are recognized
when plan amendment or curtailment occurs.

Net interest on the net defined benefit liability or asset is the change during the period in the net
defined benefit liability or asset that arises from the passage of time which is determined by
applying the discount rate based on government bonds to the net defined benefit liability or asset.
Net interest on the net defined benefit liability or asset i s recognized as expense or income in
profit or loss. Remeasurements comprising (a) actuarial gains and losses, (b) return on plan assets
(excluding amounts included in net interest on the net defined benefit liability or asset), and (c)
any change in the effect of the asset ceiling (excluding amounts included in net interest on the net
defined benefit liability or asset) are recognized immediately in other comprehensive income in
the period in which they arise. Remeasurements are not reclassified to profit or loss in subsequent
periods.

Retirement costs under Meralco’s defined contribution plan are recorded based on Meralco’s
contribution to the defined contribution plan as services are rendered by the employee.

Provision for Asset Retirement Obligations

Provision for asset retirement obligations is recognized in the period in which they are incurred if
a reasonable estimate of fair value can be made. This requires an estimation of the cost to restore
or dismantle, on a per area basis, depending on the location, and is based on the best estimate of
the expenditure required to settle the obligation at the future restoration/dismantlement date,
discounted using a pre-tax rate that reflects the current market assessment of the time value of
money and, where appropriate, the risk specific to the liability.

Provisions

153
Management’s Discussion and Analysis

Meralco is involved in various legal proceedings. Meralco’s estimate for probable costs for the
resolution of these claims, assessments and cases has been developed in consultation with
external counsels handling the defense in these claims, assessments and cases and is based upon
thorough analysis of potential outcome. The balance of ‘Provisions’ as at September 30, 2013 and
December 31, 2012 substantially represents the amount of claims related to a commercial
contract which remains to be unresolved and local taxes being contested, as discussed in Note 30
to the consolidated financial statements.

Financial Performance

The table below summarizes the audited consolidated financial performance and the contribution
of each business segment to the Meralco Group’s revenues, costs and expenses, and net income
for each of the three years in the period ended December 31, 2012.

154
Management’s Discussion and Analysis

2012

Inter-segment
Power Other Services transactions Consolidated
(in P millions)

Revenues . . . . . . . . . . . . . . . . . 282,991 3,829 (1,550) 285,270

Costs and expenses . . . . . . . . . 264,981 2,876 (1,550) 266,307

Other expenses (income) . . . . . (2,358) (818) 262 (2,914)

Net income attributable to equity


holders of the parent. . . 15,738 1,682 (404) 17,016

2011

Inter-segment
Power Other Services transactions Consolidated
(in P millions)

Revenues . . . . . . . . . . . . . . . . . 253,989 3,923 (1,104) 256,808

Costs and expenses . . . . . . . . . 237,351 2,769 (1,104) 239,016

Other expenses (income) . . . . . (1,689) (99) 881 (907)

Net income attributable to equity


holders of the parent. . . 12,752 1,906 (1,431) 13,227

2010

Inter-segment
Power Other Services transactions Consolidated

(in P millions)

Revenues . . . . . . . . . . . . . . . . . 239,077 3,444 (1,588) 240,933

Costs and expenses . . . . . . . . . 227,716 2,512 (1,588) 228,640

Other expenses (income) . . . . . (1,811) 21 765 (1,025)

Net income attributable to equity


holders of the parent. . . . 9,442 1,403 (1,160) 9,685

155
Management’s Discussion and Analysis

Nine months ended September 30, 2013 compared with nine months ended September 30, 2012

The table below summarizes the consolidated financial performance and the contribution of each
business segment to Meralco Group’s revenues, costs and expenses, and net income for the nine
months period ended September 30, 2013 and 2012.

For the Nine Months ended September 30, 2013


(Unaudited)
Inter-segment
1
Power Other Services Transactions Consolidated
(Amounts in millions)
Revenues =205,321
P P
=3,839 (P
=1,063) =208,097
P
Costs and expenses 186,679 3,057 (1,063) 188,673
Other expenses (income) (154) 10 (8) (152)
Net income attributable to equity holders 13,146 536 (38) 13,644
of the parent

For the Nine Months ended September 30, 2012


(Unaudited)
Inter-segment
2
Power Other Services Transactions Consolidated
(Amounts in millions)
Revenues P
=213,093 P
=2,830 (P
=1,174) P
=214,749
Costs and expenses 198,359 2,117 (1,174) 199,302
Other expenses (income) (2,933) (16) 244 (2,705)
Net income attributable to equity holders 12,617 1,479 (374) 13,722
of the parent

Revenues

The following table shows the composition of the Meralco Group’s consolidated revenues for the
nine-month periods ended September 30, 2012 and 2013 by business segment:

2
Principally electricity distribution
3
Ibid

156
Management’s Discussion and Analysis

Unaudited
September 30, September 30, Increase/Decrease
2012 % 2013 % Amount %
(Amounts in millions)
3
Power P
=213,093 99 P
=205,321 99 (P
=7,772) (4)
Other services 2,830 1 3,839 2 1,009 36
Inter-segment transactions (1,174) - (1,063) (1) 111 9
Total P
=214,749 100 P
=208,097 100 (P
=6,652) (3)

For the nine months ended September 30, 2013, revenues from electricity sales of P =205,321 million
represents 99% of the total consolidated revenues. Such amount though is 4% lower from the P =213,093
million in 2012. The lower electric revenues were largely due to the decrease of pass-through generation
charges as a result of (i) decrease in average generation charge to captive customers for the nine months
ended September 30, 2013 due to the tightly negotiated prices under Power Sales Agreements or PSAs
entered into beginning 2012 and, (ii) certain contestable customers sourcing their generation supply from
competitive retail electricity suppliers beginning June 26, 2013, upon commencement of Retail
Competition and Open Access or RCOA . The increase was offset by the 5% increase in energy sales
volume and higher average distribution service charges.

Power

Revenues from electricity represent Meralco and CEDC’s sale of electricity, which include
generation, transmission, distribution charges and subsidies. Meralco and CEDC distribute
electricity to industrial, commercial and residential customers. For the nine months ended
September 30, 2013, revenues from electricity sales of P205,321 million comprised 99% of the
total consolidated revenues and were lower by 4% from P213,093 million in 2012.

The composition of revenues from electricity distribution for the nine month periods ended
September 30, 2012 and 2013 is summarized as follows:

Unaudited
September 30, September 30, Increase/Decrease
2012 % 2013 % Amount %
(Amounts in millions)
Electric revenues
Pass-through charges:
Generation charge P
=137,935 65 P
=126,320 61 (P
=11,615) (8)
Transmission charge 24,461 11 21,437 10 (3,024) (12)
System loss charge 13,232 6 11,562 6 (1,670) (13)
Power act reduction (20) - (9) - 11 (55)
Inter-class, lifeline subsidies
and others 16 - 19 - 3 19
175,624 82 159,329 77 (16,295) (9)

3Ibid.

157
Management’s Discussion and Analysis

Distribution service charges 37,469 18 42,289 21 4,820 13


213,093 100 201,618 98 (11,475) (5)
Generation charges of RES - - 3,703 2 3,703 100
Total P
=213,093 100 P
=205,321 100 (P
=7,772) (4)

Total energy sold for the nine months ended September 30, 2013 was 25,616 GWh or 5% higher
than the 24,448 GWh in 2012.

Pass-through Charges

For the year 2013, pass-through charges represent 77% of the total electric revenue (excluding
other bill components namely, value-added tax or VAT, and local franchise tax or LFT and universal
charges, which are non-revenue items), with generation charges accounting for 61%, transmission
representing 10% and system loss at 6% of the total electric revenues . Pass-through charges
decreased by 9% from
= 175,623 million in 2012 to P
P = 159,329 million in 2013. Lower generation charge was attributable
to the new competitively structured and priced Power Supply Agreements or PSAs, which were
implemented beginning January 2013, as provisionally approved by the Energy Re gulatory
Commission or ERC. This resulted in a 10% decrease in average generation rate from P = 5.64 per
kilowatt-hours or kWh in 2012 to P = 5.08 kWh in 2013. Transmission charge was also lower by 16%
from P= 1.00 per kWh for the nine months ended September 30, 2012 to P = 0.84 kWh in the same
period of 2013. Average system loss charge also declined by 17% from P = 0.54 per kWh in 2012 to
= 0.45 per kWh in 2013. MERALCO’s 12-month moving average system loss rate as at September
P
30, 2013 was at 6.71%, 0.5 percentage point lower compared with the 7.19% system loss rate as at
September 30, 2012, and outperforming the ERC-imposed 8.5% cap by 1.79 percentage points as a
result of its institutionalized system loss management programs. CEDC’s 12-month moving
average system loss rate as at September 30, 2013 was at 4.09%.

Pass-through charges also decreased as a result of the initial commercial operations of RCOA. With
RCOA, Contestable customers who opted for contestability has sourced its generation from retail
electricity suppliers.

Distribution Service Charges

For the year 2013, distribution revenues, excluding billings for taxes, lifeline and inter -class
subsidy under-recoveries, comprise 21% of the total electric revenues.

Total distribution service charges for the nine months ended September 30, 2013 amounted to
= 42,289 million, reflecting a 13% increase compared with the same period in 2012. The growth in
P
distribution revenue is mainly attributable to slightly higher average distribution rate from P
= 1.53
per kWh in the first nine months of 2012 to P = 1.65 per kWh in the same period of 2013 and 5%
increase in sales volume from 24,448 GWh for the nine months ended September 30, 2012 to
25,616 GWh for the same period in 2013. Increase in average distribution rate is mainly due to
higher share of residential sales. Increase in sales volume is driven by 3% growth in customer
count, higher electricity consumption across all existing customers and consumption of new
customers. The growth in the industrial sector was driven by higher demand of food and b everage,
rubber and plastics as well as semiconductor industries. Commercial volume is driven by real
estate and retail trade fuelled by the BPO industry expansion and higher consumer spending in

158
Management’s Discussion and Analysis

entertainment, malls, hotels, and restaurants. Residential customers’ volume reflected also an
increase, which is due to warmer temperature and benign inflation.

The following table summarizes the customer count as at September 30, 2012 and 2013 and the
corresponding electric consumption per customer class for the nine-month periods ended
September 30, 2012 and 2013:

No. of Customers Electricity Sales % Change


Customer Class 2012 2013 2012 2013 No. of Electricity Sales
Customers
(in thousands) (in GWh)
Residential……… 4,703 4,862 7,361 7,775 3 6
Commercial……. 440 450 9,965 9,942 2 0
Industrial………. 10 10 7,778 7,546 - (3)
Streetlights……. 4 4 98 99 - 1
Total 5,157 5,326 25,202 25,362 3 1

Other Services

Revenues from other services pertain mostly to non-electric revenues of Meralco and revenues
from subsidiaries excluding CEDC and MGen. Revenues generated from other services increased
to P
= 3,839 million in 2013 from P = 2,830 million in 2012. The 36% increase in revenues from other
services is mainly attributable to the increase in third party payment service volume, business
expansion of outsourced services of Bayad Center and increase of fees from franchising of Bayad
Center. There is also significant growth in MIESCOR’s contract services from existing and newly
acquired contracts. Also, e-MVI Group has obtained additional requirements from international
carriers, retail, distribution and banks.

Costs and Expenses

Consolidated costs and expenses for the nine months ended September 30, 2013 amounted to
P188,673 million, 5% lower compared with P199,302 million for the same period in 2012.

The following table shows the breakdown of the Meralco group’s consolidated costs and
expenses for the nine months ended September 30, 2013 and 2012 by business segment:

Unaudited
September 30, September 30, Increase/Decrease
2012 % 2013 % Amount %
(Amounts in millions)
Power4 P
=198,359 100 P
=186,679 99 (P
=11,680) (6)
Other services 2,117 1 3,057 2 940 44
Inter-segment transactions (1,174) (1) (1,063) (1) 111 9
Total P
=199,302 100 P
=188,673 100 (P
=10,629) (5)

4
Ibid.

Power

159
Management’s Discussion and Analysis

The details of costs and expenses are summarized in the following table:

Unaudited
September September Increase/Decrease
30, 2012 % 30, 2013 % Amount %
(Amounts in millions)
Purchased power P
= 175,369 88 P
= 162,263 87 (P
= 13,106) (7)
Salaries, wages, employee
benefits and contracted 8,836 5 5 664 8
services 9,500
Depreciation and amortization 4,047 2 4,389 2 341 8
Others 10,107 5 10,528 6 421 4
Total P
= 198,359 100 P
= 186,679 100 (P
= 11,680) (6)

Costs and expenses of the power segment for the nine months ended September 30, 2013
amounted to P
= 186,679 million, 6% lower compared with the P
= 198,359 million in 2012.

For the year 2013, purchased power accounted for 87% of the total costs and expenses. Meralco’s
power segment does not operate its own generation capacity and purchases all of the electricity
that it distributes from recently contracted PSAs with the Successor Generating Companies or
SGCs, National Power Corporation or NPC (up to June 25, 2013), long-term Power Purchase
Agreements contracted with Independent Power Producers or IPPs and the Wholesale Electricity
Spot Market or WESM. The decrease in purchased power was mainly due to lower average
purchased power cost which was at P = 6.00 per kWh in 2013 compared with P = 6.65 per kWh in 2012.
This was attributable to the new competitively structured and priced PSAs, which were
implemented beginning January 2013. Also, with the start of RCOA, contestable customers
sourced its generation from retail electricity suppliers. This was partially offset by higher volume
of electricity purchased from 26,358 GWh in 2012 to 27,035 GWh in 2013 and higher average cost
of power purchased from WESM at P = 12.68 per kWh in 2013 compared with P = 12.48 per kWh in
2012.
The volume of energy purchased under long-term power supply contracts with IPPs, First Gas
Corporation or the Sta. Rita Power Plant, FGP Corp. or the San Lorenzo Power Plant and Quezon
Power (Philippines) Limited Co. or QPPL, represent 36% of Meralco’s Net Systems Input.
Purchases from PSAs, NPC SGCs and other special programs account for 60%, while the balance of
4% was sourced from the WESM.

Salaries, wages, employee benefits and contracted services increased by 8% from P= 8,836 million
for the nine months ended September 30, 2012 to P = 9,500 for the same period in 2013, which is
mainly due to salary merit increases and salary adjustments as a result of the cost bargaining
agreement or CBA and performance rating adjustments.

Depreciation and amortization increased by 8% to P= 4,389 million in 2013 from P


= 4,047 million in
2012. This is mainly due to additional depreciation from completed construction projects and
newly installed capital assets and amortization of software application related to Meralco’s
software upgrade.

160
Management’s Discussion and Analysis

Other expenses consist of taxes and permits (other than income taxes), provision for probable
charges and expenses from claims, provisions for doubtful accounts, costs of materials,
transportation, and other corporate expenses. The 7% increase in other expenses is mainly due to
higher provisions and increase in taxes and permit fees. This is partly offset by the decrease in
provision for doubtful accounts due to higher recoveries and lower advertising, transportation,
insurance, rental, and donation costs.

Other Services

Cost and expenses of the Other Services segment for the nine months ended September 30, 2013
amounted to P3,057 million, 44% higher compared with 2012, mainly due to higher salaries and
other employee benefits, contracted services, higher depreciation and amortization and other
corporate expenses.

Other Expenses (Income)

Consolidated other income, net of expenses for the nine months ended September 30, 2013
amounted to P152 million, 94% lower compared with P2,705 million in the same period in 2012.
In 2012, Meralco recognized recovery of local franchise tax of P1,571 million and P730 million
carrying charge. The decrease was also due to lower interest and other financial income.

The following table shows the breakdown of the Meralco Group’s consolidated other income, net
of expenses, for the nine-month period ended September 30, 2012 and 2013 by business
segment:

Unaudited
September 30, September 30, Increase/Decrease
2012 % 2013 % Amount %
(Amounts in millions)
4
Power (P
=2,933) 108 (P
=154) 101 =2,779
P (95)
Services and others (16 ) 1 10 (6) 26 (163)
Inter-segment transactions 244 (9) (8) 5 (252) (103)
Total (P
=2,705) 100 (P
=152) 100 = 2,553
P (94)

Net Income Attributable to Equity Holders of the Parent

Net income attributable to equity holders of the parent was 1% lower for the nine months ended
September 30, 2013 compared to the same period in 2012 which included gain recognized from
Rockwell Land Corporation’s divestment transaction in May 31, 2012.

The following table shows the breakdown of the Meralco Group’s net income attributable to the
equity holders of Meralco for the 9-month periods ended September 30, 2012 and September 30,
2013 by business segment:

4Ibid.

161
Management’s Discussion and Analysis

Unaudited
September 30, September 30, Increase/Decrease
2012 % 2013 % Amount %
(Amounts in millions)
5
Power P
=12,617 92 P
=13,146 96 P
=529 4
Other services 1,479 11 536 4 (943) (64)
Inter-segment transactions (374) (3) (38) - 336 90
Total P
=13,722 100 P
=13,644 100 (P
= 78) (1)

5Ibid.

162
Management’s Discussion and Analysis

Year ended December 31, 2012 compared with year ended December 31, 2011

Revenues

The following table shows the composition of the Meralco Group’s consolidated revenues for the
years ended December 31, 2011 and 2012 by business segment:
Increase/Decrease
2011 % 2012 % Amount %
(in P millions)
Power . . . . . . . . . . . . . . . . 253,989 99 282,991 99 29,002 11
Other Services . . . . . . . . . 3,923 1 3,829 1 (94) (2)
Inter-Segment transactions .
(1,104) — (1,550) — (446) 40
100
Total . . . . . . . . . . . . . . . . . 256,808 285,270 100 28,462 11

Power

For the year ended December 31, 2012, revenues from electricity sales of P282,991 million made
up 99% of total consolidated revenues and improved by 11% from P253,989 million in 2011. The
increase in revenues was on account of the 7% growth in volume of energy sold, which reflected
the broad-based growth of the economy, fuelled by the services, real estate and manufacturing
sectors. This was further supported by the notable increase in remittances from some 10 million
overseas Filipino workers, which provided the impetus for increased domestic consumption and
consequently, the growth in residential and commercial energy volume. In addition, the warmer
temperature in 2012 resulted in higher energy sales, which offset the impact of six weather
disturbances within the franchise area during the year. The foregoing was complemented by
earlier energization of new customers, shorter forced and planned service interruption time and
the recovery of self-generating and directly-connected customers, which resulted in higher
revenues.

163
Management’s Discussion and Analysis

The composition of revenues from electricity distribution for the years ended December 31, 2011
and 2012 is summarized as follows:

Increase/ Decrease
2011 % 2012 % Amount %

( in P millions)
Electric revenues mill
P
Pass-through charges:
Generation charge . . . . . . 157,850 62 P 183,708 65 25,858 16
Transmission charge . . . . 32,340 13 31,971 11 (369) (1)
System loss charge . . . . . 15,500 6 16,411 6 911 6
Power act reduction . . . . (106) — (25) — 81 (76)
Inter-class, lifeline subsidies
and others . . (201) — 34 — 235 (117)

205,383 81 232,099 82 26,716 13


Distribution service charges . . .
........... 48,606 19 50,892 18 2,286 5

Total . . . . . . . . . . . . . . . . . 253,989 100 282,991 100 29,002 11

Total energy sold for the year ended December 31, 2012 was 32,771 GWh, which was 7.1% higher
than the 30,592 GWh sold in 2011. Sales across all customer classes reflected increase s in 2012
compared with 2011. Sales to industrial customers increased by 11.4% to 10,111 GWh, which is
largely attributable to semiconductor, non-metallic and food and beverage manufacturers. Energy
sold to commercial customers registered an increase of 6.0% to 12,749 GWh in 2012. Sales to
residential customers increased by 4.7% to 9,779 GWh in 2012.

Pass-through charges accounted for 82% of total electricity revenue (excluding other bill
components, namely value-added tax, local franchise taxes and universal charges which are non-
revenue items), with generation charges accounting for 65%, transmission representing 11% and
system loss at 6%. Distribution revenues, excluding billings for taxes, lifeline and inter -class
subsidy under-recoveries, comprised 18% of the total electricity revenues.

Total distribution service charges for the year ended December 31, 2012 amounted to P50,892
million, reflecting a 5% increase compared with 2011. The modest growth despite the 7.1%
increase in sales volume was mainly due to the lower average distribution rate of P1.55 per kWh
in 2012 compared with P1.58 per kWh in 2011. The lower average rate was the r esult of the
customer mix realized in 2012, which saw higher growth in industrial and commercial volume
compared with 2011. Growth in the industrial sector was driven by higher output of
semiconductor, food and beverage, and basic metals industries coupled with the recovery of
automotive industry. Commercial volume was driven by the expansion of demand from the
services sub-sector, largely coming from real estate, private services, transport, storage, and
communication businesses. Residential customers’ volume also reflected an increase, although
lower than the industrial volume increase, which was driven by the continuing inflow of
remittances and benign inflation.

164
Management’s Discussion and Analysis

Billed customers steadily grew, with 163,000 new customers representing an increase of 3.2% to
almost 5.2 million as at December 31, 2012. Residential customers, while accounting for 29.8% of
the total energy sold, represented 91.2% of the Meralco Group’s total 5.2 million customers as of
December 31, 2012. Commercial customers totaling 440,000, accounted for 38.9% of the total
energy sold as of December 31, 2012. Approximately 10,000 industrial customers accounted for
30.8% of total energy sold as of December 31, 2012.

The following table summarizes the customer count as at December 31, 2011 and 2012 and the
corresponding electric consumption per customer class for the years ended December 31, 2011
and 2012:

No. of Customers Electricity Sales % Change


No. of Electricity
Customer Class 2011 2012 2011 2012 Customer Sales
(in thousands) (in GWh)
Residential…………………. 4,580 4,735 9,344 9,779 3 5
Commercial……………….. 433 440 12,027 12,749 2 6
Industrial……………………. 10 10 9,080 10,111 11
Streetlights………………… 4 4 141 132 (6)

Total…………………………… 5,027 5,189 30,592 32,771 3 7

Meralco continues to reap the benefits of its institutionalized system loss management programs
resulting in further improvements in performance. The 12-month moving average system loss
rate in 2012 was 7.04%, surpassing the previous record rate of 7.35% in 2011. With the system
loss rate below the current regulatory cap of 8.5%, a total of P3.4 billion savings in 2012 or a
cumulative P8.7 billion over the last five years, have been realized and passed on to the
customers. CEDC’s system loss rate was 3.75% in 2012.

Other Services

Revenues generated from Other Services decreased to P3,829 million in 2012 from P3,923 million
in 2011 as a result of a decline in construction contract services which was partly offset by an
increase in third party payment service volume.

Costs and Expenses

Consolidated costs and expenses for the year ended December 31, 2012 amounted to P266,307
million, 11% higher compared with P239,016 million in 2011. The increase in costs and expenses
was due to higher purchased power cost, depreciation and amortization, salaries, wages and
employee benefits, other expenses, and provisions for probable charges and expenses from
claims which were largely attributed to the power segment. Further cost and expense increases
were mitigated by the decrease in provisions for doubtful accounts and contracted services.
Purchased power costs, which comprised 87% of the total cost and expenses, increased by 13%
mainly due to a 6% increase in average purchased power rate and a 6% increase in the total
volume of electricity purchased.

165
Management’s Discussion and Analysis

The following table shows the breakdown of the Meralco Group’s consolidated costs and
expenses for the years ended December 31, 2011 and 2012 by business segment:

Increase/Decrease

2011 % 2012 % Amount %


(in P millions)
Power . . . . . . . . . . . . . . . . 237,351 99 264,981 100 27,630 12
Other Services . . . . . . . . . . 2,769 1 2,876 1 107 4
Inter-segment transactions . . . . . . (1,104) — (1,550) (1) (446) 40
....

Total . . . . . . . . . . . . . . . . . 239,016 100 266,307 100 27,291 11

Power

Costs and expenses of the power segment for the year ended December 31, 2012 amounted to
P264,981 million, 12% higher compared with the P237,351 million in 2011. Purchased power
accounted for 87% of the total cost and expenses. Increase in purchased power was mainly due to
(1) higher average purchased power cost which was at P6.60 per kWh in 2012 compared with
P6.22 per kWh in 2011, and (ii) higher volume in 2012, which totaled to 35,176 GWh, 6% higher
than the 33,081 GWh purchased in 2011. The purchased power cost from the Wholesale
Electricity Spot Market was P12.56 per kWh in 2012 compared with P8.38 per kWh in 2011.

Other Services
The costs and expenses of the Other Services business segment for the year ended December 31,
2012 amounted to P2,876 million, 4% higher compared with P2,769 million in 2011, mainly due to
higher salaries and other employee benefits, contracted services, depreciation and amortization,
provision for doubtful accounts, and taxes and other permits.

Other Expenses (Income)

Consolidated other income, net of expenses for the year ended December 31, 2012 amounted to
P2,914 million, 221% higher compared with P907 million in 2011. The P2,007 million increase was
mainly from the recognition of the local franchise tax recovery of P1,571 million and related
carrying charges of P730 million in 2012.

In a decision dated February 27, 2012, the ERC released an order app roving modifications to
Meralco’s application for recovery of local franchise taxes previously paid. As directed by the ERC,
the recovery was reflected as a separate item in Meralco bills to customers beginning April 2012.

The following table shows the breakdown of Meralco Group’s consolidated other income, net of
expenses, for the years ended December 31, 2011 and 2012 by business segment:

166
Management’s Discussion and Analysis

Increase/Decrease

2011 2012 % Amount %

Power . . . . . . . . . . . . . . . . (1,689) 186 (2,358) 81 (669) 40


Other Services . . . . . . . . . . (99) 11 (81 28 (719) 726
Inter-segment transactions 881 (97) 8)
26 (9) (619) (70)
Total. . . . . . . . . . . . . . . . . . (907) 100 2
(2,914) 100 (2,007) 221
0 221

Net Income Attributable to Equity Holders of the Parent

Consolidated net income attributable to equity holders of the parent increased by 29% amounting
to P17,016 million for the year ended December 31, 2012 from P13,227 million for the same
period in 2011. The higher net income attributable to equity holders of the parent was mainly
due to the power segment’s growth in energy sales and income from the divestment of Rockwel l
Land and local franchise tax recovery.

The following table shows the breakdown of the Meralco Group’s consolidated net income
attributable to the equity holders of Meralco for the years ended December 31, 2011 and 2012 by
business segment :

Increase/Decrease

Segment 2011 % 2012 % Amount %

(in P millions)

Power . . . . . . . . . . . . . . . . P 12,752 96 15,738 92 2,986 23


Other Services . . . . . . . . . . 1,906 14 1,682 10 (224) (12)
Inter-segment transactions (1,431) (10) (404) (2) 1,027 (72)

Total . . . . . . . . . . . . . . . . . 13,227 100 17,016 100 3,789 29

167
Management’s Discussion and Analysis

Year ended December 31, 2011 compared with year ended December 31, 2010

Revenues

The following table shows the composition of the Meralco Group’s consolidated revenues for the
years ended December 31, 2010 and 2011 by business segment:
Increase/Decrease

2010 % 2011 % Amountt %

(in P millions)
1
Power . . . . . . . . . . . . . . . . . . . . 239,077 99 253,989 99 14,912 6
Other Services . . . . . . . . . . . . . . 3,444 1 3,923 1 479 14
Inter-segment transactions . . . . . (1,588) — (1,104) — 484 (30)

Total . . . . . . . . . . . . . . . . . . . . . 240,933 100 100 15,875 7


256,808

1
Principally electricity distribution.

Power

Revenue from electricity sales, which are substantially generated from electric distribution,
amounted to P253,989 million for the year ended December 31, 2011, 6% higher compared with
P239,077 million in 2010. The composition of revenues from power distri bution for the years
ended December 31, 2010 and 2011 is summarized as follows:
Increase/Decrease

2010 % 2011 % Amount %

(in P millions)
Electric revenues
Pass-through charges:
Generation charge . . . . . . . . . . 158,850 66 157,850 62 (1,000) (1)
Transmission charge . . . . . . . . 25,456 11 32,340 13 6,884 27
System loss charge . . . . . . . . . 11,567 5 15,500 6 3,933 34
Power act reduction . . . . . . . . (219) — (106) — 113 (52)
Inter-class, lifeline subsidies and
others . . . . . . . . . . . . . . (233) — (201) — 32 (14)

195,421 82 205,383 81 9,962 5


Distribution service charges . . . . 43,656 18 48,606 19 4,950 11

Total . . . . . . . . . . . . . . . . . . . . . 239,077 100 253,989 100 14,912 6

Of the total consolidated revenues from electric distribution, 81% or P205,383 million of such
amount pertained to pass-through charges, 5% higher compared with P195,421 million in 2010.
For the year 2011, Generation, transmission, and system loss charges represented 77%, 16%, and
at 8% of the total pass-through charges. The higher pass-through charges were attributable to (i)
1% increase in electric sales volume from 30,247 GWh in 2010 to 30,592 GWh in 2011 , (ii) higher
average transmission charge per kWh from P0.84 in 2010 to P1.06 in 2011 brought about by the

168
Management’s Discussion and Analysis

approval of the Maximum Allowable Revenue of the National Grid Corporation of the Philippines
for 2011, offset by the decrease in average generation charge per kWh from P5.24 in 2010 to
P5.16 in 2011 due to lower volume purchased from the Wholesale Electricity Spot Market.

Total distribution service charges amounted to P48,606 million for the year ended December 31,
2011, 11% higher compared with P43,656 million in 2010. The rate for 4th Regulatory Year of the
2nd Regulatory Period, was implemented only in January 2011 through October 2011. For the
year ended December 31, 2011, the average distribution rate was P1.58 per kWh, 10% higher
compared with P1.43 per kWh in 2010. As at December 31, 2011, the number of billed customers
exceeded 5.0 million, 3.7% higher than the 4.8 million at the end of 2010. Energy sales to the
industrial sector was up by 4% to 9,080 GWh from 8,734 GWh in 2010 due to businesse s gained
from Cavite Export Zone, International Rice Research Institute, Toshiba Information Equipment
(Philippines), Inc. and Chevron Philippines Inc., among others, and higher sales to the
semiconductor and cement industries. Sales to the commercial sect or increased to 12,027 GWh
from 11,830 GWh in 2010 due to higher sales to the transportation, storage and communication
and real estate sectors.

The following table summarizes the customer count as at December 31, 2010 and 2011 and the
corresponding electricity consumption per customer class for the years ended December 31, 2010
and 2011:

No. of Customers Electricity Sales % Change

No. of Electricity
Customer Class 2010 2011 2010 2011 Customers Sales

(in thousands) (in GWh)


Residential . . . . . . . . . . . . . . . . . 4,412 4,580 9,540 9,344 4 (2)
Commercial . . . . . . . . . . . . . . . . 421 433 11,830 12,027 3 2
Industrial . . . . . . . . . . . . . . . . . . 10 10 8,734 9,080 — 4
Streetlights . . . . . . . . . . . . . . . . 4 4 143 141 — (1)

Total . . . . . . . . . . . . . . . . . . . . . 4,847 5,027 30,247 30,592 4 1

Meralco’s 12-month moving average system loss rate as at December 31, 2011 was at 7.35%, 0.59
percentage points lower compared with the 7.94% for the same period last year and
outperforming the ERC-imposed 8.5% cap by 1.15 percentage points.

Other Services

Revenues generated from Other Services business segment increased to P3,923 million, or 14%
higher compared with P3,444 million in 2010. The increase is due to the higher number of
Miescor transmission lines/substation maintenance contracts executed in 2011 and higher
volume of payment services business of CIS Bayad Center, Inc.

169
Management’s Discussion and Analysis

Costs and Expenses

Consolidated costs and expenses for the year ended December 31, 2011 amounted to P239,016
million, 5% higher compared with P228,640 million in 2010. Higher costs and expenses are
attributable to increases in purchased power, salaries and employee benefits, provisions for
probable charges and expenses from claims, contracted services and provision for doubtful
accounts, all mainly attributable to the power segment.

The following table shows the breakdown of Meralco’s consolidated costs and expenses for the
years ended December 31, 2010 and 2011 by business segment:
Increase/Decrease

2010 % 2011 % Amount %

(in P millions)
Power . . . . . . . . . . . . . . . . . . . . 227,716 100 237,351 99 9,635 4
Other Services . . . . . . . . . . . . . . 2,512 1 2,769 1 257 10
Inter-segment transactions . . . . . (1,588) (1) (1,104) — 484 (30)

Total . . . . . . . . . . . . . . . . . . . . . 228,640 100 239,016 100 10,376 5

Power

Costs and expenses of the power segment for the year ended December 31, 2011 amounted to
P237,351 million, 4% higher compared with P227,716 million in 2010 due to increase in
purchased power, salaries, wages and employee benefits, contracted services, and provision for
doubtful accounts. For the year ended December 31, 2011, purchased power cost increased by
P4,758 million or 2% to P205,674 million from P200,916 million in 2010. The increase in
purchased power cost is due to higher electricity volume purchased in 2011 at 33,081 GWh from
32,925 GWh in 2010, offset by the lower average purchased power cost of P6.22 per kWh or 2%
lower than in 2010.

Other Services

The cost and expenses of Other Services business segment for the years ended December 31,
2011 amounted to P2,769 million, 10% higher compared with P2,512 million in 2010, mainly due
to an increase in salaries, wages and employee benefits, contracted services, depreciation and
amortization.

Other Expenses (Income)

Consolidated other income, net of expenses for the year ended December 31, 2011 amounted to
P907 million, 12% lower compared with P1,025 million in 2010 due to an increase in borrowing
costs brought about by additional long term loans drawn in 2011, the absence of approvals of
under-recoveries with carrying charge, and the reversal of interest from bill deposits as a result
of reduction of interest rate in 2010.

The following table shows the breakdown of Meralco’s consolidated other income, net of
expenses, for years ended December 31, 2010 and 2011 by business segment:

170
Management’s Discussion and Analysis

Increase/ Decrease

2010 % 2011 % Amount %


(in P millions)

Power . . . . . . . . . . . . . . . . . . . . (1,811) 177 (1,689) 186 122 (7)


Other Services . . . . . . . . . . . . . . 21 (2) (99) 11 (120) (571)
Inter-segment transactions . . . . . 765 (75) 881 (97) 116 15

Total . . . . . . . . . . . . . . . . . . . . . (1,025) 100 (907) 100 118 (12)

Net Income Attributable to Equity Holders of the Parent

Consolidated net income attributable to equity holders of the parent increased by 37% t o
P13,227 million for the year ended December 31, 2011 from P9,685 million in 2010. It was largely
due to the higher sales volume, slightly higher distribution rate up to October 2011, and
improvement in the subsidiaries’ contribution brought by increased third party business volume.

The following table shows the breakdown of Meralco’s consolidated net income attributable to
the equity holders of Meralco for the years ended December 31, 2010 and 2011 by business
segment:
Increase/ Decrease

2010 % 2011 % Amount %

(in P millions)
Power . . . . . . . . . . . . . . . . . . . . 9,442 97 12,752 96 3,310 35
Other Services . . . . . . . . . . . . . . 1,403 14 1,906 14 503 36
Inter-segment transactions . . . . . (1,160) (11) (1,431) (10) (271) 23

Total . . . . . . . . . . . . . . . . . . . . . 9,685 100 13,227 100 3,542 37

Liquidity and Capital Resources

Meralco operates in a highly capital-intensive industry. Meralco’s liquidity requirements relate to


capital expenditures for substations, poles, wires, equipment and maintenance of its distribution
network, customer retail service and shared-services infrastructure; servicing its debt; funding its
working capital requirements; potential investment in its new gen eration business and
maintaining cash reserves against fluctuations in operating cash flows. Meralco’s funding and
treasury activities are conducted according to corporate policies designed to safeguard against
risks and generate appropriate returns while maintaining appropriate liquidity for its
requirements. Meralco currently holds its cash and cash equivalents primarily in Pesos. The
following table presents Meralco’s cash flow data for the years ended December 31, 2010, 2011
and 2012 and the nine-month periods ended September 30, 2012 and 2013:

171
Management’s Discussion and Analysis

Audited Unaudited
Years ended December 31 Nine months ended September 30

2010 2011 2012 2012 2013


(in P millions)
Consolidated Statements of Cash Flow
Net cashflows from operating
activities…………………………….. 20,358 31,934 36,244 27,372 29,743
Net cash used in investing
activities…………………………….. (6,292) (6,816) (9,549) (5,881) (14,503)
Net cash used in financing
activities…………………………….. (6,764) (4,578) (10,336) (9,825) (16,945)
Net increase (decrease) in cash
and cash equivalents…………. (7,302) 20,540 16,359 11,666 (1,705)

Capital Expenditures…………………. 9,053 8,997 10,321 5,989 6,126

Audited Unaudited
As at December 31, As at September 30,
2010 2011 2012 2012 2013
(in P millions)
Capitalization
Interest-bearing long-term financial liabilities
Current portion………………………………………. 5,574 4,560 2,360 2,366 2,331
Noncurrent portion………………………………… 15,498 19,816 20,466 22,429 20,086
Notes payable……………………………………………… 149 67 1,787 91 1,790
Equity attributable to equity holders of the
parent…………………………………………………….. 58,969 63,788 67,479 63,941 70,088
Other Selected Financial Data
Total assets………………………………………………. 178,968 210,388 217,073 208,512 223,437
Utility plant and others-net……………………… 103,250 105,510 109,312 107,215 110,668
Cash and cash equivalents……………………….. 24,370 44,141 60,500 55,807 58,795

As at September 30, 2013, the Meralco Group’s consolidated cash and cash equivalents totaled
P58,795 million, P1,705 million lower compared with P60,500 million as at December 31, 2012.
The following are the significant sources and uses of consolidated cash and cash equivalents in
the first nine months of 2013: cash flows from operating activities of P29,743 million, proceeds
from borrowings of long-term debt of P1,560 million, proceeds from subscription receivable of
P117 million, settlement of debt principal and interest of P5,395 million, capital expenditures of
P6,126 million, investment in and advances to FPM Power of P9,079 million, and dividend
payment amounting to P12,426 million.

These cash related activities were mainly driven by (i) higher pass -through charges which are
included in the amount collected from consumers but which will be paid within the following
month to the generation and transmission companies, (ii) amount of deposits related to higher
consumption and increase in customer accounts, (iii) collection of billed under -recoveries
approved by the ERC and (iv) increased amount of dividends.

Operating Activities

Consolidated net cash provided by operating activities for the nine months ended September 30,
2013 of P29,743 million was 9% higher compared with the same period in 2012 mainly due to

172
Management’s Discussion and Analysis

higher operating revenues. Consolidated net cash provided by operating activities for the year
ended December 31, 2012 of P36,244 million was 13.5% higher than that of 2011 mainly due to
higher operating revenues. Consolidated net cash provided by operatin g activities for the year
ended December 31, 2011 of P31,934 million was 56.9% higher than that of 2010, likewise mainly
due to higher operating revenues.

Investing Activities

Consolidated net cash flows used in investing activities for the nine months ended September 30,
2013 totalled P14,503 million, P8,622 million higher compared with P5,881 million used for the
same period in 2012. This was mainly due to the investment and advances to FPM Power
amounting to P9,079 million. Consolidated net cash flows used in investing activities for the year
ended December 31, 2012 totaled P9,549 million, 40% higher compared with P6,816 million used
in 2011. This was mainly due to higher capital expenditures. Consolidated net cash f lows used in
investing activities for the year ended December 31, 2011 totaled P6,816 million, 8% higher
compared with P6,292 million used in 2010. This was mainly due to additional investment in an
associate in 2011 while there was a return of investment which offset the impact of capital
expenditures in 2010.

Financing Activities

Consolidated net cash used in financing activities amounted to P16,945 million for the nine
months ended September 30, 2013, compared with P9,825 million in 2012. This was mainly due to
the long-term loan obtained in the first nine months of 2012 amounting to P3,000 million, higher
amount of dividend paid in 2013 of P12,426 million compared with P8,767 million in 2012 and
payment of interest on bill deposit amounting to P2,384 million this 2013. Consolidated net cash
used in financing activities amounted to P10,336 million for the year ended December 31, 2012,
126% higher than the P4,578 million used in 2011. This was mainly attributable to payment of
cash dividends amounting to P8,890 million, payment of interest and other financial charges from
deposits and loans amounting to P2,882 million, and settlement of long-term debt principal of
P4,565 million. Meralco availed of interest-bearing financial liabilities of P11,720 million in 2011
and P3,000 million in 2012. Consolidated net cash used in financing activities amounted to
P4,578 million in 2011, 32% lower than the P6,764 million used in 2010. This was mainly
attributable to higher availment of debt, net of repayments in 2011 compared with 2010, which
offset the higher dividends paid in 2011 compared with 2010.

173
Management’s Discussion and Analysis

Capital Expenditures

The table below sets out the capital expenditures of the Meralco Gr oup in 2010, 2011 and 2012 in
respect of its regulated asset base, together with its budgeted regulatory capital expenditures for
2013.

Capital Expenditures
Year Amount

(in P millions)
2010 (actual)…………………………………………………………………………………………………………………………………. 9,053
2011 (actual)………………………………..……………………………………………………………………………………………….. 8,997
2012 (actual)…………………………………………………………………………………………………………………………………. 10,321
2013 (budgeted)………………..…………………………………………………………………………………………………………. 12,510

Meralco has historically funded its capital expenditures through internally -generated funds and
long-term borrowings. Meralco expects to fund its budgeted capital expenditures for the balance
of the current Regulatory Period through June 2015 through the proceeds of t his offering and
cash from operations, as well as through other borrowings. The figures in Meralco’s regulatory
capital expenditure plans are based on the figures that have been approved by the ERC. These
figures do not include expenditures in respect of projects which are not part of Meralco’s
regulated asset base, such as capital expenditures required to be undertaken which were not
part of the current Regulatory Period capital expenditure approval of the ERC, and its
investments in power generation or other areas outside its core distribution business.

Quantitative and Qualitative Disclosure of Market Risk

Meralco’s principal financial instruments consist of its long -term debt, cash on hand and on
deposit, receivables and payables. These are used to provide funding for Meralco’s business
operations. Meralco does not generally enter into hedging transactions or engage in speculation
with respect to financial instruments. Meralco believes that the principal risks arising from its
financial instruments are interest rate and exchange rate risk.

Interest Rate Risk

Meralco’s exposure to interest rate risk relates primarily to its long -term debt. As of September
30, 2013, P3,375 million of Meralco’s total debt bore interest at floating rates and P17,546
million of its total debt bore interest at fixed rates. Therefore, fluctuations in interest rates could
have the effect of increasing the interest due on Meralco’s outstanding debt and increases in
such rates could make it more difficult for Meralco to pro cure new debt, or refinance existing
debt, on attractive terms. Meralco does not currently engage in interest rate derivative or swap
activities.

Exchange Rate Risk

Historically, Meralco has maintained its accounting records and has prepared its financia l
statements in Pesos. A small portion of its revenues and expenses are denominated in U.S.
dollars. Purchased power from certain suppliers is denominated and paid in U.S. dollars.

174
Management’s Discussion and Analysis

Accordingly, changes in the value of the U.S. dollar against the Peso will affect the reported
revenues and expenses in Meralco’s financial statements. Additionally, changes in exchange rates
influence the cost of Meralco’s borrowings denominated in currencies other than Pesos and the
Peso value of such borrowings on Meralco’s consolidated statements of financial position.
Meralco currently does not engage in foreign exchange derivative or swap activities.

175
Management’s Discussion and Analysis

Recent and Prospective Changes in Accounting Policies

The Philippine Financial Reporting Standards Council issued new and r evised accounting
standards effective for fiscal years beginning on or after January 1, 2013. The new standards are
called Philippine Accounting Standards and Philippine Financial Reporting Standards (“PFRS”).
Meralco has adopted and implemented PFRS and Meralco’s consolidated financial statements
included in this Prospectus have been prepared in accordance with PFRS.

Beginning January 1, 2013, the Company adopted amendments to PAS 19, Employee Benefits
which became effective for annual periods beginning on or after January 1, 2013. The
amendments require that for defined employee benefit plans, all actuarial gains and losses to be
recognized in “Other comprehensive income” and unvested service costs previously recognized
over the average vesting period to be recognized immediately in profit or loss when incurred.
Prior to adoption of the amendments to PAS 19, the Company recognized actuarial gains and
losses as income or expense when the net cumulative unrecognized gains and losses for each
individual plan at the end of the previous period exceeded 10% of the higher of the defined
benefit obligation and the fair value of the plan assets and recognized unvested past service costs
as an expense on a straight-line basis over the average vesting period until the benefits become
vested. Upon adoption of the amendments in PAS 19, the Company applied the amendments
retroactively to the earliest period presented in the unaudited interim consolidated financial
statements as of September 30, 2013, December 31, 2012 and January 1, 2012 and for the nine
months ended September 30, 2013 and 2012 included in this Prospectus.

For further discussion of these new accounting standards as relevant to Meralco, see Note 4 to
Meralco’s audited consolidated financial statements contained elsewhere in this Prospectus.

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DIRECTORS, EXECUTIVE OFFICERS AND
CONTROL PERSONS

The Board of Directors

The Board is principally responsible for Meralco’s overall direction and governance. As a matter of
practice, the Board meets at least once a month to review and monitor Meralco’s performance.

Meralco’s Articles of Association provide for eleven members of the Board, who shall be elected
by the stockholders. At present, two of Meralco’s eleven directors are independent directors. The
Board holds office for one (1) year and until their successors are elected and qualified in
accordance with the By-laws.

The Company’s current Board was elected on May 28, 2013 by the Company’s stockholders. The
composition of the Board as of the date of this Prelimary Prospectus, is as follows:

Name Age Title Date


Manuel V. Pangilinan 67 Director since May 26, 2009
President and July 1, 2010 to May 29, 2012
CEO Chairman since May 29, 2012
Ramon S. Ang 59 Director and Vice Chairman since February 1, 2009
Oscar S. Reyes. 67 Director since July 26, 2010
Chief Operating Officer July 26, 2010 to May 29,
President and CEO 2012
Ray C. Espinosa 57 Director 29, 2009
since May 26, 2012
Jose Ma. K. Lim 60 Director since May 29, 2012
Manuel M. Lopez 70 Director since April 14, 1986
Chairman and CEO July 1, 2001 to June 30, 2010
Chairman July 1, 2010 to May 29, 2012
Estelito P. Mendoza 83 Director since February 1, 2009
Artemio V. Panganiban 76 Independent Director since May 27, 2008
.Vicente L. Panlilio 67 Independent Director May 27, 2008 to May 25,
Director 2010
Eric O. Recto 49 Director since
since June
June 28,
28, 2010
2010
Pedro E. Roxas 56 Independent Director since May 25, 2010
Simeon Ken R. Ferrer 56 Corporate Secretary since May 26, 2009

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Directors, Executive Officers and Control Persons

Members of the Board

Mr. Manuel V. Pangilinan has been a Director since 2009 and Chairman since 2012. He is the
Chairman of Philippine Long Distance Telephone Company (“PLDT”), the country’s dominant
telecommunications company; Smart Communications, Inc., the largest mobile phone operator in
the Philippines; and, PLDT Communications and Energy Ventures. He is the Chief Executive Officer
and Managing Director of First Pacific Company Limited, a publicly -listed company in Hong Kong
and Co-Chairman of the newly-organized US-Philippines Business Society. He also serves as
Chairman of Metro Pacific Investments Corporation, Landco Pacific Corporation, Medical Doctors,
Inc., Colinas Verdes Corporation (operating the Makati Medical Center and Cardinal Santos
Medical Center), Davao Doctors, Inc., Riverside Medical Center, Inc. in Bacolod City, Our Lady of
Lourdes Hospital, Asian Hospital, Inc. Maynilad Water Services Corporation, Mediaquest, Inc.,
Associated Broadcasting Corporation (TV5), Philex Mining Corporation and Manila North Tollways
Corporation. Mr. Pangilinan was a member of the Board of Overseers of The Wharton School,
University of Pennsylvania. He is the Chairman of the Board of Trustees of San Beda College and
was Chairman of the Board of Trustees of the Ateneo de Manila University. Mr. Pangilinan holds a
Bachelor of Arts degree, cum laude, in Economics from the Ateneo de Manila University and a
Masters in Business Administration from Wharton School of Finance and Commerce, University of
Pennsylvania, where he was a Procter & Gamble Fellow.

Mr. Ramon S. Ang has been a Director and Vice Chairman since 2009. He is the Vice Chairman,
President and Chief Operating Officer of San Miguel Corporation. He is the Chairman and Chief
Executive Officer of Petron Corporation, Petron Marketing Corporation and SMC Global Power
Holdings Corporation. Mr. Ang also holds the following positions: President and Chief Operating
Officer of PAL Holdings, Inc. and Philippine Airlines, Inc.; Vice Chairman of Ginebra San Miguel,
Inc., San Miguel Pure Foods Company, Inc. and San Miguel Yamamura Haiphong Glass Co. Limited
(Vietnam); Director of Air Philippines Corporation; Chairman of San Miguel Brewery Inc., San
Miguel Foods, Inc., The Purefoods-Hormel Company, Inc., San Miguel Yamamura Packaging
Corporation, South Luzon Tollway Corporation, Eastern Telecommunications Philip pines, Inc.,
Liberty Telecoms Holdings, Inc., Sea Refinery Corporation and Philippine Diamond Hotel and
Resort Inc.; Chairman and President of San Miguel Properties, Inc., San Miguel Consolidated Power
Corporation, San Miguel Electric Corporation, San Miguel Energy Corporation, SMC Consolidated
Power Corporation, SMC Power Generation Corporation and SMC PowerGen, Inc. Mr. Ang is a
Director of other subsidiaries and affiliates om the San Miguel Group of the Philippines and
Southeast Asia. He holds a Bachelor of Science degree in Mechanical Engineering from Far Eastern
University.

Mr. Oscar S. Reyes has been a Director since 2010 and President and CEO since 2012. He is a
member of the Advisory Board of Philippine Long Distance Telephone Company and of the Boa rd
of Directors of the Bank of the Philippine Islands, Manila Water Company, Inc., Ayala Land, Inc.,
Smart Communications, Inc., Pepsi Cola Products Philippines, Inc., Sun Life Financial Phils., Inc.,
Basic Energy Corporation and COSCO Capital Corporation, among other firms. He is also President
of Meralco PowerGen Corporation and Chairman of Pepsi Cola Products Philippines, Inc., Meralco
Industrial Engineering Services Corporation, CIS Bayad Center, Meralco Energy, Inc., Redondo

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Directors, Executive Officers and Control Persons

Peninsula Energy, Inc. and Link Edge, Inc. He served as Country Chairman of the Shell Companies in
the Philippines and concurrently President of Pilipinas Shell Petroleum Corporation and Managing
Director of Shell Philippines Exploration B.V. He is a member of the Board of Trus tees of One
Meralco Foundation, Inc., Pilipinas Shell Foundation, Inc., SGV Foundation, Inc. and El Nido
Foundation, Inc. He holds a Bachelor of Science degree, cum laude, in Economics from the Ateneo
de Manila University and finished post-graduate studies at the Ateneo Graduate School of
Business Administration, Waterloo Lutheran University as a Colombo Plan Fellow and the Harvard
Business School.

Atty. Ray C. Espinosa has been a Director since 2009. He is the President and Chief Executive
Officer of Mediaquest Holdings, Inc., ABC Development Corporation (TV5), Mediascape, Inc.
(Cignal TV), Nation Broadcasting Corporation, and other subsidiaries of Mediaquest Holdings Inc.
He is a member of the Board of Directors of Philippine Long Distance Telephone Compa ny, Metro
Pacific Investments Corporation, Lepanto Consolidated Mining Corporation and Wolfpac Mobile,
Inc.; Vice Chairman of Philweb Corporation; and was President and Chief Executive Officer of
ePLDT, Inc. Atty. Espinosa holds a Bachelor of Laws degree, salutatorian, from the Ateneo de
Manila University and a Master of Laws degree from the University of Michigan Law School as a
Clyde Alton Dewitt Fellow. He placed first in the Philippine Bar examinations in 1982.

Mr. Jose Ma. K. Lim has been a Director since 2012. He is the President and Chief Executive Officer
of Metro Pacific Investments Corporation. He is a member of the Board of Directors of Beacon
Electric Asset Holdings, Inc., Metro Pacific Tollways Corporation, Manila North Tollways
Corporation, Tollways Management Corporation, Maynilad Water Services, Inc., Medical Doctors,
Inc., Cardinal Santos Medical Center, Our Lady of Lourdes Hospital and Asian Hospital. He serves as
Chairman of Davao Doctors Hospital and Riverside Medical Center in Bacolod Ci ty. He is a
Founding Member and Treasurer of the Shareholders Association of the Philippines. Mr. Lim holds
a Bachelor of Arts degree in Philosophy from the Ateneo de Manila University and a Masters in
Business Administration from the Asian Institute of Ma nagement.

Ambassador Manuel M. Lopez has been a Director since 1986. He was Chairman and CEO from July
1, 2001 to June 30, 2010 and Chairman of Meralco from July 1, 2010 to May 29, 2012. He is the
Philippine Ambassador to Japan. He is concurrently the Cha irman and CEO of Lopez Holdings
Corporation and is the Chairman of Indra Philippines, Inc., Bayan Telecommunications, Inc., Bayan
Telecommunications Holdings Corporation, Rockwell Land Corporation and Rockwell Leisure Club.
He is the Vice Chairman of First Philippine Holdings Corporation and a member of the Board of
Directors of ABS-CBN Corporation, ABS-CBN Holdings Corporation, Sky Cable Corporation and First
Philippine Realty Corporation. He is also the President of Eugenio Lopez Foundation, Inc.

Atty. Estelito P. Mendoza has been a Director since 2009. He is the Managing Partner of Estelito P.
Mendoza and Associates. He is a member of the Board of Directors of San Miguel Corporation,
Petron Corporation, Philippine National Bank and Philippine Airlines, I nc. A practicing lawyer for
more than 60 years, he was consistently listed as a “Leading Individual in Dispute Resolution”
among lawyers in the Philippines in the following directories/journals: “The Asia Pacific Legal

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Directors, Executive Officers and Control Persons

500”, “Chambers of Asia” and “Which Lawyer?” yearbooks for several years. He has also been a
Professorial Lecturer of law at the University of the Philippines and served as Solicitor General,
Minister of Justice, Member of the Batasang Pambansa and Provincial Governor of Pampanga. He
was also the Chairman of the Sixth (Legal) Committee, 31st Session of the UN General Assembly
and the Special Committee on the Charter of the United Nations and the Strengthening of the Role
of the Organization. He holds a Bachelor of Laws degree from the Universi ty of the Philippines and
Master of Laws degree from Harvard Law School.

(Ret.) Chief Justice Artemio V. Panganiban has been an Independent Director since 2008. He was a
former Chief Justice of the Supreme Court of the Philippines. He was also Chairperson of the
Presidential Electoral Tribunal, Judicial and Bar Council and Philippine Judicial Academy. He is also
an Independent Director of Petron Corporation, Bank of the Philippine Islands, First Philippine
Holdings Corporation, Metro Pacific Investments Corporation, Metro Pacific Tollways Corporation,
Robinsons Land Corporation, GMA Network, Inc., GMA Holdings, Inc. and Asian Terminals, Inc.;
and Independent Adviser of Philippine Long Distance Telephone Company. He is a Senior Adviser
of Metropolitan Bank and Trust Company, Chairman of the Board of Advisers of Metrobank
Foundation, Chairman of the Board of Trustees of Foundation for Liberty and Prosperity and
Philippine Dispute Resolution Center, Inc.; and a columnist for the Philippine Daily Inquirer. He
holds a Bachelor of Laws degree, cum laude, from the Far Eastern University and was awarded
the degree of Doctor of Laws (Honoris Causa) by the University of Iloilo, Far Eastern University,
University of Cebu, Angeles University and Bulacan State University. He placed sixth in the
Philippine Bar Examinations in 1960.

Mr. Vicente L. Panlilio has been a Director since 2010. He was an Independent Director from May
27, 2008 to May 25, 2010. He is a member of the Board of Directors of San Fernando Electric Light
and Power Company and Bank of Commerce. He previously served as a Director of Equitable
PCIBank and Philippine National Bank, where he was chairman and membe r of various committees
notably Audit and Risk Management Committee. He was also Chief Operating Officer and member
of the Advisory Board of Far East Bank and Trust Company. Mr. Panlilio holds a Bachelor of Science
degree in Economics from the University of the Philippines and attended the Advanced Bank
Management Program of the Asian Institute of Management.

Mr. Eric O. Recto has been a Director since 2010. He is the Chairman of Philippine Bank of
Communications; Vice Chairman of Petron Corporation, Alphaland Corporation, Atok-Big Wedge
Co., Inc. and Philweb Corporation. He is a member of the Board of Directors of San Miguel
Corporation; President and Director of Top Frontier Investment Holdings, Inc. and Q -Tech
Alliance Holdings, Inc.; and President of ISM Communications Corporation. He was also President
and Chief Executive Officer of Petron Corporation, Chief Executive Officer of Eastern
Telecommunications Phils., Inc.; and Director of Philex Mining Corporation, Philex Petroleum
Corporation and Maynilad Water Services, Inc. Mr. Recto holds a Bachelor of Science degree in
Industrial Engineering from the University of the Philippines and a Masters in Business
Administration from Cornell University.

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Directors, Executive Officers and Control Persons

Mr. Pedro E. Roxas has been an Independent Director since 2010. He is the Chairman, President
and Chief Executive Officer of Roxas and Company, Inc. He is also the Chairman and President of
Roxaco Land Corporation; Chairman of Roxas Holdings, Inc., Central Azucarera Don Pedro, Inc.,
Central Azucarera de la Carlota, Inc., Roxol Bioenergy Corporation, Club Punta Fuego, Inc., Fuego
Land Corporation and Hawaiian Philippine Sugar Company. He is a member of the Board of
Directors of Philippine Long Distance Telephone Company, BDO Private Bank and Brightnot e
Assets Corporation; President of Philippine Sugar Millers Association and Fundacion Santiago;
and Trustee of Philippine Business for Social Progress. Mr. Roxas holds a Bachelor of Science
degree in Business Administration from the University of Notre Dame.

Atty. Simeon Ken R. Ferrer has been the Corporate Secretary since 2009. He is a Senior Partner at
the SyCip Salazar Hernandez and Gatmaitan Law Firm and is Chairman of the firm’s Hiring
Committee. He is the President and Chairman of Maxim Philippine Land Corporation. He is also
Director and Corporate Secretary of Habibi Cove Realty Corporation, Marbelene Realty
Corporation, Maxim Philippine Assembly Corporation, Maxim Philippine Holding Corporation,
Maxim Philippines Operating Corporation, Microdel Holdings, Inc., and Park Lane Assets, Inc.; Vice
Chairman of Philwater Holdings Company, Inc., among others. Atty. Ferrer is a member of the
Integrated Bar of the Philippines and the Philippine Bar Association. He is also the International
Alumni Contact for the Philippines of the University of Michigan Alumni Association. He holds a
Bachelor of Science degree in Business Economics and Bachelor of Laws degree from the
University of the Philippines and a Master of Laws degree from the University of Michigan as a
DeWitt Fellow.

Board Committees

The Board currently has five committees for corporate governance purposes: the Executive
Committee, the Remuneration and Leadership Development Committee, the Nomination and
Governance Committee, the Audit and Risk Management Committee and the Finance
Committee. The Executive Committee, chaired by Mr. Manuel V. Pangilian, may act on such
matters within the competence of the Board as delegated to it under the By -Laws. The
Remuneration and Learning Development Committee, chaired by Mr. Manuel V. Pangilian,
assists the Board in the development of the Company’s overall performance management,
compensation, retirement and leadership development policies and programs based on the
Company-approved philosophy and budget. The Nomination and Governance Committee,
chaired by Mr. Pedro E. Roxas, screens qualified nominees for election as directors, assesses
the independence of directors, introduces improvements on Board organization and
procedures, sets up mechanisms for performance evaluation of the Board and Management
and provides programs for continuing education of the Board. The Audit and Risk Management
Committee, chaired by (Ret.) Chief Justice Artemio V. Panganiban, assists the Board in its
oversight responsibilities with respect to the financial reporting proces s, the system of internal
control, the audit process, the risk management process and the company’s process of
monitoring compliance with laws and regulations. The Finance Committee, chaired by Atty. Ray
C. Espinosa, reviews the financial operations of the Company and matters regarding major
purchase contracts and acquisition and/or divestment of investments, businesses or ventures.

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Directors, Executive Officers and Control Persons

Key Executive Officers

The Company’s management is responsible for the Company’s day-to-day operations. More
specifically, the management is responsible for the implementation and execution of projects,
plans and programs, managing company finances including disbursements and payments and
approval of transactions within the limits of its authority.

As of the date of this Prospectus, the Company employed the following key executive officers:

Name Age Title


Oscar S. Reyes……………………. . 67 President and CEO (since May 2012)
Ricardo V. Buencamino . . . . . 68 Senior Executive Vice President (since January
2013) and Head, Networks
Aaron A. Domingo . . . . . . . . . 50 Executive Vice President (since 2010) and
General Manager
Roberto R. Almazora . . . . . . . 52 Senior Vice President (since March 2009) and
Energy Market Adviser
Angelito D. Bermudo . . . . . . . 53 Senior Vice President
.Alfredo S. Panlilio . . . . . . . . . 50 Senior Vice President (since September 2010) and
Head, Customer Retail Services and Corporate
Ramon B. Segismundo . . . . . . 55 Communication
Senior Vice President (since February 2010) and
Head, Human Resources and Corporate Services
Betty C. Siy-Yap . . . . . . . . . . . 51 Senior Vice President and Chief Finance Officer
(since July 2009)
Rafael L. Andrada . . . . . . . . . 53 First Vice President (since January 2005), Treasurer
(since 1998) and Head, Investment Management
Ruben B. Benosa . . . . . . . . . . 56 First Vice President (since January 2010) and Head,
Corporate Logistics Office
Helen T. De Guzman . . . . . . . 55 First Vice President (since January 2010) and Head,
Internal Audit
Ivanna G. Dela Peña . . . . . . . 59 First Vice President (since January 2010) and Head,
Regulatory Management Office
William S. Pamintuan . . . . . . 51 First Vice President (since January 2012), Deputy
General Counsel, Assistant Corporate Secretary,
Compliance Officer, Information Disclosure Officer
and Head, Legal
Ireneo D. Acuña . . . . . . . . . . 47 Vice President (since January 2013) and Head,
Electric Distribution and Development Office
Angelita S. Atanacio . . . . . . . 54 Vice President (since June 2008) and Head,
Organization Transformation and Management
Bennette D. Bachoco . . . . . . . 44 Services
Vice President (since September 2011) and
Head, Financial Planning and Reporting

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Directors, Executive Officers and Control Persons

Edgardo V. Carasig . . . . . . . . 47 Vice President (since January 2013) and Head,


HR Operations
Marthyn S. Cuan . . . . . . . . . . 33 Vice President (since January 2011) and Chief
Information Officer
Rustico C. De Borja, Jr. . . . . . 58 Vice President (since July 2007) and
Head, Sub-Transmission Services
Gerardo F. Dela Paz . . . . . . . . 54 Vice President (since January 2010) and Deputy
Head, Corporate Governance
Manolo C. Fernando . . . . . . . 57 Vice President (since January 2010), Assistant
Treasurer (since July 2001) and Head, Treasury
Services and Investment Planning and Monitoring
Name Age Title
Ferdinand O. Geluz. . . . . . . . 48 Vice President (Since January 2013) and Head, Home
and MicroBiz Group-Central Business Area
Victor S. Genuino. . . . . . . . . . 41 Vice President (since January 2011) and Head,
Corporate Business Group
Nixon G. Hao. . . . . . . . . . . . . 54 Vice President (Since June 2008) and Head,
Network Asset Management
Fortunato C. Leynes. . . . . . . . 55 Vice President (since January 2006) and Head,
Retail Electricity Supplier
Redentor L. Marquez . . . . . . 55 Vice President (since January 2008) and Head, Home
and Micro-Biz Group-North Business Area
Raymond B. Ravelo . . . . . . . . 35 Vice President (since May 2011) and Head, Strategy
and Corporate Development
Jose Rainier A. Reyes . . . . . . 44 Vice President (since January 2013) and Head,
Small & Medium Enterprise Business Group
Nestor P. Sarmiento . . . . . . . 54 Vice President (since January 2012) and Head,
Engineering Design
Liza Rose G.Serrano-Diangson 53 Vice President (since January 2010) and Head,
Customer Process
Jose Antonio T. Valdez . . . . . 48 Vice President (since January 2011) and Head,
Marketing Customer Solutions and Innovations

Mr. Ricardo V. Buencamino has been Senior Executive Vice President since January 2013 and
is the Head of Networks. He is a Director of Clark Electric Distribution Corporation, Me ralco
Energy, Inc., Calamba Aero Power Corporation, Atimonan Land Ventures Development
Corporation, Meralco Industrial Engineering Services Corporation and Asian Hospital, Inc. He
is also Director and Vice Chairman of General Electric Philippines Meter and Instrument Co.
Inc. He was formerly a Director of First Private Power Corporation, Landbees Corporation,
Miescor(USA), Inc. and MiescorBuilders, Inc.
Mr. Aaron A. Domingo has been Executive Vice President and General Manager since 2010.
He is the Managing Director of FPM Power Holdings Limited. He is also currently a Director of

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Directors, Executive Officers and Control Persons

PacificLight Power Pte. Ltd., Luzon Natural Gas Energy Corporation, Atimonan Land Ventures
Development Corporation, Redondo Peninsula Energy Inc. and Calamba Aero Po wer
Corporation. He previously served as Managing Director of Moneta Capital Limited, UPC
Renewables Partners BV, and Noble Energy Development Limited. He has also served as the
Chief Operating Officer of Asian Energy Ventures Group, as a Director in General Electric, and
as an Analyst for Nippon Credit Bank. He holds a Bachelor of Science degree in Business
Administration from Syracuse University and a Masters degree in Business Administration
from the University of Chicago Booth School of Business.
Mr. Roberto R. Almazora has been Senior Vice President since 2009 and Energy Market
Adviser. He previously served as a Director of Meralco Energy, Inc., Meralco Industrial
Engineering Services Corporation, General Electric Philippines Meter and Instrument Co.,
Inc., Miescor Builders, Inc., Landbees Corporation, Clark Electric Distribution Corporation
and First Private Power Corporation.
Mr. Angelito D. Bermudo is currently serving as a Senior Vice President. Concurrently, he is
also the President and Chief Executive Officer of the Miescor group, Miescor, Miescor
Builders Inc. and Miescor Logistics Inc. He has over 30 years of experience in the
construction industry and has previously served as the President and Chief Executive Officer
of Atlantic Gulf & Pacific Company of Manila and Deputy General Manager of Linde Arabian
Contractors. He is a licensed mechanical engineer and holds a Bachelor of Science degree in
Mechanical Engineering from the University of the Philippines and a Masters degree in
Business Management from the Asian Institute of Management.
Mr. Alfredo S. Panlilio has been Senior Vice President since 2010 and is the Head of Customer
Retail Services and Corporate Communication. He is a Director of PLDT Global Corporation,
Mabuhay Satellite Corporation, CIS Bayad Center, Inc., Corporate Information Solutions, Inc.,
Customer Frontline Solutions, in (formerly Outsourced Telleserve Corporation), Meralco
Energy, Inc., Miescorrail, Inc., Radius Telecoms, Inc., Paragon Vertical Co rporation and Indra
Philippines, Inc. He also serves as Vice Chairman and Trustee of First Pacific Leadership
Academy, Inc.; Trustee of One Meralco Foundation, Inc. and Loyola Agila Futbol Club, Inc.;
and President of MVP Sports Foundation, Inc. He was formerly a Director of Asean Telecon
Holdings Sdn Bhd and Aces Philippines Cellular Satellite Corporation.
Mr. Ramon B. Segismundo has been Senior Vice President since 2010 and is the Head of
Human Resources and Corporate Services. He is the Vice Chairman and Governor of the
Philippine Basketball Association. He is also the Chairman of Customer Frontline Solutions,
Inc. (formerly Outsourced Telleserve Corporation). He serves as a Director of Meralco
Industrial Engineering Services Corporation, CIS Bayad Center, Inc. and General Electric
Philippines Meter and Instrument Co., Inc.; Trustee of One Meralco Foundation, Inc.,
MMLDC Foundation, Inc., Meralco Pension Fund and Loyola Agila Futbol Club, Inc.
Ms. Betty C. Siy-Yap has been Senior Vice President and Chief Finance Officer since 2009.
She is a Director of Republic Surety and Insurance Co., Inc., Meralco Industrial Engineering
Services Corporation, Clark Electric Distribution Corporation, General Electric Philippines
Meter and Instrument Co., Inc., CIS Bayad Center, Inc., Miescorrail, Inc., Meralco Financial
Services Corporation, Indra Philippines, Inc., Meralco PowerGen Corporation, Calamba Aero
Power Corporation, Philippine Commercial Capital, Inc., Redondo Peninsula Energy, Inc.,
Atimonan Land Ventures Development Corporation, and Radius Telecoms, Inc. She is also the
President of Lighthouse Overseas Insurance Limited; Trustee of Meralco Pension Fund, One

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Directors, Executive Officers and Control Persons

Meralco Foundation, Inc., and Loyola Agila Futbol Club, Inc.; Treasurer of MVP Sports
Foundation, Inc. and First Pacific Learning Academy, Inc. She serves as Alternate Governor of
the Philippine Basketball Association and was a Director of Rockwell Land, Inc. and e -
Meralco Ventures, Inc. She was a Partner of SyCip Gorres Velayo & Co. from 1995 to 20 09.
Mr. Rafael L. Andrada has been First Vice President since 2005, Treasurer since 1998 and is
the Head of Investment Management. He is a Director of Bauang Private Power Corporation,
CIS Bayad Center, Inc., General Electric Philippines Meter and Instrume nt Co., Inc., Republic
Surety and Insurance Co., Inc., Meralco Industrial Engineering Services Corporation and First
Private Power Corporation. He also serves as Director and Treasurer of Clark Electric
Distribution Corporation and Lighthouse Overseas Insurance Limited; and Treasurer of
Meralco PowerGen Corporation, Calamba Aero Power Corporation, Redondo Peninsula
Energy, Inc. and Atimonan Land Ventures Development Corporation. He was former Trustee
of Meralco Pension Fund.
Mr. Ruben B. Benosa has been First Vice President since 2010 and is the Head of the
Corporate Logistics Office. He is the Chairman of Meralco Financial Services Corporation. He
is also a Director of Radius Telecoms, Inc., Meralco Energy, Inc. and Miescorrail, Inc. He has
been a Director of e-Meralco Ventures, Inc., Miescor Builders, Inc., Miescor Logistics, Inc. and
BayanTrade, Inc.; and Chairman of Outsourced Telleserve Corporation.
Ms. Helen T. De Guzman has been First Vice President since 2010 and is the Head of
Corporate Audit. She served as a Director of Outsourced Telleserve Corporation and Miescor
Builders, Inc. She is a Member and past Director and Chapter President of the Institute of
Internal Auditors Philippines and the Philippine Institute of Certified Public Accou ntants. She
was also the Honorary Treasurer of the Asian Confederation of Institutes of Internal
Auditors in 2008.
Ms. Ivanna G. Dela Peña has been First Vice President since 2010 and is the Head of
Regulatory Management Office. She is a Director of Clark Electric Distribution Corporation,
Radius Telecoms, Inc., Share An Opportunity and Medical Ambassadors Philippines, Inc.
Atty. William S. Pamintuan has been First Vice President since 2012, Deputy General
Counsel, Assistant Corporate Secretary, Compliance Officer, Information Disclosure Officer
and is the Head of Legal. He is the Corporate Secretary of Meralco PowerGen Corporation,
Atimonan Land Ventures Development Corporation, Calamba Aero Power Corporation,
Redondo Peninsula Energy, Inc., Meralco Industrial Engineering Services Corporation and
First Pacific Leadership Academy, Inc. He is also a Director of Miescorrail, Inc. and Assistant
Corporate Secretary of Cebu Air, Inc. He was former Corporate Secretary and Senior Vice
President at Digital Telecommunications Phils, Inc. and Digitel Mobile Phils., Inc.; and,
General Manager of Digitel Crossing, Inc. He holds a Bachelor of Arts degree in Political
Science and Bachelor of Laws degree from the University of the Philippines.
Mr. Ireneo D. Acuña has been Vice President since January 2013 and is the Head of Electric
Distribution and Development Office. He is a Director of Miescor Builders, Inc. He previously
served as Director of Miescor Logistics, Inc. and e -Meralco Ventures, Inc.
Ms. Angelita S. Atanacio has been Vice President since 2008 and is the Head of Organization
Transformation and Management Services. She is a Director of Meralco Financial Services
Corporation. She was formerly a Director of Miescorrail, Inc.

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Directors, Executive Officers and Control Persons

Ms. Bennette D. Bachoco has been Vice President since 2011 and is the Head of Financial
Planning and Reporting. She is a Director of Miescor Builders, Inc. and Customer Frontline
Solutions, Inc. (formerly Outsourced Telleserve Corporation) and Meralco Energy, Inc. She
previously served as Senior Vice President for Finance of Trans-Asia Oil and Energy
Development Corporation and was a Partner of SyCip Gorres Velayo & Co, from 2003 to
2009.
Mr. Edgardo V. Carasig has been Vice President since January 2013 and is the Head of HR
Operations. He is a Director of Customer Frontline Solutions, Inc. and Miescor Logistics, Inc.
Mr. Marthyn S. Cuan has been Vice President since 2011 and is the Chief Information Officer.
He is a Director of Radius Telecoms, Inc. and Indra Philippines, Inc. He is the Vice President
and Co-Founder of Ideaspace Foundation. He was a Director of e -Meralco Ventures, Inc. and
served as the Operations Head, Information Enterprise Services of Deutsche Bank Group-
Manila Shared Service Center.
Mr. Rustico C. De Borja, Jr. has been Vice President since 2007 and is the Head of Sub-
Transmission Services. He was a Director of Meralco Industrial Engineering Services
Corporation, Miescor Builders, Inc., and Meralco Employees Savings and Loan Association.
He was a former Trustee of Meralco Management and Leadership Development Corporation.
Mr. Gerardo F. Dela Paz has been Vice President since 2010 and is the Deputy is the Head of
the Corporate Governance Office. He is the Founding Member of Good Governance
Advocates and Practitioners of the Philippines. He is also the Secretary and Treasurer of
Harvest Time Philippines. He previously served as a Trustee and Trea surer of Meralco
Management and Leadership Development Corporation.
Mr. Manolo C. Fernando has been Vice President since 2010, Assistant Treasurer since 2001
and is the Head of Treasury Services and Investment Planning & Monitoring. He is a
Director of Republic Surety and Insurance Co., Inc., Miescor Log istics, Inc., Customer
Frontline Solutions, Inc. (formerly Outsourced Telleserve Corporation) and ATRKE Philippine
Balanced Fund, Inc. He is also the President and Director of Meralco Financial Services
Corporation; Treasurer of Meralco Energy, Inc., Meralco Industrial Engineering Services
Corporation, e-Meralco Ventures, Inc. and Radius Telecoms, Inc. He has been the Chairman,
Public Affairs Committee of Financial Executives Institute of the Philippines.
Mr. Ferdinand O. Geluz has been Vice President since January 2013 and is the Head of Home
and Micro-Biz Group — Central Business Area. He served as a Director of Meralco Energy,
Inc.
Mr. Victor S. Genuino has been Vice President since 2011 and is the Head of the Corporate
Business Group. He is a Director of Customer Frontline Solutions, Inc. (formerly Outsourced
Telleserve Corporation), Miescor Logistics, Inc. and Miescor Builders, Inc. He is also a
Trustee of Loyola Agila Futbol Club, Inc. He was former District Head, Hong Kong and
Singapore of PLDT (HK) Ltd.
Mr. Nixon G. Hao has been Vice President since 2008 and is the Head of Network Asset
Management. He is a Director of Clark Electric Distribution Corpo ration, Society of Risk
Management Professionals, Inc. and Philippine Electricity Market Corporation. He was a
Director of e-Meralco Ventures, Inc. and Meralco Employees Savings and Loan Association,
Inc.

186
Directors, Executive Officers and Control Persons

Mr. Fortunato C. Leynes has been Vice President since 2006 and is the Head of Retail
Electricity Supply. He is a Director of Clark Electric Distribution Corporation. He is also the
Chairman of Board of Electrical Engineering, Professional Regulation Commission. He has
been a Director of Meralco Financial Services Corporation.
Mr. Redentor L. Marquez has been Vice President since 2008 and is the Head of Home and
Micro-Biz Group — North Business Area. He is a Director of Meralco Savings and Loan
Association. He was a Director of Meralco Energy, Inc. and Mera lco Industrial Engineering
Services Corporation.
Mr. Raymond B. Ravelo has been Vice President since 2011 and is the Head of Strategy and
Corporate Development. He is a Director and the President and Chief Executive Officer of
Radius Telecoms, Inc. He is also a Trustee of Wharton Penn Alumni Association, Inc. He
formerly served as Engagement Manager of McKinsey and Company.
Mr. Jose Rainier A. Reyes has been Vice President since January 2013 and is the Head of the
Small & Medium Enterprise Business Group. He previously served as Head of Sales of Globe
Telecom.
Mr. Nestor P. Sarmiento has been Vice President since 2012 and is the Head of Engineering
Design. He is a Director of Miescor Logistics, Inc., Miescor Builders, Inc. and Radius
Telecoms, Inc. He is also a Director and the Corporate Secretary of Distribution Management
Committee, representing Luzon Private and Local Government Distributors.
Ms. Liza Rose G. Serrano-Diangson has been Vice President since 2010 and is the Head of
Customer Process. She served as a Director of Customer Frontline Solutions, Inc. and was
former Trustee of Meralco Millennium Foundation, Inc.
Mr. Jose Antonio T. Valdez has been Vice President since 2011 and is the Head of Marketing
Customer Solutions and Innovations. He is a Director of Bahay Maria, a shelter for street
children in Makati. He was formerly the Head of Business Development and Marketing of
PLDT Global Corporation and Vice President for Retail Marketing of PLDT.
Significant employees

The Company has no other employees that are expected to make as significant a
contribution to the business as its executive officers.

Family relationships

There are no family relationships up to the fourth civil degree, either by consanguinity or
affinity, among directors, executive officers, or nominees.

187
EXECUTIVE COMPENSATION

Compensation
The aggregate annual compensation for the last two fiscal years and projected
compensation for the ensuing year of Meralco’s Chief Executive Officer and four most highly
compensated executive officers, as a group, and all other key officers, other officers and
directors, as a group, are as follows:

Name Year Salaries 1 Other Compensation 2


(In Millions of Pesos) (In Millions of Pesos)
Chief Executive Offier Projected 2013 4 123 222
and 4 most highly 2012 3 106 34
compensated 2011 90 45
executive officers
All other key officers, Projected 2013 4 203 297
other officers and 2012 154 44
directors as a group 2011 136 32
(excluding the CEO
and four most highly
compensated
executive officers)

(1) Guaranteed compensation including government mandated pay-out.


(2) Includes performance-based pay and other cash benefits.
(3) Comprised of the following: Oscar S. Reyes, President and Chief Executive Officer;
Ricardo V. Buencamino, Senior Executive Vice President and Head of Networks; Alfredo
S. Panlilio, Senior Vice President and Head of Customer Retail Services and Corporate
Communication; Betty C. Siy-Yap, Senior Vice President and Chief Finance Officer and
Ramon B. Segismundo, Senior Vice President and Head of Human Resources and
Corporate Services.
(4) Includes long-term incentive payout in 2013 for achievement of goals during the 3-year
performance period covering 2010 to 2012.

As provided in Meralco’s Amended By-Laws, directors, as such, shall not receive any stated
salary for their services, but by resolution of the stockholders, a fixed sum and expenses of
attendance, if any, may be allowed for attendance at each regular or special meeting of the
Board; but nothing herein contained shall be construed to preclude any director from
serving the Company in any other capacity and receiving compensation therefor.

188
Executive Compensation

On March 22, 2013, the Board approved the amendment of Article II, Section 7 of Meralco’s
By-Laws to provide reasonable per diems for their attendance at each regular or special
meeting, in whatever form as may be approved, provided that the total value of such
additional compensation, in whatever form so given, shall not exceed one percent (1%) of
the net income before tax of the Company during the preceeding year.

Consistent with the foregoing, the Board approved the increase in the compensation of all
members of the Board up to a maximum of P3.0 million per annum. The increase in
compensation shall be through a stock grant based on a pre -approved number of shares for
each non-executive director. The foregoing was ratified by the stockholders in the annual
general meeting on May 28, 2013.

Other arrangements

There are no other arrangements pursuant to which the directors and officers of the Company
are compensated, or are to be compensated, directly or indirectly, by the Company for services
rendered by such directors as of the date of this Prospectus.

Employment contracts and termination of employment and change in control

There are no fixed-term employment contracts between the Company and its executive officers.
There is no compensatory plan nor arrangement with respect to an executive officer which
results in, or will result from, the resignation, retirement, or any other termination of such
executive officer’s employment with the Company, or from a change in control of the Company,
or a change in an executive officer’s responsibilities following a change in control of the
Company, other than as provided in the Meralco Employees Retirement Plans and in the
Company’s long-term Incentive Plan for superintendents and up.

189
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN RECORD AND BENEFICIAL OWNERS

Warrants and options outstanding

As of the date of this Prospectus, there are no outstanding warrants held by the Company’s
president, named executive officers, and all directors and officers, as a group, other than stock
purchase plan outstanding in respect of the 12th and 13th Employee Stock Purchase Plan.
Stock ownership plans
Pursuant to the terms of Meralco’s Employee Stock Purchase Plan, as at September 30, 2013, the
equity securities beneficially owned by executive officers covered by subscriptions to existing
offerings of the Employee Stock Purchase Plan, including stock dividends, are as follows:

Title of Number of Percent of


Class Name and Citizenship Shares Class
Common . . . . . . .. Ricardo V. Buencamino, Filipino 42,278 0.00%
Common . . . . . . .. Roberto R. Almazora, Filipino 36,408 0.00%
Common . . . . . . .. Ruben B. Benosa, Filipino 22,261 0.00%
Common . . . . . . .. Helen T. De Guzman, Filipino 25,513 0.00%
Common . . . . . . .. Ivanna G. Dela Peña, Filipino 26,231 0.00%
Common . . . . . . .. Rustico C. De Borja, Jr. , Filipino 23,043 0.00%
Common . . . . . . .. Gerardo F. Dela Paz, Filipino 21,000 0.00%
Common . . . . . . .. Manolo C. Fernando, Filipino 21,274 0.00%
Common . . . . . . .. Ferdinand O. Geluz, Filipino 12,877 0.00%
Common . . . . . . .. Redentor L. Marquez, Filipino 22,116 0.00%
Common . . . . . . .. Nestor P. Sarmiento, Filipino 18,653 0.00%
Common . . . . . . .. Liza Rose G. Serrano-Diangson, Filipino 22,689 0.00%
Subscriptions under the Plan are payable over a period of 5 years through payroll deduction.

190
Security Ownership of Management and Certain Record and Beneficial Owners

SUBSTANTIAL SHAREHOLDERS’ AND DIRECTORS’ INTERESTS

Based on Meralco’s stock and transfer book, the security ownership as at September 30,
2013 of certain record and beneficial owners of more than 5% of any class of its voting
securities and of the directors and officers of Meralco is as follows:

Name, address of Record Name of


Owner and Relationship Beneficial No. of Shares
with Issuer Owner and Citizenship Held Percent
Relationship
Beacon Electric Asset Same as the Filipino 563,124,042 49.96%
with Record
Holdings, Inc Record Owner
Owner
10/F MGO Bldg., Legaspi
corner Dela Rosa Streets,
Legaspi Village, Makati
City

No relationship
PCD Nominee with PCD Participants Filipino and 248,608,336 22.06%
Issuer
Corporation Foreign
37/F Tower One
Enterprise Center, 6766
Ayala Avenue corner
Paseo de Roxas Makati
City
San Miguel Corporation Same as the Filipino 91,872,280 8.15%
No San
40 relationship with
Miguel Avenue, Record Owner
Issuer
Mandaluyong City

SMC Global Power Same as the Filipino 69,059,538 6.13%


Holdings Corporation Record Owner
155 EDSA, Barangay Wack
Wack Mandaluyong City

San Miguel Pure Foods Same as the Filipino 59,090,909 5.24%


Company, Inc Record Owner
JMT Corporate
Condominium, ADB
Avenue, Ortigas Center,
Pasig City
Directors and Officers as 1,003,676 0.09%
a Group

Beacon Electric Asset Holdings, Inc. (“Beacon Electric”) is a special purpose company jointly
owned by PLDT Communications and Energy Ventures, Inc. (“PCEV”, formerly Pilipino
Telephone Corporation) and Metro Pacific Investments Corporation (“MPIC”) whose sole

191
Security Ownership of Management and Certain Record and Beneficial Owners

purpose is to hold PCEV’s and MPIC’s shares in Meralco. The Chairman, or in his absence, the
President of Beacon Electric, or any other representative designated by the President of
Beacon Electric, is duly authorized as proxy to vote its Meralco shares as he may deem proper
or beneficial to Beacon Electric.

San Miguel Corporation (“SMC”) is a food, beverage and packaging company established in
1890 initially as a single-product brewery. SMC has over 100 facilities in the Philippines,
Southeast Asia and China. SMC’s extensive product portfolio includes beer, hard liquor,
carbonated and non-carbonated non-alcoholic beverages, processed and packaged food
products, meat, poultry, dairy products and a number of packaging products. SMC’s flagship
product, San Miguel Beer, is among the world’s best-selling beers. In addition to its leadership
in the Philippine food and beverage industry, SMC has established a significant presence
overseas. The company’s operations extend beyond its home base of the Philippines to China
(including Hong Kong), Vietnam, Indonesia, Malaysia, Thailand and Australia.

SMC has significantly expanded its participation in both its core businesses of food, beverages
and packaging, and heavy industries including power and other utilities, mining, energy, toll
ways and airports. The chairman, or in his absence, the president of SMC, or any other
representative designated by the president of SMC, is duly authorized as proxy to vote its
Meralco shares as he may deem proper or beneficial to SMC.

In June 2013, the San Miguel Group announced that it is considering alternatives in relation to
its stake in Meralco, including a possible disposition of all or part of such stake. On July 19,
2013, San Miguel Group announced it had sold an effective 5.7% interest in Meralco. On
September 30, 2013, the San Miguel Group disclosed that they have agreed to sell their 27%
stake in Meralco to JG Summit Holdings (“JGSHI”) for approximately P72.0 Billion subject to the
satisfaction of certain closing conditions. As of the date of this Prospectus, no announcement
or disclosure had been made by either San Miguel or JGSHI on the completion and closing of
the said transaction.

PCD Nominee Corporation (“PCD”) is a wholly-owned subsidiary of the Philippine Depository


and Trust Corporation (“PDTC”). Originally, stock certificates were issued to investors every
time they acquired shares of the Company. However, with the Philippine Central Depos itory
(“PCD”)’s computerized Book Entry System that took effect in November 1997, investors of
Meralco shares now have an option whether they will be issued certificates or not. Their
shares may be lodged at the PCD and further trading will be scripless (computerized with no
certificates) until they request the issuance of certificates. The PCD Nominee Corporation
holds the shares as the registered owner thereof in Meralco’s books on behalf of PCD
Participants and their clients. The participants of PCD are the beneficial owners of such shares
and may be nominated as proxy to vote the same. Stockholders with PCD-lodged shares have
no record of their shareholdings with Meralco or its transfer agent, Securities Transfer
Services, Inc. Only certificated shares are recorded in Meralco’s books, which may be voted by
the registered owners or their proxies.

SMC Global Power Holdings Corporation is a wholly -owned subsidiary of San Miguel
Corporation that engages in the generation and sale of electricity in the Phili ppines. The

192
Security Ownership of Management and Certain Record and Beneficial Owners

company also focuses on the exploration and mining of coal. The chairman, or in his absence,
the president of SMC Global Power Holdings Corporation, or any other representative
designated by the president of SMC Global Power Holdings Corporation, is duly authorized as
proxy to vote its Meralco shares as he may deem proper or beneficial to SMC Global Power
Holdings Corporation.

San Miguel Pure Foods Company, Inc. (“Pure Foods”) was incorporated on October 13, 1956 to
primarily engage in the business of manufacturing and marketing of processed meat products.
Pure Foods, through its subsidiaries, later diversified into poultry and livestock operations,
feeds and flour milling, dairy and coffee operations, franchise operations and young animal
ration manufacturing and distribution. Pure Foods holds several food brands in its portfolio,
among them, Magnolia, Pure Foods, Monterey, Star, Dari Creme, B-Meg and Jellyace. To date,
Pure Foods has a product line up that offers a variety of food products an d services for both
individual and food service customers. The chairman, or in his absence, the president of Pure
Foods, or any other representative designated by the President of Pure Foods, is duly
authorized as proxy to vote its Meralco shares as he may deem proper or beneficial to Pure
Foods.

Voting trust holders of 5% or more

Meralco is not aware of any persons holding more than 5% of a class of shares under a voting
trust or any similar agreements.

Change in control

Based on Meralco’s stock and transfer book, no change of control in Meralco has occurred
since the beginning of its last fiscal year. Meralco is not aware of any existing arrangement
which may result in a change in control of Meralco.

193
DESCRIPTION OF DEBT

Meralco has various loan agreements and notes, as well as working capital availments , surety
bonds issued in favor of PEMC and NGCP and certain standby letters of credit entered into in the
ordinary course of business. As of September 30, 2013, Meralco’s outstanding long-term debts
under its various loan agreements and notes amounted to P25,383 million.

Floating Rate Loans

P2,500 Million Term Loan Facility

In January 2011, Meralco entered into a P2,500 million, 7-year Floating Rate Term Loan Facility
from a local bank. The interest rate on the loan is reset every six months based on the 6 -month
Philippine Dealing System Treasury—Fixing (“PDST-F”) rate, plus a spread. The principal is payable
in nominal annual amortizations with a balloon payment on the maturity date.

P3,000 Million Term Loan Facility

In October 2009, Meralco entered into a P3,000 million, 5-year bilateral Floating Rate Term Loan
Facility. The principal is payable over five years with final maturity in October 2014.

Fixed Rate Loans

P3,000 Million Note Facility Agreement

On January 5, 2012, Meralco signed a P3,000 million Fixed Rate Note Facility Agreement for its
P1,000 million, 7-year notes and P2,000 million, 10-year notes due in 2019 and 2022, respectively.
The notes were priced off the relevant 7-year and 10-year benchmarks, plus a spread and issued
on January 9, 2012. Principal repayments are through annual nominal amortizations and a balloon
payment on each of the two final maturity dates.

P5,000 Million Note Facility Agreement

In June 2011, Meralco entered into a Fixed Rate Note Facility Agreement for its P500 million, 7-
year notes and P4,500 million, 10-year notes due in 2018 and 2021, respectively. The principal is
payable in nominal annual amortizations with a balloon payment on each of the two final maturity
dates.

P5,000 Million Note Facility Agreement

In December 2010, Meralco entered into a Fixed Rate Note Facility Agreement for the issuance of
P23 million, 5-year fixed rate notes maturing in December 2015 and P4,977 million, 5.5-year fixed
rate notes due in June 2016. The 5-year fixed rate notes are payable in full at maturity date w hile
the 5.5-year fixed rate notes are payable in nominal annual amortizations with a balloon payment
on maturity date.

194
Description of Debt

P4,800 Million Note Facility Agreement

In November 2010, Meralco signed a Fixed Rate Note Facility Agreement for its P1,997 million, 7-
year fixed rate notes and P2,803 million, 10-year fixed rate notes. The notes were issued on
December 2, 2010 and are payable in nominal annual amortizations with a balloon payment on
each of the two maturity dates.

P1,700 Million Short-term Loan

In December 13, 2012, Meralco entered into a Short -term loan for P1,700 million. The loan
matures on December 6, 2013.

Debt Covenants

Meralco’s loan agreements require that Meralco’s parent -only EBITDA plus beginning cash balance
to be at least 1.2 times its scheduled principal and interest payments calculated at specific
measurement dates. For the three months ended September 30, 2013, Meralco’s parent -only
EBITDA plus beginning cash balance was 29 times its scheduled principal and interest payments for
the succeeding quarter. The agreements also contain restrictions with respect to the creation of
liens or encumbrances on assets, issuance of guarantees, mergers or consolidations, disposition of
a significant portion of its assets and related party transactions. As at September 30, 2013,
Meralco was in compliance with all of its debt covenants.

195
CORPORATE GOVERNANCE

Meralco, a publicly listed company in the Philippines, adheres to all the rules and regulations of
the SEC and the Philippine Stock Exchange (“PSE”); and in particular to those rules and regulations
for the development of the Philippine capital market. The Company is a leader in good corporate
governance, both in the local and regional settings, as attested to by various reputable institutions
that have given it countless citations and recognitions. In 2012, the Company was adjudged as the
Employer of the Year by the People Management Association of the Philippines (“PMAP”), and as
Best in Asia on Investors Relations and Corporate Governance by Corporate Governance Asia,
among others.

CORPORATE GOVERNANCE FRAMEWORK

Corporate Governance (“CG”) is an integral component in Meralco’s management framework as


Meralco pursues its business aspirations for all its stakeholders. Meralco’s corporate governance
framework is anchored on the principles of fairness, accountability, integrity and transparency. In
2010, the Company made corporate governance a major thrust and institutionalized the “Be Right”
communication policy in the Meralco culture.

As a public utility. Meralco is subject to regulation, legislation and public scrutiny. All directors,
officers and employees of Meralco and its subsidiaries are therefore committed to observe all
company policies and relevant regulations and laws. Meralco adheres to these imperatives, both in
substance and form, as its commitment to stakeholders: shareholders, customers, government,
employees , business partners, suppliers, creditors, contractors and the community.

A Corporate Governance Office (“CGO”) was created on March 16, 2010 to manifest Meral co’s
dedication to pursue excellence in corporate governance. Its mandated is to support the Board of
Directors and Management in the formulation and implementation of corporate governance plans,
programs and initiatives, and in monitoring compliance to a chieve the highest standards of
competence and ethical culture among directors, officers and employees of Meralco.

The following are some of the corporate governance policies Meralco adheres to:

•Insider Trading Policy


•Code of Ethics and Conflict of Interest Policy
•Be Right (Open Communication) Policy & Anti-Corruption Program

THE BOARD

The Board and its structure are fully governed by Meralco’s Revised Manual of Corporate
Governance or CG Manual and the SEC’s Revised Code of Corporate Governance or SRC. The
duties and responsibilities of the Board include, but are not limited to the for mulation, regular
review and update of the company vision, mission, strategic objectives, policies and procedures
that guide its activities; the approval, adoption and pro -active oversight of the execution of the
corporate strategy; formulation, adoption and oversight power in the execution of corporate
policy including corporate governance; oversight power on risk management; setting up of an

196
Corporate Governance

accountability system with the inclusion of rewards, incentives and penalties; and the promotion
of an ethical, social and good governance culture in the company. A complete list of the Board
duties and responsibilities are detailed in the CG Manual which is accessible to all interested
parties at the Meralco website. Also the types of decisions for which board approv al is required,
such as acquisitions, disposals, issuance of shares, financial restructuring, etc. when made are fully
disclosed.

The Board formed five (5) committees to ensure compliance with the principles of good corporate
governance. The five (5) Board committees are: Executive Committee, Remuneration and
Learning Development Committee, Nomination and Governance Committee, Audit and Risk
Management Committee, and Finance Committee.

GOVERNMENT and COMMUNITY

Launched in July 2011, One Meralco Foundation, Inc. or OMF serves Filipinos through innovative
and sustainable Corporate Social Responsibility or CSR thrusts aligned wit h Meralco’s power
distribution business which is rapidly evolving to make it a total energy solutions provider. OMF
rallies employees, business and government partners to carry out long -term and sustainable
programs in four areas:
1) Community Electrification- To develop feasible alternatives to provide depressed
communities with electricity, through socialized schemes, for these beneficiaries, in partnership
with Local Government Units or LGUs, Non-Government Organizations or NGOs, and other
community institutions.
2) Grassroots Partnerships – To create programs that will build strong partnerships with
various stakeholders in the communities for public safety, responsible stewardship and community
development.
3) Youth and Sports Advocacy – To implement educational and sports program for
disadvantaged young people to develop their life-long skills.
4) Emergency Preparedness and Disaster Response – To closely work with disaster
management agencies of the government and partner organizations.
A more comprehensive report on Meralco’s CSR efforts is found in the Company’s 2012 Annual
Report and in a separate publication of OMF’s 2012 Annual Report, entitled, “Dream, Believe,
Achieve” which is available for perusal and reference of stakeholders.

197
FINANCIAL INFORMATION

The following pages set forth Meralco’s audited consolidated financial statements as at
December 31, 2012 and 2013 and for each of the three years in the period ended December 31,
2012, and the unaudited interim consolidated financial statements as at September 30, 2013 and
for the nine months ended September 30, 2013 and 2012.

198
Manila Electric Company and Subsidiaries

Interim Consolidated Financial Statements


As at September 30, 2013 and For the Nine Months and
Three Months Ended September 30, 2013 and 2012

and

Independent Auditors’ Report on


Interim Consolidated Financial Statements
SyCip Gorres Velayo & Co. Tel: (632) 891 0307 BOA/PRC Reg. No. 0001,
6760 Ayala Avenue Fax: (632) 819 0872 December 28, 2012, valid until December 31, 2015
1226 Makati City ey.com/ph SEC Accreditation No. 0012-FR-3 (Group A),
Philippines November 15, 2012, valid until November 16, 2015

INDEPENDENT AUDITORS’ REPORT ON


INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The Stockholders and the Board of Directors


Manila Electric Company
Lopez Building
Ortigas Avenue, Pasig City

Introduction

We have reviewed the accompanying interim consolidated financial statements of Manila Electric
Company and Subsidiaries, which comprise the interim consolidated statement of financial position as
at September 30, 2013, and the related interim consolidated statements of income and statements of
comprehensive income for the nine months and three months ended September 30, 2013 and 2012,
and statements of changes in equity and statements of cash flows for the nine months ended September
30, 2013 and 2012, and a summary of significant accounting policies and other explanatory notes.
Management is responsible for the preparation and fair presentation of these interim consolidated
financial statements in accordance with Philippine Financial Reporting Standards. Our responsibility
is to express a conclusion on these interim consolidated financial statements based on our review.

Scope of Review

We conducted our review in accordance with Philippine Standard on Review Engagements 2410,
Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A
review of interim financial information consists of making inquiries, primarily of persons responsible
for financial and accounting matters, and applying analytical and other review procedures. A review
is substantially less in scope than an audit conducted in accordance with Philippine Standards on
Auditing and consequently does not enable us to obtain assurance that we would become aware of all
significant matters that might be identified in an audit. Accordingly, we do not express an audit
opinion.

*SGVFS002843*
A member firm of Ernst & Young Global Limited
-2-

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the
accompanying interim consolidated financial statements do not present fairly, in all material respects,
the financial position of Manila Electric Company and Subsidiaries as at September 30, 2013, and
their financial performance for the nine months and three months ended September 30, 2013 and 2012
and their cash flows for the nine months ended September 30, 2013 and 2012 in accordance with
Philippine Financial Reporting Standards.

SYCIP GORRES VELAYO & CO.

Martin C. Guantes
Partner
CPA Certificate No. 88494
SEC Accreditation No. 0325-AR-2 (Group A),
March 15, 2012, valid until March 14, 2015
Tax Identification No. 152-884-272
BIR Accreditation No. 08-001998-52-2012,
April 11, 2012, valid until April 10, 2015
PTR No. 3669687, January 2, 2013, Makati City

October 25, 2013

*SGVFS002843*
A member firm of Ernst & Young Global Limited
MANILA ELECTRIC COMPANY AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION
September 30, 2013
(With Comparative Audited Figures as at December 31, 2012 and January 1, 2012)

December 31, January 1,


September 30, 2012 2012
2013 (As restated - (As restated -
Note (Unaudited) see Note 4) see Note 4)
(Amounts in millions)
ASSETS
Noncurrent Assets
Utility plant and others 8 and 16 P
=110,668 =109,312
P =105,510
P
Investments in and advances to
associates and joint ventures 9 11,072 1,815 844
Investment properties 10 and 16 1,528 1,634 1,642
Deferred tax assets - net 29 4,774 3,050 725
2, 8, 11, 13, 28, 30
Other noncurrent assets - net and 31 5,671 8,837 6,594
Total Noncurrent Assets 133,713 124,648 115,315

Current Assets
Cash and cash equivalents 12 and 28 58,795 60,500 44,141
Trade and other receivables 2, 11, 13, 19, 24 and 28 26,194 28,077 29,108
Inventories 14 2,139 1,371 1,675
Other current assets 15 and 28 2,596 2,295 2,500
89,724 92,243 77,424
Assets of discontinued operations 6 – – 18,349
Total Current Assets 89,724 92,243 95,773
Total Assets P
=223,437 =216,891
P =211,088
P

EQUITY AND LIABILITIES


Equity Attributable to Equity Holders
of the Parent
Common stock 16 P
=11,273 =11,273
P =11,273
P
Subscriptions receivable (94) (211) (521)
Additional paid-in capital 4,111 4,111 4,111
Excess of acquisition cost over carrying
value of non-controlling interest
acquired (328) (328) (328)
Employee stock purchase plan 17 1,049 1,049 915
Unrealized fair value gains on available-
for-sale, or AFS, financial assets 11 115 120 85
Unrealized fair value gains on AFS
financial assets of discontinued
operations 6 – – 14
Share in cumulative translation
adjustments of a subsidiary and
associates 9 297 3 12
Cumulative actuarial gains (losses) 4 45 289 (1,665)
Treasury shares 16 (11) (11) (9)
Retained earnings: 6 and 16
Appropriated 11,000 6,000 6,000
Unappropriated 42,631 45,607 42,269
Equity Attributable to Equity
Holders of the Parent 70,088 67,902 62,156
Non-controlling Interests 2 281 248 4,713
Total Equity 70,369 68,150 66,869

(Forward)

*SGVFS002843*
-2-

December 31, January 1,


September 30, 2012 2012
2013 (As restated - (As restated -
Note (Unaudited) see Note 4 ) see Note 4 )
(Amounts in millions)

Noncurrent Liabilities
Interest-bearing long-term financial
liabilities - net of current portion 18, 26 and 28 P
=20,086 =20,466
P =19,816
P
Customers’ deposits - net of current portion 13,19, 26 and 28 21,721 23,313 24,080
Long-term employee benefits 27 6,752 8,833 10,558
Provisions 20 and 30 21,273 19,411 16,919
Refundable service extension costs -
net of current portion 23 and 28 5,315 4,357 3,794
Deferred tax liabilities - net 29 1 – 595
Other noncurrent liabilities 25 and 28 17,641 12,843 6,302
Total Noncurrent Liabilities 92,789 89,223 82,064

Current Liabilities
Notes payable 22, 26 and 28 1,790 1,787 67
Trade payables and other current liabilities 16, 19, 23, 24 and 28 47,820 47,576 40,011
Customers’ refund 2, 21 and 28 6,020 6,127 6,250
Income tax payable 2,318 1,668 2,154
Current portion of interest-bearing long-
term financial liabilities 18, 26 and 28 2,331 2,360 4,560
60,279 59,518 53,042
Liabilities of discontinued operations 6 – – 9,113
Total Current Liabilities 60,279 59,518 62,155
Total Liabilities 153,068 148,741 144,219

P
=223,437 =216,891
P =211,088
P

See accompanying Notes to Interim Consolidated Financial Statements.

*SGVFS002843*
MANILA ELECTRIC COMPANY AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME

Unaudited
For the Nine Months Ended For the Three Months
September 30 Ended September 30
2012 2012
(As restated - (As restated -
Note 2013 see Note 4) 2013 see Note 4)
(Amounts in millions, except per share data)
REVENUES
Sale of electricity 2, 5, 24, 25 and 31 P
=205,321 =213,093
P P
=65,620 =70,629
P
Sale of other services 10 2,776 1,656 779 520
208,097 214,749 66,399 71,149

COSTS AND EXPENSES


Purchased power 24, 25 and 31 162,263 175,369 50,688 57,507
Salaries, wages and employee benefits 17, 26 and 27 8,237 7,136 2,660 2,433
Provision for probable charges and expenses
from claims 20 and 30 8,284 6,804 3,085 2,940
Depreciation and amortization 8, 10 and 11 4,545 4,177 1,523 1,333
Contracted services 2,224 1,931 703 636
Provision for doubtful accounts - net 13 366 655 136 121
Taxes, fees and permits 317 310 93 103
Other expenses 24 and 26 2,437 2,920 824 770
188,673 199,302 59,712 65,843

OTHER EXPENSES (INCOME)


Interest and other financial income 2 and 26 (950) (2,071) (218) (472)
Interest and other financial charges 18, 19, 22 and 26 1,058 1,188 350 364
Equity in net losses (gains) of associates
and joint ventures 9 398 1 350 (11)
Derivative mark-to-market losses (gains) 28 24 (40) 24 (19)
Foreign exchange losses (gains) (248) (2) 29 –
Others 2 (434) (1,781) (142) (9)
(152) (2,705) 393 (147)
INCOME BEFORE INCOME TAX 19,576 18,152 6,294 5,453

PROVISION FOR (BENEFIT FROM)


INCOME TAX 29
Current 7,506 7,443 2,881 2,660
Deferred (1,621) (2,177) (804) (1,087)
5,885 5,266 2,077 1,573
NET INCOME FROM CONTINUING
OPERATIONS 13,691 12,886 4,217 3,880
INCOME FROM DISCONTINUED
OPERATIONS, NET OF INCOME
TAX 6 – 967 – –
NET INCOME P
=13,691 =13,853
P P
=4,217 =3,880
P

(Forward)

*SGVFS002843*
-2-

Unaudited
For the Nine Months For the Three Months
Ended September 30 Ended September 30
2012 2012
(As restated - (As restated-
Note 2013 see Note 4) 2013 see Note 4)
(Amounts in millions, except per share data)

Net Income Attributable To


Equity holders of the Parent 32 P
=13,644 =13,722
P P
=4,203 =3,869
P
Non-controlling interests 47 131 14 11
P
=13,691 =13,853
P P
=4,217 =3,880
P

Earnings Per Share Attributable


to Equity Holders of the Parent
Basic/Diluted 32 P
=12.11 =12.17
P P
=3.73 =3.43
P

Earnings Per Share Attributable


to Equity Holders of the Parent of
Continuing Operations
Basic/Diluted 32 P
=12.11 =11.40
P P
=3.73 =3.43
P

See accompanying Notes to Interim Consolidated Financial Statements.

*SGVFS002843*
MANILA ELECTRIC COMPANY AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME

Unaudited
For the Nine Months Ended For the Three Months Ended
September 30 September 30
Note 2013 2012 2013 2012
(Amounts in millions)

NET INCOME FOR THE PERIOD P


=13,691 =13,853
P P
=4,217 =3,880
P

OTHER COMPREHENSIVE
INCOME
Items that will be reclassified to profit
or loss in subsequent periods:
Unrealized fair value (loss) gain
on available-for-sale financial
assets 11 (7) 34 (14) 3
Income tax effect 2 (10) 4 –
(5) 24 (10) 3
Unrealized fair value gain on
available-for-sale financial assets
of discontinued operations 6 – (20) – –
Income tax effect – 6 – –
– (14) – –
Share in cumulative translation
adjustments of a subsidiary and
associates 9 294 7 29 –
Items that will not be reclassified to
profit or loss in subsequent
periods:
Actuarial gain (loss) 27 (349) 2,094 – 698
Income tax effect 105 (628) – (209)
(244) 1,466 – 489

OTHER COMPREHENSIVE
INCOME FOR THE PERIOD,
NET OF INCOME TAX 45 1,483 19 492

TOTAL COMPREHENSIVE
INCOME FOR THE PERIOD,
NET OF INCOME TAX =13,736
P =15,336
P P
=4,236 =4,372
P

Total Comprehensive Income


Attributable To
Equity holders of the Parent =13,689
P =15,205
P =4,222
P =4,361
P
Non-controlling interests 47 131 14 11
=13,736
P =15,336
P =4,236
P =4,372
P

See accompanying Notes to Interim Consolidated Financial Statements.

*SGVFS002843*
MANILA ELECTRIC COMPANY AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
(UNAUDITED)

Equity Attributable to Equity Holders of the Parent


Excess of Unrealized Share in
Acquisition Fair Value Cumulative
Cost Over Unrealized Gains on Translation
Carrying Fair Value AFS Adjustments Unappro-
Value of Gains on Financial of priated Equity
Non- Employee AFS Assets of a Subsidiary Cumulative Appropriated Retained Attributable Non-
Common Additional controlling Stock Financial Discontinued and Actuarial Treasury Retained Earnings to Equity controlling
Stock Subscriptions Paid-in Interest Purchase Plan Assets Operations an Associate Gains (Losses) Shares Earnings (Notes 4, 6 Holders of Interests Total
(Note 16) Receivable Capital Acquired (Note 17) (Note 11) (Note 6) (Note 9) (Note 4) (Note 16) (Note 16) and 16) the Parent (Note 6) Equity
(Amounts in millions)
At January 1, 2013, as previously
reported P
=11,273 (P
=211) P
=4,111 (P
=328) P
=1,049 P
=120 P
=– P
=3 P
=– (P
=11) P
=6,000 P
=45,473 P
=67,479 P
=248 P
=67,727
Effect of adoption of PAS 19R – – – – – – – – 289 – – 134 423 – 423
At January 1, 2013, as restated 11,273 (211) 4,111 (328) 1,049 120 – 3 289 (11) 6,000 45,607 67,902 248 68,150
Net income – – – – – – – – – – – 13,644 13,644 47 13,691
Other comprehensive income – – – – – (5) – 294 (244) – – – 45 – 45
Total comprehensive income – – – – – (5) – 294 (244) – – 13,644 13,689 47 13,736
Collection of subscriptions receivable – 117 – – – – – – – – – – 117 – 117
Dividends – – – – – – – – – – – (11,620) (11,620) (14) (11,634)
Appropriation of unrestricted retained
earnings – – – – – – – – – – 5,000 (5,000) – – –
– 117 – – – – – – – – 5,000 (16,620) (11,503) (14) (11,517)
At September 30, 2013 P
=11,273 (P
=94) P
=4,111 (P
=328) P
=1,049 P
=115 P
=– P
=297 P
=45 (P
=11) P
=11,000 P
=42,631 P
=70,088 P
=281 P
=70,369

At January 1, 2012, as previously


reported =11,273
P (P
=521) =4,111
P (P
=328) =915
P =85
P =14
P =12
P =–
P (P
=9) =6,000
P =42,236
P =63,788
P =4,713
P =68,501
P
Effect of adoption of PAS 19R – – – – – – – – (1,665) – – 33 (1,632) – (1,632)
As January 1, 2012, as restated 11,273 (521) 4,111 (328) 915 85 14 12 (1,665) (9) 6,000 42,269 62,156 4,713 66,869
Net income – – – – – – – – – – – 13,722 13,722 131 13,853
Other comprehensive income – – – – – 24 (14) 7 1,466 – – – 1,483 – 1,483
Total comprehensive income – – – – – 24 (14) 7 1,466 – – 13,722 15,205 131 15,336
Collection of subscriptions receivable – 151 – – – – – – – – – – 151 – 151
Share-based payments – – – – 134 – – – – – – – 134 – 134
Purchase of treasury shares – – – – – – – – – (2) – – (2) – (2)
Dividends – – – – – – – – – – – (13,780) (13,780) (22) (13,802)
Effect of discontinued operations – – – – – – – – – – – – – (4,571) (4,571)
– 151 – – 134 – – – – (2) – (13,780) (13,497) (4,593) (18,090)
At September 30, 2012 =11,273
P (P
=370) =4,111
P (P
=328) =1,049
P =109
P =–
P =19
P (P
=199) (P
=11) =6,000
P =42,211
P =63,864
P =251
P =64,115
P

See accompanying Notes to Interim Consolidated Financial Statements.

*SGVFS002843*
MANILA ELECTRIC COMPANY AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited
For the Nine Months Ended
September 30
Note 2013 2012
(Amounts in millions)
CASH FLOWS FROM OPERATING
ACTIVITIES
Income before income tax of continuing operations P
=19,576 =18,152
P
Income before income tax of discontinuing
operations 6 – 1,050
Income before income tax 19,576 19,202
Adjustments for:
Provision for probable charges and expenses
from claims - net 20 8,274 6,804
Depreciation and amortization 8, 10 and 11 4,545 4,177
Interest and other financial charges 26 1,058 1,188
Interest and other financial income 26 (950) (2,071)
Equity in net losses of associates
and joint ventures 9 398 1
Provision for doubtful accounts 13 366 655
Loss (gain) on disposal of utility plant
and others - net (112) 29
Loss on disposal of investment properties 9 –
Reversal of write-down of inventory
to net realizable value 14 (4) (36)
Employee share-based payments 17 – 134
Others (144) (411)
Operating income before working capital changes 33,016 29,672
Decrease (increase) in:
Trade and other receivables 3,414 4,564
Inventories (764) (98)
Other current assets (297) (1,513)
Increase (decrease) in:
Trade payables and other current liabilities (79) (1,827)
Customers’ refund (107) (97)
Customers’ deposits 1,899 1,571
Long-term employee benefits (2,425) 120
Cash generated from operations 34,657 32,392
Income tax paid (4,914) (5,020)
Net cash flows from operating activities 29,743 27,372

CASH FLOWS FROM INVESTING


ACTIVITIES
Additions to:
Investment in and advances to an associate 9 (9,079) –
Utility plant and others 8 (5,787) (5,959)
Intangibles 11 (339) (30)
Interest and other financial income received 908 1,298
Proceeds from:
Disposal of utility plant and others 112 113
Disposal of investment properties 91 –
Dividends received 11 –
Increase in other noncurrent assets (420) (1,303)
Net cash used in investing activities (14,503) (5,881)

(Forward)

*SGVFS002843*
-2-

Unaudited
For the Nine Months Ended
September 30
Note 2013 2012
(Amounts in millions)

CASH FLOWS FROM FINANCING


ACTIVITIES
Proceeds from:
Availment of notes payable P
=1,560 P32
=
Collection of subscriptions receivable 117 151
Availment of interest-bearing long-term
financial liabilities, net of issue costs – 3,000
Payments of:
Dividends (12,426) (8,767)
Interest and other financial charges (3,417) (1,186)
Notes payable (1,557) (8)
Interest-bearing long-term financial liabilities (421) (2,881)
Decrease in other noncurrent liabilities (801) (166)
Net cash used in financing activities (16,945) (9,825)

NET INCREASE (DECREASE) IN CASH


AND CASH EQUIVALENTS (1,705) 11,666

CASH AND CASH EQUIVALENTS


AT BEGINNING OF PERIOD 60,500 44,141

CASH AND CASH EQUIVALENTS


AT END OF PERIOD 12 P
=58,795 =55,807
P

See accompanying Notes to Interim Consolidated Financial Statements.

*SGVFS002843*
MANILA ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. Corporate Information

Manila Electric Company or MERALCO, holds a congressional franchise under Republic Act or
RA No. 9209 effective June 28, 2003. RA No. 9209 grants MERALCO a 25-year franchise valid
through June 28, 2028 to construct, operate, and maintain the electric distribution system in the
cities and municipalities of Bulacan, Cavite, Metro Manila, and Rizal and certain cities,
municipalities, and barangays in the provinces of Batangas, Laguna, Pampanga, and Quezon. On
October 20, 2008, the Energy Regulatory Commission or ERC, granted MERALCO a consolidated
Certificate of Public Convenience and Necessity for the operation of electric service within its
franchise coverage, effective until the expiration of MERALCO’s congressional franchise.

The power segment, primarily power distribution, consists of operations of MERALCO and its
subsidiary, Clark Electric Distribution Corporation or CEDC. CEDC is registered with Clark
Development Corporation or CDC, under RA No. 9400, Bases Conversion Development Act of
1992, as a Clark Special Economic Zone or CSEZ, enterprise, primarily engaged in the operation,
and maintenance of a power distribution system within CSEZ.

Separately, MERALCO is developing power generation plants through its wholly-owned


subsidiary, MERALCO PowerGen Corporation or MGen. Also, it has another unit for its
participation in retail electricity supply or RES. The MERALCO local RES, otherwise known as
MPower, is a business unit within MERALCO. Through several other subsidiaries, its other
business segments provide engineering, construction and consulting services, bill collection
services, energy management services and information systems and technology services.

MERALCO’s investment in common equity shares of Rockwell Land Corporation or Rockwell


Land, was declared as property dividends on February 27, 2012 to stockholders of record as at
March 23, 2012. On April 25, 2012, the Securities and Exchange Commission or SEC, approved
the property dividend declaration. Consequently, MERALCO distributed and paid the property
dividends on May 11, 2012. The details of the declaration are in Note 6 – Discontinued
Operations. MERALCO and its subsidiaries are collectively referred to as the MERALCO Group.

The single largest shareholder of MERALCO as at September 30, 2013 is Beacon Electric Asset
Holdings, Inc. or Beacon Electric, which owns 49.96% of the common shares. Beacon Electric is
jointly owned by Metro Pacific Investments Corporation or Metro Pacific and PLDT
Communications and Energy Ventures, Inc., or PCEV, both of which are domestic corporations
and are affiliates of First Pacific Company Limited, a Hong Kong-based investment and
management company. San Miguel Corporation or SMC, together with its subsidiaries, San
Miguel Pure Foods Company Inc. and San Miguel Global Power Holdings or San Miguel Group,
owns 27.12% of the outstanding shares of MERALCO. First Philippine Holdings Corporation or
First Holdings, and First Philippine Utilities Corporation, collectively own 3.95%. The balance of
MERALCO’s common shares is held by the public.

In June 2013, San Miguel Group announced that it is considering alternatives in relation to its
stake in MERALCO, including a possible disposition of all or part of such stake. On July 19, 2013,
San Miguel Group announced that it had sold approximately 5.7% of its holding in MERALCO.

The common shares of MERALCO are listed on and traded in the Philippine Stock Exchange or
PSE, with security symbol MER.

*SGVFS002843*
-2-

The registered office address of MERALCO is Lopez Building, Ortigas Avenue, Pasig City,
Philippines.

The accompanying interim consolidated financial statements as at September 30, 2013 and for the
nine months and three months ended September 30, 2013 and 2012, were reviewed and
recommended by the Audit and Risk Management Committee for approval to the Board of
Directors or BOD on October 23, 2013. On October 25, 2013, these interim consolidated financial
statements were approved and authorized for issue by the BOD.

2. Rate Regulations

As distribution utilities or DUs, MERALCO and CEDC are subject to the rate-making regulations
and regulatory policies of the ERC. Billings of MERALCO and CEDC to customers are itemized
or “unbundled” into a number of bill components that reflect the various activities and costs
incurred in providing electric service. The adjustment to each bill component is governed by
mechanisms promulgated and enforced by the ERC, mainly: [i] the “Rules Governing the
Automatic Cost Adjustment and True-up Mechanisms and Corresponding Confirmation Process
for Distribution Utilities,” which govern the recovery of pass-through costs, including over- or
under-recoveries of the bill components, namely, (a) generation charge, (b) transmission charge,
(c) system loss or SL, charge, (d) lifeline subsidy, and (e) local franchise tax or LFT, and business
tax; and [ii] the “Rules for the Setting of Distribution Wheeling Rates or RDWR,” as modified by
ERC Resolution No. 20, Series of 2008, which govern the determination of MERALCO’s
distribution, supply, and metering charges.

The rate-setting mechanism of CEDC is likewise in accordance with the ERC regulations. The
following is a discussion of matters related to rate-setting of MERALCO and CEDC:

Rate Application

CEDC Rate Unbundling

On August 19, 2011, CEDC received an ERC Order to implement certain revisions of its schedule
of rates effective on its August 2010 billing cycle, after the ERC approved CEDC’s unbundling
application pursuant to Section 36 of RA No. 9136, Electric Power Industry Reform Act of 2001 or
EPIRA.

Thereafter, on June 21, 2012, CEDC received an Order from the ERC (docketed on May 28, 2012)
directing CEDC to refund to its customers the amount of P=0.8 million (the difference between its
then existing rates and the rates approved by the ERC) at a rate equivalent to P
=0.0067 per kilowatt
hour or kWh, for a period of five (5) months or until the said amount shall have been fully
refunded. The refund process was completed by CEDC in October 2012.

Performance-Based Regulations or PBR

MERALCO

MERALCO was among the Group A entrants to the PBR, together with two other private DUs.

Rate-setting under PBR is governed by the RDWR. The PBR scheme sets tariffs based on the
regulated asset base of the DUs, and the required operating and capital expenditures once every
regulatory period or RP, to meet operational performance and service level requirements
responsive to the needs for adequate, reliable and quality power, efficient service, and growth of

*SGVFS002843*
-3-

all customer classes in the franchise area as approved by the ERC. The PBR also employs a
mechanism that penalizes or rewards a DU depending on its network and service performance.

As part of the PBR, MERALCO implements payouts to customers for instances when its
performance is beyond the guaranteed service levels or GSL. See Note 23 – Trade Payables and
Other Current Liabilities.

Rate filings and settings are done on a RP basis. One (1) RP consists of four (4) Regulatory Years
or RYs. An RY for MERALCO begins on July 1 and ends on June 30 of the following year. As at
September 30, 2013, MERALCO is operating in the first quarter of the third RY of the third RP.
The third RP is from July 1, 2011 to June 30, 2015.

Maximum Average Price or MAP for RY 2008 and RY 2009

On January 11 and April 1, 2008, MERALCO filed separate applications for the approval of its
proposed translation of the MAP for RY 2008 and RY 2009, respectively, into different rate
schedules for its various customer segments. A portion of the distribution charge under-recoveries
as a result of the delayed implementation of the PBR was incorporated in the proposed MAP for
RY 2009.

In April 2009, the ERC approved the implementation of MERALCO’s average distribution rate of
=1.2227 per kWh effective billing period of May 2009. This rate is inclusive of the under-
P
recoveries for calendar year 2007 of P
=0.1285 per kWh.

On May 28, 2009, certain electricity consumer groups filed a Petition with the Court of Appeals,
or CA, questioning the decision and Order of the ERC on MERALCO’s rate translation application
for RY 2008 and RY 2009. In a decision dated January 27, 2010, the CA denied the Petition.
Consequently, the consumer groups brought the case to the Supreme Court of the Philippines or
SC. Comments and responses were filed by both parties with a Manifestation filed by MERALCO
on January 26, 2011. As at October 25, 2013, the SC has yet to render its decision on this case.

Third RP Reset Application

On June 18, 2010, MERALCO filed an application for the approval of its proposed Annual
Revenue Requirement or ARR, and Performance Incentive Scheme or PIS, for the third RP, the
Final Determination of which was approved on June 6, 2011. The PIS, which sets the performance
measures and targets that apply throughout the third RP, was also approved. A Petition for
Certiorari of the ERC’s decision was filed by an intervenor with the CA.

On February 3, 2012, the CA denied such petition. This prompted the same intervenor to file a
motion for reconsideration on such Resolution, which motion was likewise denied by the CA on
June 28, 2012. Hence, said intervenor filed a Petition for Review on Certiorari of the CA’s
resolutions with the SC.

On August 29, 2012, the SC denied such petition. The motion for reconsideration of such
Resolution filed by the same intervenor was denied with finality by the SC on November 26, 2012.

*SGVFS002843*
-4-

MAP for RY 2012

On June 21, 2011, MERALCO filed an application for the approval of its MAP for RY 2012 and
translation into rate tariffs by customer category. On October 6, 2011, the ERC provisionally
approved the MAP for RY 2012 of P =1.6012 per kWh and the rate translation per customer class
was reflected commencing with the October 2011 customer bills. Hearings for the final approval
of the application have been completed and all parties have submitted their respective memoranda.
As at October 25, 2013, the application is pending approval by the ERC.

MAP for RY 2013

On June 11, 2012, the ERC provisionally approved the MAP for RY 2013 of P =1.6303 per kWh
which was reflected starting with the July 2012 customer bills. Hearings on this case have been
completed and MERALCO is awaiting the final decision of the ERC.

MAP for RY 2014

On April 1, 2013, MERALCO filed its application for the approval of its MAP for RY 2014 of
P
=1.6510 per kWh and the translation thereof into rate tariffs by customer category. Hearing was
completed on May 9, 2013. MERALCO filed its Formal Offer of Evidence or FOE on May 10,
2013. On June 10, 2013, the ERC provisionally approved the MAP for RY 2014 of P =1.6474 per
kWh and the rate translation per customer class.

CEDC

CEDC was among the four Group D entrants to the PBR. Similar to MERALCO, it is subject to
operational performance and service level requirements approved by the ERC. The RP of CEDC
began on October 1, 2011 and ends on September 30, 2015.

Reset Application and MAP for RY 2012

In compliance with the ERC’s PBR rate setting mechanism, CEDC filed a reset application for the
approval of its ARR and PIS with the ERC. CEDC filed its revised application on November 3,
2010, which underwent a series of hearings and public consultations in 2011. The ERC issued
CEDC’s Final Determination on August 5, 2011. Subsequently, CEDC filed with the ERC its
application for RY 2012 Rate Translation into the different customer classes.

On April 10, 2012, the ERC approved with modification, CEDC’s application for the approval of
the translation into distribution rates of different customer classes for the first RY of the approved
ARR under the PBR for the RP October 1, 2011 to September 30, 2015. CEDC implemented the
approved distribution, supply and metering charges of P=0.8527 per kWh and the new customer
segments in its June 2012 billing.

MAP for RY 2013

On August 30, 2012, CEDC filed its application for the approval of its MAP for RY 2013. The
ERC, on December 17, 2012, approved a MAP of P =0.8953 per kWh. The revised rates based on the
approved MAP 2013 were implemented by CEDC starting January 2013.

*SGVFS002843*
-5-

SC Decision on Unbundling Rate Case

On May 30, 2003, the ERC issued an Order approving MERALCO’s unbundled tariffs that
resulted in a total increase of P=0.17 per kWh over the May 2003 tariff levels. However, on
August 4, 2003, certain consumer and civil society groups filed a Petition for Review of the ERC’s
ruling with the CA. On July 22, 2004, the CA set aside the ERC’s ruling on MERALCO’s rate
unbundling and remanded the case to the ERC. Further, the CA opined that the ERC should have
asked the Commission on Audit or COA, to audit the books of MERALCO. The ERC and
MERALCO subsequently filed separate motions asking the CA to reconsider its decision. On
January 24, 2005, as a result of the denial by the CA of the motions, the ERC and MERALCO
elevated the case to the SC.

In an En Banc decision promulgated on December 6, 2006, the SC set aside and reversed the CA
ruling saying that a COA audit was not a prerequisite in the determination of a utility’s rates.
However, while the SC affirmed ERC’s authority in rate-fixing, the SC directed the ERC to request
COA to undertake a complete audit of the books, records and accounts of MERALCO. On
January 15, 2007, in compliance with the directive of the SC, the ERC requested COA to conduct
an audit of the books, records and accounts of MERALCO using calendar years 2004 and 2007 as
test years.

The COA audit, which began in September 2008, was completed in August 2009.

On February 17, 2010, the ERC issued its Order directing MERALCO and all intervenors in the
case to submit, within 15 days from receipt of the Order, their respective comments on the COA’s
“Report No. 2009-01 Rate Audit Unbundled Charges.”

On July 1, 2011, the ERC maintained and affirmed its findings and conclusions in its Order dated
March 20, 2003. The ERC stated that the COA recommendation to apply disallowances under PBR
to rate unbundling violates the principle against retroactive rate-making. An intervenor group filed
a motion for reconsideration of the said Order. On September 5, 2011, MERALCO filed its
comment to the intervenor’s motion for reconsideration. On February 4, 2013, the ERC denied the
intervenor’s motion for reconsideration. The intervenor filed a petition for review before the CA.
MERALCO is awaiting further action of the CA on this matter.

Applications for the Recovery of Generation Costs and SL Charges

MERALCO filed separate applications for the full recovery of generation costs, including value-
added tax or VAT, incurred for the supply months of August 2006 to May 2007 or total under-
recoveries of P
=12,679 million for generation charges and P=1,295 million for SL charges.

The separate applications for the full recovery of generation charges have been approved by the
ERC in its decisions released on January 18, 2008, September 3, 2008 and August 16, 2010.

As at September 30, 2013, the remaining balance of P=394 million of such unrecovered generation
costs will be billed subsequent to September 2013 at the rate of P=0.0314 per kWh until fully
recovered. The amount recoverable within 12 months is included in the “Trade and other
receivables” account.

With respect to the P=1,295 million SL charge under-recoveries, the ERC ordered MERALCO to
file a separate application for the recovery of SL adjustments after the ERC confirms the
transmission rate to be used in the calculation of the SL rate in accordance with the SL rate
formula of the Automatic Generation Rate Adjustments Guidelines. MERALCO has filed the

*SGVFS002843*
-6-

application for recovery of the P


=1,295 million SL charge under-recoveries with the ERC. This was
included in the Consolidated Application of under/over recoveries in generation, transmission, SL
and lifeline charges filed on March 31, 2011 with the ERC. Hearings were completed on
October 25, 2011. On December 12, 2011, MERALCO filed for the admission of its Supplemental
Application. An expository hearing was conducted on February 1, 2012. As at October 25, 2013,
MERALCO has already filed its FOE and is awaiting the final resolution by the ERC.

Inter-Class Cross Subsidies and Lifeline Subsidies

MERALCO filed separate applications to recover inter-class cross subsidies (on November 14,
2007) and lifeline subsidies (on February 19, 2008).

In a decision dated November 16, 2009, the ERC authorized MERALCO to recover the inter-class
cross subsidy under-recoveries covering the period June 2003 to October 2006 amounting to
=1,049 million and total lifeline subsidy under-recoveries covering the period June 2003 to
P
December 2007 amounting to P =856 million.

In December 2009, MERALCO implemented the decisions of the ERC on the inter-class cross and
lifeline subsidies. As at September 30, 2013, the total amount of billed lifeline subsidies amounted
to P
=803 million. The balance of inter-class cross subsidies has been fully recovered in April 2013.
The balance of lifeline subsidies is P=53 million and will be billed within the next three months
from October 1, 2013. The amount recoverable is included in the “Trade and other receivables”
account.

Consolidated Applications for the Confirmation of Over/Under-recoveries of


Pass-through Charges

On August 12, 2009, the ERC issued Resolution No. 16, Series of 2009, adopting the “Rules
Governing the Automatic Cost Adjustment and True-up Mechanisms and Corresponding
Confirmation Process for Distribution Utilities.” These rules govern the recovery of pass-through
costs, including over- or under-recoveries with respect to the following bill components:
generation charge, transmission charge, SL charge, lifeline and interclass rate subsidies, LFT and
business tax. On October 18, 2010, the ERC promulgated ERC Resolution No. 21, Series of 2010,
amending certain formula contained in ERC Resolution No. 16, Series of 2009, and setting
March 31, 2011 (covering adjustments implemented until the billing month of December 2010)
and March 31, 2014 (covering adjustments from January 2011 to December 2013) as the new
deadlines for DUs in Luzon to file their respective applications. Subsequent filings shall be made
every three years thereafter.

On March 31, 2011, MERALCO filed a consolidated application with the ERC to confirm its
under- or over-recoveries accumulated from June 2003 to December 2010 in compliance with
Resolution No. 16, Series of 2009, as subsequently amended by Resolution No. 21, Series of 2010.
Hearings were completed on October 25, 2011. On December 8, 2011, MERALCO filed an
Omnibus Motion praying for, among other things, the admission of the Supplemental Application.
In an Order dated December 12, 2011, the ERC granted MERALCO’s Omnibus Motion and
admitted its Supplemental Application. Accordingly, hearings for the Supplemental Application
were conducted where MERALCO presented additional evidence. MERALCO filed its FOE on
September 13, 2012. The consolidated filing includes net generation charge under-recoveries of
=1,000 million, net transmission charge over-recoveries of P=111 million, net lifeline subsidy
P
under-recoveries of P=9 million and net SL over-recoveries of P
=425 million, excluding any
applicable carrying charges.

*SGVFS002843*
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On July 6, 2012, MERALCO filed a consolidated application with the ERC to confirm its under- or
over-recoveries for the calendar year 2011. The consolidated filing includes net generation charge
under-recoveries of P=1,826 million, transmission charge under-recoveries of P=253 million, net
lifeline subsidy under-recoveries of P=39 million and SL over-recoveries of P=445 million,
excluding any applicable carrying charges. Hearings on the application have been completed and
MERALCO has submitted its FOE on January 25, 2013. As at October 25, 2013, the application is
pending approval by the ERC.

Deferred PPA

On October 14, 2009, the ERC released its findings on MERALCO’s implementation of the
collection of the approved pass-through cost under-recoveries in 2004. ERC directed MERALCO
to refund P
=268 million of deferred PPA transmission line costs related to Quezon Power
(Philippines) Limited Company or QPPL and deferred accounting adjustments or DAA incurred to
customers, along with P=184 million in carrying charges, or an equivalent of P=0.0169 per kWh.
MERALCO implemented the refund beginning November 2009 until September 2010. However,
the ERC has yet to rule on MERALCO’s deferred PPA under-recoveries of P =106 million, which
does not represent the transmission line fee. As at October 25, 2013, MERALCO has filed a
Motion for Reconsideration, which is pending decision by the ERC.

Application for Recovery of Local Franchise Taxes or LFT

On March 25, 2011, MERALCO filed with the ERC an application for recovery of LFT paid but
not yet billed to customers for the period beginning first quarter of 1993 up to the second quarter
of 2004 for five provinces, namely: Bulacan, Batangas, Cavite, Laguna and Rizal; and 14 cities,
namely: San Jose Del Monte, Batangas, San Pablo, Tagaytay, Lucena, Mandaluyong, Marikina,
Quezon, Caloocan, Pasay, Las Piñas, Manila, Pasig and Calamba. The LFT is recognized as a
valid and reasonable DU expense in the ERC’s unbundling decision.

In a Decision dated February 27, 2012, the ERC released its Order approving with modifications
MERALCO’s application. The ERC approved recovery of LFT amounting to P =1,571 million plus
carrying charges of P
=730 million. As directed by the ERC, the recovery was reflected as a separate
item in the MERALCO billing statement to its customers beginning April 2012. As at
September 30, 2013, a total of P
=732 million LFT and carrying charges have been billed to affected
customers.

SC Decision on the =
P 0.167 per kWh Refund

Following the SC’s final ruling that directed MERALCO to refund affected customers
P0.167 per kWh for billings made from February 1994 to April 2003, the ERC approved the
=
release of the refund in four phases. The refund is still ongoing. See Note 21 – Customers’ Refund.

3. Basis of Preparation and Statement of Compliance

The accompanying interim consolidated financial statements have been prepared on a historical
cost basis, except for MERALCO’s utility plant and others and investment properties acquired
before January 1, 2004, which are carried at deemed cost, and for derivative financial instruments
and available-for-sale, or AFS, financial assets, which are measured at fair value. Derivative
financial instruments are shown as part of “Other current assets” or “Trade payables and other
current liabilities” accounts, as applicable, in the interim consolidated statement of financial

*SGVFS002843*
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position. AFS financial assets are included as part of “Other noncurrent assets” account in the
interim consolidated statement of financial position.

The interim consolidated financial statements provide comparative information in respect of the
previous period. In addition, the MERALCO Group presents an additional statement of financial
position at the beginning of the earliest period presented when there is a retrospective application
of an accounting policy, a retrospective restatement, or a reclassification of items in financial
statements. An additional statement of financial position as at January 1, 2012 is presented in these
interim consolidated financial statements due to retrospective application of certain accounting
policies. See Note 4 – Significant Accounting Policies, Changes and Improvements.

All values are rounded to the nearest million peso, except when otherwise indicated.

Statement of Compliance

The interim consolidated financial statements of MERALCO and its subsidiaries have been
prepared in compliance with Philippine Financial Reporting Standards or PFRS.

Basis of Consolidation

The interim consolidated financial statements comprise the financial statements of MERALCO and
the following directly and indirectly-owned subsidiaries as at September 30, 2013 and
December 31, 2012 and for the nine months and three months ended September 30, 2013 and
2012:

September 30, 2013 December 31, 2012


Place of Percentage of Ownership
Subsidiaries Incorporation Principal Business Activity Direct Indirect Direct Indirect
Corporate Information Solutions, Inc.,
or CIS Philippines e-Transactions 100 – 100 –
CIS Bayad Center, Inc., or Bayad
Center Philippines Bills payment collection – 100 – 100
Customer Frontline Solutions, Inc. or
CFSI Philippines Tellering services – 100 – 100
Meralco Energy, Inc., or MEI Philippines Energy systems management 100 – 100 –
eMERALCO Ventures, Inc., or e-MVI Philippines e-Business development 100 – 100 –
Paragon Vertical Corporation Philippines Information technology and
multi-media services – 100 – 100
MGen Philippines Development of power
generation plants 100 – 100 –
Calamba Aero Power Corporation 1 Philippines Power generation – 100 – 100
Atimonan Land Ventures
Development Corporationi Philippines Real estate – 100 – 100
Luzon Natural Gas Energy
Corporation 2 Philippines Power generation – 100 – –
MPG Holdings Phils. Inc. British Virgin
Islands Holding company – 100 – –
Meralco Financial Services Corporation
or Finserve Philippines Financial services provider 100 – 100 –
Republic Surety and Insurance
Company, Inc. or RSIC Philippines Insurance 100 – 100 –
Lighthouse Overseas Insurance Limited
or LOIL Bermuda Insurance 100 – 100 –

(Forward)

*SGVFS002843*
-9-

September 30, 2013 December 31, 2012


Place of Percentage of Ownership
Subsidiaries Incorporation Principal Business Activity Direct Indirect Direct Indirect
MIESCOR Philippines Engineering, construction and
consulting services 99 – 99 –
MIESCOR Builders Inc. or MBI Philippines Electric transmission and
distribution operation and
maintenance – 100 – 100
MIESCOR Logistics Inc. or MLI Philippines General services,
manpower/maintenance – 100 – 100
Miescorrail, Inc. or Miescorrail Philippines Engineering, construction and
maintenance of mass transit
system – 100 – 100
CEDC Philippines Power distribution 65 – 65 –

1
Incorporated February 15, 2011 and has not started commercial operations as at September 30, 2013.
2
Incorporated January 11, 2013 and has not started commercial operations as at September 30, 2013.

Subsidiaries are fully consolidated from the date of acquisition, being the date at which
MERALCO obtains control, and continue to be consolidated until the date that such control ceases.
Control is the power to govern the financial and operating policies of the entity.

The interim consolidated financial statements are prepared using uniform accounting policies for
like transactions and other events with similar circumstances. All intra-group balances, income
and expenses, unrealized gains and losses and dividends resulting from intra-group transactions
are eliminated in full.

Non-controlling interests represent the portion of profit or loss and net assets in CEDC and
MIESCOR and its subsidiaries not held by MERALCO and are presented separately in the interim
consolidated statement of income, interim consolidated statement of comprehensive income and
within equity in the interim consolidated statement of financial position, separately from equity
attributable to equity holders of the parent.

Total comprehensive income within a subsidiary is attributed to the non-controlling interest even
if such results in a deficit.

A change in the ownership interest of a subsidiary, without a change of control, is accounted for as
an equity transaction.

If the MERALCO Group loses control over a subsidiary, it: (a) derecognizes the assets (including
goodwill) and liabilities of the subsidiary; (b) derecognizes the carrying amount of any
non-controlling interest; (c) derecognizes the cumulative translation adjustments deferred in
equity; (d) recognizes the fair value of the consideration received; (e) recognizes the fair value of
any investment retained; (f) recognizes any surplus or deficit in profit or loss; and (g) reclassifies
MERALCO’s share of components previously recognized in the consolidated statement of
comprehensive income to the consolidated statement of income.

Seasonality of Operations and Growth Drivers

Approximately 99% of the MERALCO Group’s operating revenues pertain to sale of electricity
distributed by MERALCO and CEDC.

The electricity sales of MERALCO and CEDC exhibit a degree of quarterly seasonality. The kWh
sales in the first quarter is lower than the average of the year as this period is characterized by
cooler temperature and softer consumer demand following heightened consumer spending in the
last quarter of the year. The second quarter is marked by higher than average kWh sales. This is
due to a number of factors, including: increased consumption of households and commercial

*SGVFS002843*
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establishments due the summer season; increased production of industries to replenish stocks and
in preparation for the opening of classes; and, heightened construction activity to take advantage
of the sunny weather. Despite the onset of the rainy season which tapers cooling requirements of
commercial establishments, kWh sales typically peaks in the third quarter of the year.
Manufacturing industries that cater to the export market have their peak production schedule at
this time as they rush to meet shipping deadlines to foreign markets. Industries catering to the
domestic market are also now starting production in preparation for the Christmas season. Lastly,
the fourth quarter performance is about the average of the year. Industrial production winds down
while households and commercial establishments also cut down on their cooling loads. Given this
perspective on the seasonality of kWh sales, a higher proportion of the MERALCO’s and CEDC’s
revenues are earned in the second half of the year.

Aside from the quarterly seasonal pattern, kWh sales on a year-on-year basis adjust as a result of a
number of factors. Sales of electricity normally increase in periods of economic growth, low
inflation and electricity rates, and in periods of high temperatures over extended period of time,
e.g. the El Niño episodes.

The businesses of all other subsidiaries are not highly seasonal.

4. Significant Accounting Policies, Changes and Improvements

Changes in Accounting Policies and Disclosures

The accounting policies adopted in the preparation of interim consolidated financial statements are
consistent with those of the previous financial year except for the adoption of the following
amendments and improvements to existing standards, which were effective beginning
January 1, 2013.

PAS 1, Presentation of Financial Statements – Presentation of Items of Other


Comprehensive Income or OCI

The amendments to PAS 1 change the grouping of items presented in OCI. Items that can be
reclassified (or “recycled”) to profit or loss at a future point in time (for example, upon
derecognition or settlement) will be presented separately from items that will never be recycled.
The amendment is applicable to the MERALCO Group and has assessed that the adoption did not
have significant effect on the consolidated financial statements. The amendment affected the
presentation in the consolidated statement of comprehensive income only and had no impact on
the MERALCO Group’s financial position or performance.

PAS 19, Employee Benefits (Amendments)

For defined benefit plans, the Revised PAS 19 requires all actuarial gains and losses to be
recognized in other comprehensive income and unvested past service costs previously recognized
over the average vesting period to be recognized immediately in profit or loss when incurred.

Prior to adoption of the Revised PAS 19, the MERALCO Group recognized actuarial gains and
losses as income or expense when the net cumulative unrecognized gains and losses for each
individual plan at the end of the previous period exceeded 10% of the higher of the defined benefit
obligation and the fair value of the plan assets and recognized unvested past service costs as an
expense on a straight-line basis over the average vesting period until the benefits become vested.
Upon adoption of the Revised PAS 19, the MERALCO Group changed its accounting policy to

*SGVFS002843*
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recognize all actuarial gains and losses in other comprehensive income and all past service costs in
profit or loss in the period they occur.

The Revised PAS 19 replaced the interest cost and expected return on plan assets with the concept
of net interest on defined benefit liability or asset which is calculated by multiplying the net
balance sheet defined benefit liability or asset by the discount rate used to measure the employee
benefit obligation, each as at the beginning of the annual period.

The Revised PAS 19 also amended the definition of short-term employee benefits and requires
employee benefits to be classified as short-term based on expected timing of settlement rather than
the employee’s entitlement to the benefits. In addition, the Revised PAS 19 modifies the timing of
recognition for termination benefits. The modification requires the termination benefits to be
recognized at the earlier of when the offer cannot be withdrawn or when the related restructuring
costs are recognized.

The MERALCO Group reviewed its existing employee benefits and determined that the amended
standard has significant impact on its accounting for retirement benefits. The MERALCO Group
obtained the services of an independent actuary to compute the impact on the interim consolidated
financial statements. The effects are detailed below:

As at As at
December 31, January 1,
2012 2012
(Amounts in millions)
Consolidated statements of financial position
Increase (decrease) in:
Net defined benefit liability (P
= 605) =2,332
P
Deferred tax assets (181) 700
Other comprehensive income 289 (1,665)
Retained earnings 134 33

For the
Nine Months
Ended September 30,
2012
(Amounts in millions, except per share data)
Consolidated statement of income
Increase (decrease) in:
Net benefit cost (P
=108)
Provision for income tax 33
Profit for the period attributable to:
Equity holders of the Parent 75
Non-controlling interests –
Earnings per share 0.06

Consolidated statement of comprehensive income


Increase in other comprehensive income 1,466

*SGVFS002843*
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Philippine Interpretation IFRIC 29, Stripping Costs in the Production Phase


of a Surface Mine

This interpretation applies to waste removal (stripping) costs incurred in surface mining activity,
during the production phase of the mine. The interpretation addresses the accounting for the
benefit from the stripping activity. This new interpretation is not relevant to the MERALCO
Group.

PFRS 7, Financial Instruments: Disclosures - Offsetting Financial Assets


and Financial Liabilities

These amendments require an entity to disclose information about rights of set-off and related
arrangements (such as collateral agreements). The new disclosures are required for all recognized
financial instruments that are set off in accordance with PAS 32, Financial Instruments:
Presentation. These disclosures also apply to recognized financial instruments that are subject to
an enforceable master netting arrangement or ‘similar agreement’, irrespective of whether they are
set-off in accordance with PAS 32. The amendments require entities to disclose, in a tabular
format unless another format is more appropriate, the following minimum quantitative
information. These are presented separately for financial assets and financial liabilities recognized
at the end of the reporting period:

a) The gross amounts of those recognized financial assets and recognized financial liabilities;
b) The amounts that are set off in accordance with the criteria in PAS 32 when determining the
net amounts presented in the statement of financial position;
c) The net amounts presented in the statement of financial position;
d) The amounts subject to an enforceable master netting arrangement or similar agreement that
are not otherwise included in (b) above, including:
i. Amounts related to recognized financial instruments that do not meet some or all of the
offsetting criteria in PAS 32; and
ii. Amounts related to financial collateral (including cash collateral); and
e) The net amount after deducting the amounts in (d) from the amounts in (c) above.

The amendments are applicable to the MERALCO Group and based on the evaluation, the
amendments have no impact on the MERALCO Group’s financial position or performance.

PFRS 10, Consolidated Financial Statements

PFRS 10 replaces the portion of PAS 27, Consolidated and Separate Financial Statements, that
addresses the accounting for consolidated financial statements. It also includes the issues raised in
Standing Interpretations Committee or SIC 12, Consolidation - Special Purpose Entities. PFRS 10
establishes a single control model that applies to all entities including special purpose entities. The
changes introduced by PFRS 10 will require management to exercise significant judgment to
determine which entities are controlled, and therefore, are required to be consolidated by a parent,
compared with the requirements that were in PAS 27. A reassessment of control was performed by
MERALCO on all its subsidiaries and associates in accordance with the provisions of PFRS 10.
Based on the reassessment made, MERALCO has not determined any change in the control or
significant influence in any of its subsidiaries and associates.

PFRS 11, Joint Arrangements

PFRS 11 replaces PAS 31, Interests in Joint Ventures, and SIC 13, Jointly Controlled Entities -
Non-Monetary Contributions by Venturers. PFRS 11 removes the option to account for jointly

*SGVFS002843*
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controlled entities using proportionate consolidation. Instead, jointly controlled entities that meet
the definition of a joint venture must be accounted for using the equity method. The standard is
applicable to the MERALCO Group and based on the MERALCO Group’s evaluation, the
application of this new standard has no impact on the consolidated financial statements of the
MERALCO Group.

PFRS 12, Disclosure of Interests in Other Entities

PFRS 12 includes all of the disclosures related to consolidated financial statements that were
previously in PAS 27, as well as all the disclosures that were previously included in PAS 31 and
PAS 28, Investments in Associates. These disclosures relate to an entity’s interests in subsidiaries,
joint arrangements, associates and structured entities. The standard is applicable to the MERALCO
Group and based on the MERALCO Group’s evaluation, the standard has no impact on the
MERALCO Group’s financial position or performance but affects disclosures only.

PFRS 13, Fair Value Measurement

PFRS 13 establishes a single source of guidance under PFRS for all fair value measurements.
PFRS 13 does not change when an entity is required to use fair value, but rather provides guidance
on how to measure fair value under PFRS when fair value is required or permitted. The standard is
applicable to the MERALCO Group and based on the MERALCO Group’s evaluation, the standard
has no impact on the MERALCO Group’s financial position or performance but affects disclosures
only.

PAS 27, Separate Financial Statements (as revised in 2011)

As a consequence of the issuance of the new PFRS 10 and PFRS 12, what remains of PAS 27 is
limited to accounting for subsidiaries, jointly controlled entities, and associates in the separate
financial statements. The standard is applicable to the MERALCO Group and based on the
MERALCO Group’s evaluation, the application of this new standard has no impact on the
consolidated financial statements of the MERALCO Group.

PAS 28, Investments in Associates and Joint Ventures (as revised in 2011)

As a consequence of the issuance of the new PFRS 11 and PFRS 12, PAS 28 has been renamed
PAS 28, Investments in Associates and Joint Ventures, and describes the application of the equity
method to investments in joint ventures in addition to associates. The standard is applicable to the
MERALCO Group and based on the MERALCO Group’s evaluation, the application of this new
standard has no impact on the consolidated financial statements of the MERALCO Group.

Annual Improvements to PFRS (2009-2011 cycle)

The Annual Improvements to PFRS (2009-2011 cycle) contain non-urgent but necessary
amendments to PFRS. The amendments are effective for annual periods beginning on or after
January 1, 2013 and to be applied retrospectively.

PFRS 1, First-time Adoption of PFRS – Borrowing Costs

The amendment clarifies that, upon adoption of PFRS, an entity that capitalized borrowing costs
in accordance with its previous generally accepted accounting principles, may carry forward,
without any adjustment, the amount previously capitalized in its opening statement of financial
position at the date of transition. Subsequent to the adoption of PFRS, borrowing costs are

*SGVFS002843*
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recognized in accordance with PAS 23, Borrowing Costs. The amendment does not apply to the
MERALCO Group as it is not a first-time adopter of PFRS.

PAS 1, Presentation of Financial Statements - Clarification of the Requirements for


Comparative Information

The amendment clarifies the requirements for comparative information that are disclosed
voluntarily and those that are mandatory due to retrospective application of an accounting policy,
or retrospective restatement or reclassification of items in the financial statements. An entity must
include comparative information in the related notes to the financial statements when it voluntarily
provides comparative information beyond the minimum required comparative period. The
additional comparative period does not need to contain a complete set of financial statements. On
the other hand, supporting notes for the third balance sheet (mandatory when there is a
retrospective application of an accounting policy, or retrospective restatement or reclassification
of items in the financial statements) are not required. The amendments affect disclosures only and
have no impact on the MERALCO Group’s financial position or performance.

PAS 16, Property, Plant and Equipment - Classification of Servicing Equipment

The amendment clarifies that spare parts, stand-by equipment and servicing equipment should be
recognized as property, plant and equipment when they meet the definition of property, plant and
equipment and should be recognized as inventory if otherwise. The amendment has no impact on
the MERALCO Group’s financial position or performance.

PAS 32, Financial Instruments: Presentation - Tax Effect of Distribution to Holders of


Equity Instruments

The amendment clarifies that income taxes relating to distributions to equity holders and to
transaction costs of an equity transaction are accounted for in accordance with PAS 12, Income
Taxes. The amendment has no impact on the MERALCO Group’s financial position or
performance.

PAS 34, Interim Financial Reporting - Interim Financial Reporting and Segment
Information for Total Assets and Liabilities

The amendment clarifies that the total assets and liabilities for a particular reportable segment
need to be disclosed only when the amounts are regularly provided to the chief operating decision
maker and there has been a material change from the amount disclosed in the entity’s previous
annual financial statements for that reportable segment. The amendment has no impact on the
MERALCO Group’s financial position or performance.

New Accounting Standards, Interpretations and Amendments to Existing Standards Effective


after December 31, 2013

The MERALCO Group will adopt the following new standards, interpretations and amendments to
existing standards enumerated below when these become effective. Except as otherwise indicated,
the MERALCO Group does not expect the adoption of these revised standards and amendments to
PFRS to have a significant impact on the MERALCO Group’s consolidated financial statements.

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Effective 2014

PAS 36, Impairment of Assets - Recoverable Amount Disclosures for Non-Financial


Assets (Amendments)

These amendments remove the unintended consequences of PFRS 13 on the disclosures required
under PAS 36. In addition, these amendments require disclosure of the recoverable amounts for
the assets or cash-generating units for which impairment loss has been recognized or reversed
during the period. These amendments are effective retrospectively for annual periods beginning on
or after January 1, 2014 with earlier application permitted, provided PFRS 13 is also applied. The
amendments affect disclosures only and have no impact on the MERALCO Group’s financial
position or performance.

Investment Entities (Amendments to PFRS 10, PFRS 12 and PAS 27)

These amendments provide an exception to the consolidation requirement for entities that meet the
definition of an investment entity under PFRS 10. The exception to consolidation requires
investment entities to account for subsidiaries at fair value through profit or loss. It is not expected
that this amendment would be relevant to the MERALCO Group since none of the entities in the
MERALCO Group would qualify to be an investment entity under PFRS 10.

Philippine Interpretation IFRIC 21, Levies (IFRIC 21)

IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers
payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon
reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated
before the specified minimum threshold is reached. The MERALCO Group does not expect that
IFRIC 21 will have material financial impact in future financial statements.

PAS 39, Financial Instruments: Recognition and Measurement - Novation of


Derivatives and Continuation of Hedge Accounting (Amendments)

These amendments provide relief from discontinuing hedge accounting when novation of a
derivative designated as a hedging instrument meets certain criteria. The MERALCO Group has
not novated its derivatives during the current period. However, these amendments would be
considered for future novations.

PAS 32, Financial Instruments: Presentation – Offsetting Financial Assets


and Financial Liabilities

The amendments clarify the meaning of “currently has a legally enforceable right to set-off” and
also clarify the application of the PAS 32 offsetting criteria to settlement systems (such as central
clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The
amendments affect presentation only and have no impact on the MERALCO Group’s financial
position or performance. The amendments to PAS 32 are to be applied retrospectively for annual
periods beginning on or after January 1, 2014.

*SGVFS002843*
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Effective 2015

PFRS 9, Financial Instruments: Classification and Measurement

PFRS 9, as issued, reflects the first phase on the replacement of PAS 39 and applies to the
classification and measurement of financial assets and liabilities as defined in PAS 39, Financial
Instruments: Recognition and Measurement. Work on impairment of financial instruments and
hedge accounting is still ongoing, with a view to replacing PAS 39 in its entirety. PFRS 9 requires
all financial assets to be measured at fair value at initial recognition. A debt financial asset may, if
the fair value option or FVO is not invoked, be subsequently measured at amortized cost if it is
held within a business model that has the objective to hold the assets to collect the contractual cash
flows and its contractual terms give rise, on specified dates, to cash flows that are solely payments
of principal and interest on the principal outstanding. All other debt instruments are subsequently
measured at fair value through profit or loss. All equity financial assets are measured at fair value
either through OCI or profit or loss. Equity financial assets held for trading must be measured at
fair value through profit or loss. For FVO liabilities, the amount of change in the fair value of a
liability that is attributable to changes in credit risk must be presented in OCI. The remainder of
the change in fair value is presented in profit or loss, unless presentation of the fair value change
in respect of the liability’s credit risk in OCI would create or enlarge an accounting mismatch in
profit or loss. All other PAS 39 classification and measurement requirements for financial
liabilities have been carried forward into PFRS 9, including the embedded derivative separation
rules and the criteria for using the FVO. The MERALCO Group conducted an evaluation of the
early adoption of PFRS 9 and has assessed that the first phase of PFRS 9 will have an effect on the
classification and measurement of financial assets. The MERALCO Group will quantify the effect
on the consolidated financial statements in conjunction with the other phases, when issued, to
present a comprehensive picture.

PFRS 9 is effective for annual periods beginning on or after January 1, 2015.

Deferred Effectivity

Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate
This interpretation covers accounting for revenue and associated expenses by entities that
undertake the construction of real estate directly or through subcontractors. The interpretation
requires that revenue on construction of real estate be recognized only upon completion, except
when such contract qualifies as construction contract to be accounted for under PAS 11 or involves
rendering of services in which case revenue is recognized based on stage of completion. Contracts
involving provision of services with the construction materials and where the risks and rewards of
ownership are transferred to the buyer on a continuous basis will also be accounted for based on
stage of completion. The SEC and the FRSC have deferred the effectivity of this interpretation
until the final “Revenue” standard is issued by the International Accounting Standards Board and
an evaluation of the requirements of the final “Revenue” standard against the practices of the
Philippine real estate industry is completed.

Significant Accounting Policies

The principal accounting policies adopted in the preparation of the consolidated financial
statements are as follows:

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Business Combinations and Goodwill

Business combinations are accounted for using the acquisition method. The cost of an acquisition
is measured as the aggregate of the consideration transferred measured at acquisition-date fair
value and the amount of any non-controlling interest in the acquiree. For each business
combination, the MERALCO Group elects whether to measure the non-controlling interest in the
acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets.
Acquisition-related costs in a business combination are expensed.

When a business is acquired, an assessment is made of the identifiable assets acquired and
liabilities assumed for appropriate classification and designation in accordance with the
contractual terms, economic and other pertinent conditions as at the acquisition date. This includes
the separation of embedded derivatives in host contracts by the acquiree.

If the business combination is achieved in stages, the acquirer’s previously held equity interest in
the acquiree is remeasured at fair value as at acquisition date and any resulting gain or loss is
recognized in profit or loss.

Any contingent consideration to be transferred by the acquirer will be recognized at fair value at
the acquisition date. Subsequent changes to the fair value of the contingent consideration, which is
deemed to be an asset or liability will be recognized in accordance with PAS 39, either in profit or
loss or other comprehensive income. If the contingent consideration is classified as equity, it shall
not be remeasured until it is finally settled within equity.

Goodwill is initially measured at cost being the excess of the aggregate of the consideration
transferred, any non-controlling interest in the acquiree and, in a business combination achieved in
stages, the acquisition-date fair value of the previously held equity interest in the acquiree, over
the fair value of net identifiable assets acquired. If the difference is negative, such difference is
recognized as gain in the consolidated statement of income.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For
the purpose of impairment testing, goodwill acquired in a business combination is, from
acquisition date, allocated to each of the cash generating units that are expected to benefit from the
combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those
units, beginning on the acquisition date.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is
disposed of, the goodwill associated with the operation disposed of is included in the carrying
amount of the operation when determining the gain or loss on disposal of the operation. Goodwill
disposed of in such circumstance is measured based on relative values of the operation disposed
and the portion of the cash-generating unit retained.

Business combinations involving entities under common control are accounted for similar to the
pooling-of-interest method. The assets and liabilities of the combining entities are reflected at their
carrying amounts reported in the consolidated financial statements of the controlling holding
company. Any difference between the consideration paid and the share capital of the “acquired”
entity is reflected within equity as additional paid-in capital. The consolidated statement of income
reflects the results of the combining entities for the full period, irrespective of when the
combination takes place. Comparatives are presented as if the entities had always been combined
since the date the entities were under common control.

*SGVFS002843*
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Utility Plant and Others

Utility plant and others, except land, are stated at cost, net of accumulated depreciation and
amortization and accumulated impairment loss, if any. Costs include the cost of replacing part of
such utility plant and other properties when such cost is incurred, if the recognition criteria are
met. All other repair and maintenance costs are recognized as incurred in the consolidated
statement of income. The present value of the expected cost for the decommissioning of the asset
after use is included in the cost of the respective asset if the recognition criteria for a provision are
met.

Land is stated at cost less any impairment in value.

MERALCO’s utility plant and others are stated at deemed cost. The revalued amount recorded as
at January 1, 2004 was adopted as deemed cost as allowed by the transitional provisions of
PFRS 1. The balance of revaluation increment was closed to retained earnings. See Note 16 –
Equity for the related discussion.

Depreciation and amortization of utility plant and others are computed using the straight-line
method (except for certain subtransmission and distribution assets, which use straight-line
functional group method) over the following estimated useful lives:

Asset Type Estimated Useful Lives


Subtransmission and distribution 10–50 years, depending on the life
of the significant parts
Others:
Buildings and improvements 15–40 years
Communication equipment 10 years
Office furniture, fixtures and other equipment 5 years
Transportation equipment 5–10 years
Others 5–20 years

An item of utility plant and others is derecognized upon disposal or when no future economic
benefits are expected from its use or disposal. Any gain or loss arising as a result of the
derecognition of the asset (calculated as the difference between the net disposal proceeds and the
carrying amount of the asset) is included in the consolidated statement of income in the period the
asset is derecognized.

The asset’s residual values, useful lives and methods of depreciation and amortization are
reviewed, and adjusted prospectively if appropriate, at each reporting date to ensure that the
residual values, periods and methods of depreciation and amortization are consistent with the
expected pattern of economic benefits from items of utility plant and others.

Construction in Progress

Construction in progress is stated at cost, which includes cost of construction, plant and
equipment, capitalized borrowing costs and other direct costs. Construction in progress is not
depreciated until such time that the relevant assets are substantially completed and available for
their intended use.

*SGVFS002843*
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Borrowing Costs

Borrowing costs are capitalized if they are directly attributable to the acquisition, construction or
production of a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial
period of time to get ready for its intended use or sale. Capitalization of borrowing costs
commences when the activities necessary to prepare the asset for its intended use or sale have
been undertaken and expenditures and borrowing costs have been incurred. Borrowing costs are
capitalized until the asset is substantially available for its intended use.

Borrowing costs include interest charges and other costs incurred in connection with the
borrowing of funds, as well as any exchange differences arising from any foreign currency-
denominated borrowings used to finance the projects, to the extent that they are regarded as an
adjustment to interest costs.

All other borrowing costs are expensed as incurred.

Investment Properties

Investment properties, except land, are stated at cost, net of accumulated depreciation and
accumulated impairment loss, if any. The carrying amount includes transaction costs and costs of
replacing part of an existing investment property at the time such costs are incurred if the
recognition criteria are met and excludes the costs of day-to-day servicing of an investment
property.

Investment properties include properties that are being constructed or developed for future use as
investment property.

Land classified as investment property is carried at cost less any impairment in value.

MERALCO’s investment properties acquired before January 1, 2004 are stated at deemed cost. See
Note 16 – Equity for the related discussions.

Investment properties, except land, are being depreciated on a straight-line basis over the useful
life of five to 35 years.

Investment properties are derecognized either when they have been disposed of or when these are
permanently withdrawn from use and no future economic benefit is expected from its disposal.
Any gain or loss from the derecognition of the investment properties are recognized in the
consolidated statement of income in the period these are disposed or retired.

Transfers are made to investment property when and only when there is a change in use,
evidenced by ending of owner-occupation or commencement of an operating lease to another
party. If owner-occupied property becomes an investment property, the MERALCO Group
accounts for such property in accordance with the policy stated under utility plant and others up to
the date of the change in use. Transfers are made from investment property when, and only when,
there is a change in use, evidenced by commencement of owner-occupation or commencement of
development with a view to sale. Transfers from investment property are recorded using the
carrying amount of the investment property at the date of change in use.

*SGVFS002843*
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Asset Retirement Obligations

Under the terms of certain lease contracts, the MERALCO Group is required to dismantle the
installations made in leased sites and restore such sites to their original condition at the end of the
term of the lease contracts. The MERALCO Group recognizes a liability measured at the present
value of the estimated costs of these obligations and capitalizes such costs as part of the balance of
the related item of utility plant and others and investment properties. The amount of asset
retirement obligations is accreted and such accretion is recognized as interest expense.

Intangible Assets

Intangible assets acquired separately are initially measured at cost. Following initial recognition,
intangible assets are carried at cost less accumulated amortization and any accumulated
impairment loss. The useful lives of intangible assets are assessed at the individual asset level as
having either finite or indefinite useful lives.

Intangible assets with finite lives are amortized over the useful economic lives of five years using
the straight-line method and assessed for impairment whenever there is an indication that the
intangible assets may be impaired. At a minimum, the amortization period and the amortization
method for an intangible asset with a finite useful life are reviewed at each reporting date.
Changes in the expected useful life or the expected consumption pattern of future economic
benefit embodied in the asset are accounted for by changing the amortization period or method, as
appropriate, and treated as change in accounting estimates. The amortization expense of intangible
assets with finite lives is recognized in the consolidated statement of income.

Intangible assets with indefinite useful lives are not amortized, but are assessed for impairment
annually either individually or at the cash-generating unit level. The assessment of indefinite
useful life is done annually at every reporting date to determine whether such indefinite useful life
continues to exist. Otherwise, the change in the useful life assessment from indefinite to finite is
made on a prospective basis.

Gains or losses arising from derecognition of an intangible asset are measured as the difference
between the net disposal proceeds and the carrying amount of the asset, and are recognized in the
consolidated statement of income.

Intangible assets generated within the business are not capitalized and expenditures are charged to
profit or loss in the period these are incurred.

Investments in and Advances to Associates

An associate is an entity over which MERALCO has significant influence and which is neither a
subsidiary nor a joint venture. Investments in associates are accounted for using the equity method
of accounting and are initially recognized at cost.

Under the equity method, investment in an associate is carried in the consolidated statement of
financial position at cost plus post-acquisition changes in the MERALCO Group’s share of net
assets of the associate, less any impairment in value. Any goodwill relating to an associate is
included in the carrying amount of the investment and is not amortized nor individually tested for
impairment. The consolidated statement of income reflects the MERALCO Group’s share of the
results of operations of the associates. Where there has been a change recognized directly in the
equity of the associate, the MERALCO Group recognizes its share in any change and discloses
this, when applicable, in the consolidated statement of comprehensive income and changes in

*SGVFS002843*
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equity. Unrealized gains and losses resulting from transactions between and among the
MERALCO Group and the associates are eliminated to the extent of the interest in those
associates.

The share in profits and losses of associates is shown on the face of the consolidated statement of
income. This is the profit or loss attributable to equity holders of the associate and is therefore
profit or loss after tax and net of non-controlling interest in the subsidiaries of the associates.

The reporting date of the associates and that of the MERALCO Group are identical and the
associates’ accounting policies conform with those used by the MERALCO Group for like
transactions and events in similar circumstances.

After application of the equity method, the MERALCO Group determines whether it is necessary
to recognize an impairment loss on the investments in associates. At the end of each reporting
date, the MERALCO Group determines whether there is any objective evidence that each of the
investments in associates is impaired. If this is the case, the MERALCO Group calculates the
amount of impairment as the difference between the recoverable amount of the investment in
associate and its carrying value and recognizes the amount in the consolidated statement of
income.

Upon loss of significant influence over the associate, the MERALCO Group measures and
recognizes any remaining investment at its fair value. Any difference between the carrying amount
of the investment in associate upon loss of significant influence, and the aggregate of the fair value
of the remaining investment and proceeds from disposal, is recognized in the consolidated
statement of income. If MERALCO Group's share of losses of an associate equals or exceeds its
interest in the associate, MERALCO Group discontinues recognizing its share of further losses.
MERALCO Group's interest in an associate is the carrying amount of the investment in the
associate determined using the equity method together with any long-term interests that, in
substance, form part of MERALCO Group's net investment in the associate. An item for which
settlement is neither planned nor likely to occur in the foreseeable future is, in substance, an
extension of MERALCO Group's investment in that associate. Losses recognized using the equity
method in excess of MERALCO Group's investment in ordinary shares are applied to the other
components of MERALCO Group's interest in an associate in the reverse order of their seniority
(i.e., priority in liquidation).

Investments in Joint Ventures

The MERALCO Group’s ownership interests in Indra Philippines, Inc. or Indra Philippines, and
Rockwell Business Center, both jointly controlled entities, are accounted for using the equity
method of accounting in the consolidated financial statements. The interests in joint ventures are
carried at cost plus post-acquisition changes in the MERALCO Group’s share in the net assets of
the joint ventures, less any impairment in value. The MERALCO Group’s share in the results of
operations of the joint ventures is recognized in the consolidated statement of income. If
MERALCO Group's share of losses of a joint venture equals or exceeds its interest in the joint
venture, MERALCO Group discontinues recognizing its share of further losses. MERALCO
Group's interest in a joint venture is the carrying amount of the investment in the joint venture
determined using the equity method together with any long-term interests that, in substance, form
part of MERALCO Group's net investment in the joint venture. An item for which settlement is
neither planned nor likely to occur in the foreseeable future is, in substance, an extension of
MERALCO Group's investment in that joint venture. Losses recognized using the equity method in
excess of MERALCO Group's investment in ordinary shares are applied to the other components

*SGVFS002843*
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of MERALCO Group's interest in a joint venture in the reverse order of their seniority (i.e., priority
in liquidation).

A joint venture is a contractual arrangement whereby two or more parties undertake an economic
activity that is subject to joint control. A jointly controlled entity is a joint venture that involves
the establishment of a separate entity in which each venturer has an interest. The financial
statements of the joint ventures are prepared for the same reporting period as that of the
MERALCO Group, using consistent accounting policies.

Adjustments are made in the consolidated financial statements to eliminate the MERALCO
Group’s share of unrealized gains and losses on transactions between the MERALCO Group and
the jointly controlled entities. The joint venture is carried at equity method until the date on which
the MERALCO Group ceases to have joint control over the jointly controlled entity.

The MERALCO Group measures and recognizes the remaining investment at fair value upon loss
of control and provided the jointly controlled entity does not become a subsidiary or associate.
Any difference between the carrying amount of the jointly controlled entity upon loss of joint
control, and the aggregate of the fair value of the remaining investment and proceeds from
disposal, is recognized in the consolidated statement of income. When the remaining investment
constitutes significant influence, it is accounted for as investment in an associate.

Impairment of Nonfinancial Assets

The MERALCO Group assesses at each reporting date whether there is an indication that a
nonfinancial asset (utility plant and others, investment properties, investments in and advances to
associates and joint ventures, receivable from the BIR and intangible assets), other than goodwill
and intangible assets with indefinite useful life, may be impaired. If any such indication exists, the
MERALCO Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable
amount is the higher of an individual asset’s or a cash-generating unit’s fair value less costs to sell
and its value in use. Where the carrying amount of an asset exceeds its recoverable amount, the
asset is considered impaired and is written down to its recoverable amount. The fair value is the
amount obtainable from the sale of the asset in an arm’s-length transaction. In determining fair
value less costs to sell, an appropriate valuation model is used. These calculations are corroborated
by valuation factors/parameters, quoted share prices for publicly traded securities or other
available fair value indicators. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset. Impairment losses are
recognized in the consolidated statement of income.

An assessment is also made at each reporting date as to whether there is any indication that
previously recognized impairment losses may no longer exist or may have decreased. If such
indication exists, the MERALCO Group estimates the individual asset’s or cash-generating unit’s
recoverable amount. A previously recognized impairment loss is reversed only if there has been a
change in the estimates used to determine the asset’s recoverable amount since the last impairment
loss was recognized. If a reversal of impairment loss is to be recognized, the carrying amount of
the asset is increased to its recoverable amount. The increased amount cannot exceed the carrying
amount that would have been determined had no impairment loss been recognized for the asset in
prior years. Such reversal is recognized in the consolidated statement of income. After such
reversal, the depreciation and amortization expense are adjusted in future periods to allocate the
asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining
useful life.

*SGVFS002843*
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Intangible assets with indefinite useful lives are tested for impairment annually at every reporting
date or more frequently if events or changes in circumstances indicate that the carrying value may
be impaired, either individually or at the cash-generating unit level, as appropriate. The amount of
impairment is calculated as the difference between the recoverable amount of the intangible asset
and its carrying amount. The impairment loss is recognized in the consolidated statement of
income. Impairment losses relating to intangible assets may be reversed in future periods.

Goodwill is reviewed for impairment annually at every reporting date or more frequently if events
or changes in circumstances indicate that the carrying value may be impaired. Impairment is
determined for goodwill by assessing the recoverable amount of the cash-generating unit or group
of cash-generating units, to which the goodwill relates. Where the recoverable amount of the cash-
generating unit or group of cash-generating units is less than the carrying amount of the cash-
generating unit or group of cash-generating units to which goodwill has been allocated, an
impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future
periods.

If there is incomplete allocation of goodwill acquired in a business combination to cash-generating


units or group of cash-generating units, an impairment testing of goodwill is only carried out when
impairment indicators exist. Where impairment indicators exist, impairment testing of goodwill is
performed at a level at which the acquirer can reliably test for impairment.

Inventories

Inventories are stated at the lower of cost and net realizable value. Costs of acquiring materials
and supplies including costs incurred in bringing each item to their present location and condition
are accounted using the moving average cost method. Net realizable value is the estimated selling
price in the ordinary course of business less the estimated cost to sell or the current replacement
cost of the asset.

Financial Assets

Initial Recognition

Financial assets are classified as at fair value through profit or loss or FVPL, loans and
receivables, held-to-maturity or HTM investments, AFS financial assets, or as derivatives
designated as hedging instruments in an effective hedge, as appropriate. The classification of
financial assets is determined at initial recognition and, where allowed and appropriate, re-
evaluated at each reporting date.

Financial assets are recognized initially at fair value. Transaction costs are included in the initial
measurement of all financial assets, except for financial instruments measured at FVPL.

Purchases or sales of financial assets that require delivery of assets within a timeframe established
by regulation or convention in the market place (regular way purchase) are recognized on the trade
date, which is the date the MERALCO Group commits to purchase or sell the asset.

The MERALCO Group’s financial assets include cash and cash equivalents, trade and non-trade
receivables, advance payments to a supplier, quoted and unquoted equity securities and embedded
derivatives that are not accounted for as effective accounting hedges.

*SGVFS002843*
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Subsequent Measurement

The subsequent measurement of financial assets depends on the classification as follows:

Financial Assets at FVPL

Financial assets at FVPL include financial assets held-for-trading and financial assets designated
upon initial recognition as at FVPL. Financial assets are classified as held-for-trading if they are
acquired for the purpose of selling in the near term. Derivative assets, including separated
embedded derivatives are also classified as held-for-trading unless they are designated as effective
hedging instruments.

Financial assets may be designated at initial recognition as at FVPL if any of the following criteria
are met: (i) the designation eliminates or significantly reduces the inconsistent treatment that
would otherwise arise from measuring the assets or recognizing gains or losses on them on a
different basis; (ii) the financial assets are part of a group, which are managed and their
performance are evaluated on a fair value basis, in accordance with a documented risk
management strategy; or (iii) the financial assets contain one or more embedded derivatives that
would need to be recorded separately.

Financial assets at FVPL are carried in the consolidated statement of financial position at fair
value with gains or losses on fair value changes recognized in the consolidated statement of
income under “Interest and other financial income” or “Interest and other financial charges”
account, respectively. Interest earned and dividends received from investment at FVPL are also
recognized in the consolidated statement of income under “Interest and other financial income”
account.

Derivatives embedded in host contracts are accounted for as separate derivatives when their risks
and characteristics are not closely related to those of the host contracts and the host contracts are
not carried at fair value. These embedded derivatives are measured at fair value with gains and
losses arising from changes in fair value recognized in the consolidated statement of income.
Reassessment only occurs if there is a change in the terms of the contract that significantly
modifies the cash flows that would otherwise be required under the contract.

Loans and Receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that
are not quoted in an active market. Such financial assets are carried at amortized cost using the
effective interest method. This method uses an effective interest rate that discounts estimated
future cash receipts through the expected life of the financial asset to the net carrying amount of
the financial asset. Gains or losses are recognized in the consolidated statement of income when
the loans and receivables are derecognized or impaired, as well as when these are amortized.
Interest earned or incurred is recorded in “Interest and other financial income” or “Interest and
other financial charges” account, respectively, in the consolidated statement of income. Assets in
this category are included under current assets except for assets with maturities beyond 12 months
from the reporting date, which are classified as noncurrent assets.

HTM Investments

Non-derivative financial assets with fixed or determinable payments and fixed maturities are
classified as HTM when the MERALCO Group has the positive intention and ability to hold these
assets to maturity. After initial measurement, HTM investments are measured at amortized cost
using the effective interest method. Gains or losses are recognized in the consolidated statement of

*SGVFS002843*
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income. Assets in this category are included in the current assets except for maturities beyond 12
months from the reporting date, which are classified as noncurrent assets.

AFS Financial Assets

AFS financial assets are non-derivative financial assets that are designated as AFS or are not
classified in any of the three foregoing categories. They are purchased and held indefinitely and
may be sold in response to liquidity requirements or changes in market conditions. After initial
measurement, AFS financial assets are measured at fair value with unrealized gains or losses
recognized in other comprehensive income until the investment is derecognized, at which time the
cumulative gain or loss recorded in other comprehensive income is recognized in the consolidated
statement of income, or determined to be impaired, at which time the cumulative loss recorded in
other comprehensive income is recognized in the consolidated statement of income. Interest
earned on holding AFS debt securities are included under “Interest and other financial income”
account in the consolidated statement of income. Dividends earned on holding AFS equity are
recognized in the consolidated statement of income under “Interest and other financial income”
account when the right of the payment has been established. These are included under noncurrent
assets unless there is an intention to dispose of the investment within 12 months from the reporting
date.

Financial Liabilities

Initial Recognition

Financial liabilities are classified as financial liabilities at FVPL, other financial liabilities, or as
derivatives designated as hedging instruments in an effective hedge, as appropriate. The
classification of the financial liability is determined at initial recognition.

Financial liabilities are recognized initially at fair value inclusive of directly attributable
transaction costs, except for financial liabilities at FVPL.

The MERALCO Group’s financial liabilities include notes payable, interest-bearing long-term
financial liabilities, trade payables and other current liabilities (excluding output VAT, accrued
taxes, reinsurance liability and deferred lease income), customers’ deposits, refundable service
extension costs, customers’ refund, other noncurrent liabilities and derivatives that are not
accounted for as effective accounting hedges.

Subsequent Measurement

The subsequent measurement of financial liabilities depends on their classification as follows:

Financial Liabilities at FVPL

Financial liabilities at FVPL include financial liabilities held-for-trading and financial liabilities
designated upon initial recognition as at FVPL. Financial liabilities are classified as held-for-
trading if they are incurred for the purpose of repurchasing in the near term. Derivative liabilities,
including separated embedded liabilities are also classified as held-for-trading unless they are
designated as effective hedging instruments. Financial liabilities at FVPL are carried in the
consolidated statement of financial position at fair value with gains or losses recognized in the
consolidated statement of income under “Interest and other financial income” or “Interest and
other financial charges” account, respectively. Interest incurred on financial liabilities designated

*SGVFS002843*
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as at FVPL is recognized in the consolidated statement of income under “Interest and other
financial charges” account.

Financial liabilities may be designated at initial recognition as at FVPL, if any of the following
criteria are met: (i) the designation eliminates or significantly reduces the inconsistent treatment
that would otherwise arise from measuring the liabilities or recognizing gains or losses on them on
a different bases; (ii) the financial liabilities are part of a group which are managed and their
performance are evaluated on a fair value basis, in accordance with a documented risk
management strategy; or (iii) the financial liabilities contain one or more embedded derivatives
that would need to be recorded separately. The MERALCO Group does not have financial
liabilities designated as at FVPL as at September 30, 2013 and December 31, 2012.

Other Financial Liabilities

After initial recognition, other financial liabilities are subsequently measured at amortized cost
using the effective interest method.

Gains and losses are recognized in the consolidated statement of income when the liabilities are
derecognized as when these are amortized. Amortized cost is calculated by taking into account any
discount or premium on acquisition and fees or costs that are integral part of the effective interest
rate. The effective interest amortization is included under “Interest and other financial charges”
account in the consolidated statement of income.

Derivative Financial Instruments

Initial Recognition and Subsequent Measurement

MERALCO has separated embedded foreign currency forwards which are derivative financial
instruments used to hedge risks associated with foreign currency fluctuations.

Derivative instruments, including separated embedded derivatives, are initially recognized at fair
value on the date at which a derivative transaction is entered into or separated, and are
subsequently re-measured at fair value. Changes in fair value of derivative instruments, other than
those accounted for as effective hedges, are recognized immediately in the consolidated statement
of income. Changes in fair value of derivative instruments accounted as effective hedges are
recognized in other comprehensive income. Derivatives are carried as assets when the fair value is
positive and as liabilities when the fair value is negative. MERALCO Group does not have
derivatives accounted for under hedge accounting.

An embedded derivative is separated from the hybrid or combined contract if all the following
conditions are met: (a) the economic characteristics and risks of the embedded derivative are not
clearly and closely related to the economic characteristics and risks of the host contract; (b) a
separate instrument with the same terms as the embedded derivative would meet the definition of a
derivative; and (c) the hybrid instrument is not recognized as at FVPL.

Subsequent reassessment is prohibited unless there is a change in the terms of the contract that
significantly modifies the cash flows that otherwise would be required under the contract. An
entity determines whether a modification to cash flows is significant by considering the extent to
which the expected future cash flows associated with the embedded derivative, the host contract or
both have changed.

See Note 28 – Financial Assets and Liabilities.

*SGVFS002843*
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Offsetting of Financial Instruments

Financial assets and liabilities are offset and the net amount is reported in the consolidated
statement of financial position if, and only if, there is currently enforceable legal right to offset the
recognized amounts and there is an intention to settle on a net basis, or to realize the assets and
settle the liabilities simultaneously.

Fair Value of Financial Instruments

The fair value of financial instruments that are actively traded in organized financial markets is
determined by reference to quoted market prices at the close of business at the transaction or
reporting date. When current bid and asking prices are not available, the price of the most recent
transaction provides evidence of the current fair value as long as there has not been a significant
change in economic circumstances since the time of the transaction.

For financial instruments where there is no active market, fair value is determined using valuation
techniques. Such techniques include use of recent arm’s-length market transactions, reference to
the current market value of another instrument, which are substantially the same, discounted cash
flow analysis and other pricing models.

Amortized Cost of Financial Instruments

Amortized cost is computed using the effective interest method less any allowance for impairment
and principal repayment, plus or minus the cumulative amortization of premium or discount. The
calculation takes into account any premium or discount on acquisition and includes transaction
costs and fees that are an integral part of effective interest.

‘Day 1’ Profit or Loss

Where the transaction price in a non-active market is different from the fair value of other
observable current market transactions in the same instrument or based on a valuation technique
whose variables include only data from observable market, the MERALCO Group recognizes the
difference between the transaction price and fair value (a ‘Day 1’ profit or loss) in the
consolidated statement of income, unless it qualifies for recognition as some other type of asset or
liability. In cases where data used are not observable, the difference between the transaction price
and model value is only recognized in the consolidated statement of income when the inputs
become observable or when the instrument is derecognized. For each transaction, the MERALCO
Group determines the appropriate method of recognizing the ‘Day 1’ profit or loss amount.

Impairment of Financial Assets

The MERALCO Group assesses at each reporting date whether a financial asset or group of
financial assets is impaired. A financial asset or a group of financial assets is deemed to be
impaired if, and only if, there is objective evidence of impairment as a result of one or more events
that has occurred after the initial recognition of the asset (an incurred “loss event”) and that loss
event has an impact on the estimated future cash flows of the financial asset or the group of
financial assets that can be reliably estimated. Evidence of impairment may include indications
that the debtor or a group of debtors is experiencing significant financial difficulty, default or
delinquency in interest or principal payments, the probability that they will enter bankruptcy or
other financial reorganization and where observable data indicate that there is a measurable
decrease in the estimated future cash flows, such as changes in arrears or economic conditions that
correlate with defaults.

*SGVFS002843*
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Financial Assets Carried at Amortized Cost

For financial assets carried at amortized cost, the MERALCO Group first assesses whether
objective evidence of impairment exists individually. If it is determined that no objective evidence
of impairment exists for an individually assessed financial asset, whether significant or not, the
asset is included in a group of financial assets with similar credit risk characteristics and that
group of financial assets is collectively assessed for impairment based on historical loss
experience. Assets that are individually assessed for impairment and for which an impairment loss
is or continues to be recognized are not included in a collective assessment of impairment.
MERALCO and CEDC consider termination or disconnection of service and significant financial
difficulties of debtors as objective evidence that a financial asset or group of financial assets is
impaired. For both specific and collective assessments, any deposits, collateral and credit
enhancement are considered in determining the amount of impairment loss.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is
measured as the difference between the asset’s carrying amount and the present value of estimated
future cash flows (excluding future credit losses that have not been incurred) discounted at the
financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial
recognition). If a loan is subject to variable interest rate, the discount rate for measuring any
impairment loss is the current effective interest rate. The carrying amount of the asset is reduced
either directly or through the use of an allowance account and the amount of the loss is recognized
in the consolidated statement of income. Interest income continues to be accrued on the reduced
carrying amount based on the original effective interest rate of the asset. The financial asset
together with associated allowance is written off when there is no realistic prospect of future
recovery and all collateral or deposits has been realized or has been transferred to the MERALCO
Group.

If, in a subsequent period, the amount of the estimated impairment loss increases or decreases
because of an event occurring after the impairment was recognized, the previously recognized
impairment loss is increased or reduced by adjusting the allowance account. If an asset written off
is recovered, the recovery is recognized in the consolidated statement of income. Any reversal of
an impairment loss is recognized in the consolidated statement of income, to the extent that the
carrying value of the asset does not exceed its amortized cost at the reversal date.

AFS Financial Assets

In the case of equity instruments classified as AFS, objective evidence would include a significant
or prolonged decline in the fair value of the investment below its cost. When a decline in the fair
value of an AFS financial asset has been recognized in other comprehensive income and there is
objective evidence that the asset is impaired, the cumulative loss that had been recognized in other
comprehensive income is reclassified from equity to profit or loss even though the financial asset
has not been derecognized. The amount of the cumulative loss that is reclassified from equity to
profit or loss is the difference between the acquisition cost (net of any principal repayment and
amortization) and current fair value, less any impairment loss on the financial asset previously
recognized in profit or loss. Impairment losses recognized in profit or loss for investment in equity
instruments are not reversed in the consolidated statement of income. Subsequent increases in fair
value after impairment are recognized directly in other comprehensive income.

In the case of debt instruments classified as AFS, impairment is assessed based on the same
criteria as financial assets carried at amortized cost. Future interest income is based on the reduced
carrying amount and is accrued based on the rate of interest used to discount future cash flows for
the purpose of measuring impairment loss. Such accrual is recorded as part of “Interest and other

*SGVFS002843*
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financial income” in the consolidated statement of income. If, in a subsequent period, the fair
value of a debt instrument increases and the increase can be objectively related to an event
occurring after the impairment loss was recognized in the consolidated statement of income, the
impairment loss is reversed in the consolidated statement of income.

Assets Carried at Cost

If there is objective evidence that an impairment loss has been incurred on an unquoted equity
instrument that is not carried at fair value because its fair value cannot be reliably measured, or on
a derivative asset that is linked to and must be settled by delivery of such an unquoted equity
instrument, the amount of the loss is measured as the difference between the asset’s carrying
amount and the present value of estimated future cash flows discounted at the current market rate
of return for a similar financial asset.

Derecognition of Financial Instruments

Financial Assets

A financial asset (or where applicable, a part of a financial asset or part of a group of similar
financial assets) is derecognized when:

§ the right to receive cash flows from the asset has expired;

§ the MERALCO Group has transferred its right to receive cash flows from the asset or has
assumed an obligation to receive cash flows in full without material delay to a third party
under a “pass-through” arrangement; and

§ either the MERALCO Group (a) has transferred substantially all the risks and rewards of the
asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the
asset, but has transferred control of the asset.

Where the MERALCO Group has transferred its right to receive cash flows from an asset or has
entered into a “pass-through” arrangement, and has neither transferred nor retained substantially
all the risks and rewards of the asset nor transferred control of the asset, a new asset is recognized
to the extent of the MERALCO Group’s continuing involvement in the asset.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured
at the lower of original carrying amount of the asset and the maximum amount of consideration
that the MERALCO Group could be required to repay.

Financial Liabilities

A financial liability is derecognized when the obligation under the liability is discharged or
cancelled or has expired.

Where an existing financial liability is replaced by another from the same lender on substantially
different terms, or the terms of an existing liability are substantially modified, such an exchange or
modification is treated as a derecognition of the original liability and the recognition of a new
liability, and the difference in the carrying amount of a financial liability extinguished or
transferred to another party and the consideration paid, including any non-cash assets transferred
or liabilities assumed is recognized in the consolidated statement of income.

*SGVFS002843*
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Redeemable Preferred Stock

MERALCO’s peso-denominated redeemable preferred stock has characteristics of a liability and is


thus recognized as a liability in the consolidated statement of financial position. The
corresponding dividends on those shares are recognized as part of “Interest and other financial
charges” account in the consolidated statement of income. Dividends are no longer accrued when
such shares have been called for redemption.

Provisions

Provisions are recognized when the MERALCO Group has a present obligation, legal or
constructive, as a result of a past event, and when it is probable that an outflow of resources
embodying economic benefits will be required to settle the obligation and a reliable estimate can
be made of the amount of the obligation. Where the MERALCO Group expects a provision, or a
portion, to be reimbursed, for example under an insurance contract, the reimbursement is
recognized as a separate asset but only when the reimbursement is virtually certain. The expense
relating to any provision is presented in the consolidated statement of income, net of any
reimbursement. If the effect of the time value of money is material, provisions are discounted
using a current pre-tax rate that reflects, where appropriate, the risks specific to the liabilities.

Retirement Benefits

MERALCO and substantially all of its subsidiaries have distinct, funded, noncontributory defined
benefit retirement plans covering all permanent employees. MERALCO’s retirement plan provides
for post-retirement benefits in addition to a lump sum payment to employees hired up to
December 31, 2003. Retirement benefits for employees hired commencing January 1, 2004 were
amended to provide for a defined lump sum payment only. MERALCO also has a contributory
Provident Plan introduced in January 2009 in which employees hired commencing January 1,
2004 may elect to participate.

The net defined benefit liability or asset is the aggregate of the present value of the defined benefit
obligation at the end of the reporting period reduced by the fair value of plan assets (if any),
adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The asset ceiling
is the present value of any economic benefits available in the form of refunds from the plan or
reductions in future contributions to the plan.

The cost of providing benefits under the defined benefit plans is actuarially determined using the
projected unit credit method.

Defined benefit costs comprise the following:


- Service cost
- Net interest on the net defined benefit liability or asset

Service costs which include current service costs, past service costs and gains or losses on non-
routine settlements are recognized as expense in profit or loss. Past service costs are recognized
when plan amendment or curtailment occurs. These amounts are calculated periodically by
independent qualified actuaries.

Net interest on the net defined benefit liability or asset is the change during the period in the net
defined benefit liability or asset that arises from the passage of time which is determined by
applying the discount rate based on government bonds to the net defined benefit liability or asset.

*SGVFS002843*
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Net interest on the net defined benefit liability or asset is recognized as expense or income in
profit or loss.

Remeasurements comprising actuarial gains and losses, return on plan assets and any change in
the effect of the asset ceiling (excluding net interest on defined benefit liability) are recognized
immediately in other comprehensive income in the period in which they arise. Remeasurements
are not reclassified to profit or loss in subsequent periods.

Plan assets are assets that are held by a long-term employee benefit fund or qualifying insurance
policies. Plan assets are not available to the creditors of the MERALCO Group, nor can they be
paid directly to the MERALCO Group. Fair value of plan assets is based on market price
information. When no market price is available, the fair value of plan assets is estimated by
discounting expected future cash flows using a discount rate that reflects both the risk associated
with the plan assets and the maturity or expected disposal date of those assets (or, if they have no
maturity, the expected period until the settlement of the related obligations). If the fair value of the
plan assets is higher than the present value of the defined benefit obligation, the measurement of
the resulting defined benefit asset is limited to the present value of economic benefits available in
the form of refunds from the plan or reductions in future contributions to the plan.

The MERALCO Group’s right to be reimbursed of some or all of the expenditure required to settle
a defined benefit obligation is recognized as a separate asset at fair value when and only when
reimbursement is virtually certain.

The retirement costs under the defined contribution plan are recorded based on MERALCO’s
contribution to the defined contribution plan as services are rendered by the employee.

Termination benefit

Termination benefits are employee benefits provided in exchange for the termination of an
employee’s employment as a result of either an entity’s decision to terminate an employee’s
employment before the normal retirement date or an employee’s decision to accept an offer of
benefits in exchange for the termination of employment.

A liability and expense for a termination benefit is recognized at the earlier of when the entity can
no longer withdraw the offer of those benefits and when the entity recognizes related restructuring
costs. Initial recognition and subsequent changes to termination benefits are measured in
accordance with the nature of the employee benefit, as either post-employment benefits, short-term
employee benefits, or other long-term employee benefits.

Employee leave entitlement

Employee entitlements to annual leave are recognized as a liability when they are accrued to the
employees. The undiscounted liability for leave expected to be settled wholly before twelve
months after the end of the annual reporting period is recognized for services rendered by
employees up to the end of the reporting period.

Long-term Incentive Plan

The liability relating to the long-term incentive plan comprises the present value of the defined
benefit obligation at the end of the reporting period.

*SGVFS002843*
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Employee Stock Purchase Plan or ESPP

Up to 2009, MERALCO had an employee stock purchase plan, which covered active and retired
employees. Under the plan, the qualified participant may purchase fixed number of shares of
stock at a pre-agreed price. The plan features include vesting requirements and payment terms.

The cost of equity-settled transactions with employees is measured by reference to the difference
between the fair value of the shares on the grant date and the price at which the share may be
purchased under the award or offer. In valuing equity-settled transactions, no account is taken of
any performance conditions other than market conditions.

The cost of equity-settled transactions is recognized, together with a corresponding increase in


equity, over the period in which the performance and/or service conditions are fulfilled, ending on
the date at which the relevant employees become fully entitled to the award (‘the vesting date’).
The cumulative expense recognized for equity-settled transactions at each reporting date until the
vesting date reflects the extent to which the vesting period has expired and MERALCO’s best
estimate of the number of equity instruments that will ultimately vest. The profit or loss charge or
credit for a period represents the movement in cumulative expense recognized as at the beginning
and end of the reporting period.

No expense is recognized for awards that do not ultimately vest.

When the terms of the equity-settled awards are modified and the modification increases the fair
value of the equity instruments granted, as measured immediately before and after the
modification, the entity shall include the incremental fair value granted in the measurement of the
amount recognized for services received as consideration for the equity instrument granted. The
incremental fair value granted is the difference between the fair value of the modified equity
instrument and that of the original equity instrument, both estimated as at the date of the
modification. If the modification occurs during the vesting period, the incremental fair value
granted is included in the measurement of the amount recognized for services received over the
period from the modification date until the date when the modified equity instruments vest, in
addition to the amount based on the grant date fair value of the original equity instruments, which
is recognized over the remainder of the original vesting period. If the modification occurs after
vesting date, the incremental fair value granted is recognized immediately or over the vesting
period if the employee is required to complete an additional period of service before becoming
unconditionally entitled to those modified equity instruments.

Revenue Recognition

Revenues are stated at amounts invoiced to customers, inclusive of pass-through components, net
of discounts, rebates, VAT and other taxes, where applicable. Revenue is recognized to the extent
that it is probable that the economic benefits will flow to the MERALCO Group and the revenue
can be reliably measured. In addition, collectibility is reasonably assured and the delivery of the
goods or rendering of the service has occurred. The MERALCO Group assesses its revenue
arrangements against specific criteria in order to determine if it is acting as principal or agent. The
MERALCO Group concluded that it is acting as principal in all of its revenue arrangements. The
following specific recognition criteria must also be met before revenue is recognized:

Sale of Electricity

Revenues are recognized upon supply of power to the customers. The Uniform Filing
Requirements or UFR, on the rate unbundling released by the ERC on October 30, 2001 specified

*SGVFS002843*
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the following bill components: (a) generation charge, (b) transmission charge, (c) SL charge,
(d) distribution charge, (e) supply charge, (f) metering charge, (g) Currency Exchange Rate
Adjustment or CERA I and II, where applicable and (h) interclass and lifeline subsidies. VAT,
LFT, the Power Act Reduction (for residential customers) adjustment and universal charges are
also separately presented in the customer’s billing statement. VAT, LFT and universal charges are
billed and collected on behalf of the national and local governments and do not form part of
MERALCO and CEDC’s revenues.

Sale of Services

Revenues from construction contracts are recognized and measured using the percentage-of-
completion method of accounting for the physical portion of the contract work, determined based
on the actual costs incurred in relation to the total estimated costs of the contract. Revenue from
contracts to manage, supervise or coordinate construction activity for others and contracts where
materials and services are supplied by project owners are recognized only to the extent of the
contracted fees.

Contract costs principally include subcontracted costs related to contract performance. Expected
losses on contracts are recognized immediately when it is probable that the total contract costs will
exceed total contract revenues. The amount of such loss is determined irrespective of whether or
not work has commenced on the contract; the stage of completion of contract activity; or the
amount of profits expected to arise on other contracts, which are not treated as a single
construction contract. Changes in contract performance, contract conditions and estimated
profitability, including those arising after final contract settlements and after gross margins are
recognized in the period in which the changes are determined.

Service and consulting fees are recognized when the services are rendered.

Interest Income

Revenue is recognized as interest accrues, using the effective interest method. The effective
interest rate is the rate that discounts estimated future cash receipts through the expected life of the
financial instrument.

Dividends

Revenue is recognized when the MERALCO Group’s right to receive the payment is established.

Lease Income

Income arising from lease of investment properties and poles is accounted for on a straight-line
basis over the lease term.

Lease income is included under “Revenues – Sale of other services” account in the consolidated
statement of income.

Leases

The determination of whether an arrangement is, or contains a lease is based on the substance of
the arrangement at the inception date of whether the fulfillment of the arrangement is dependent
on the use of a specific asset or the arrangement conveys a right to use the asset.

*SGVFS002843*
- 34 -

Company as Lessee

Operating lease payments are recognized as expense in the consolidated statement of income on a
straight-line basis over the lease term.

Company as Lessor

Leases where the MERALCO Group does not transfer substantially all the risk and benefits of
ownership of the asset are classified as operating lease. Initial direct costs incurred in negotiating
an operating lease are added to the carrying amount of the leased asset and recognized over the
lease term on the same basis as rental income. Contingent rents are recognized as revenue in the
period in which they are earned.

Foreign Currency-Denominated Transactions and Translations

The consolidated financial statements are presented in Philippine peso, which is also MERALCO’s
functional and presentation currency. The Philippine peso is the currency of the primary economic
environment in which MERALCO Group operates, except for LOIL. This is also the currency that
mainly influences the revenue from and cost of rendering services. Each entity in MERALCO
Group determines its own functional currency and items included in the financial statements of
each entity are measured using that functional currency.

The functional currency of LOIL is the United States or U.S. dollar.

Transactions in foreign currencies are initially recorded in the functional currency rate prevailing
at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are
re-translated using functional currency closing rate of exchange prevailing at the end of the
reporting date. All differences are recognized in the consolidated statement of income except for
foreign exchange differences that relate to capitalizable borrowing costs on qualifying assets.
Nonmonetary items that are measured in terms of historical cost in foreign currency are translated
using the exchange rate as at the date of the initial transactions.

As at the reporting date, the monetary assets and liabilities of associates, and LOIL whose
functional currency is other than Philippine peso, are translated into Philippine peso at the rate of
exchange prevailing at the end of the reporting period, and income and expenses of an associate
are translated monthly using the weighted average exchange rate for the month. The exchange
differences arising on translation are recognized as a separate component of other comprehensive
income as cumulative translation adjustments. On disposal of the associate, the amount of
cumulative translation adjustments recognized in other comprehensive income is recognized in the
consolidated statement of income.

Income Taxes

Current Income Tax

Current income tax assets and liabilities for the current and prior period are measured at the
amount expected to be recovered from or paid to the taxation authority. The tax rate and tax laws
used to compute the amount are those that are enacted or substantively enacted as at the reporting
date.

*SGVFS002843*
- 35 -

Deferred Income Tax


Deferred income tax is provided using the balance sheet liability method on all temporary
differences at the reporting date between the income tax bases of assets and liabilities and their
carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognized for all taxable temporary differences, except:

§ where the deferred income tax liability arises from the initial recognition of goodwill or of an
asset or liability in a transaction that is not a business combination and, at the time of the
transaction, affects neither the accounting profit nor taxable profit or loss; and

§ in respect of taxable temporary differences associated with investments in associates and joint
ventures, where the timing of the reversal of the temporary differences can be controlled and it
is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognized for all deductible temporary differences to the extent
that it is probable that taxable profit will be available against which the deductible temporary
differences can be utilized except:

§ when the deferred income tax asset relating to the deductible temporary difference arises from
the initial recognition of an asset or liability in a transaction that is not a business combination
and, at the time of the transaction, affects neither the accounting profit nor taxable profit or
loss; and

§ in respect of deductible temporary differences associated with investments in subsidiaries,


associates and joint ventures, deferred income tax assets are recognized only to the extent that
it is probable that the temporary differences will reverse in the foreseeable future and taxable
profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced
to the extent that it is no longer probable that sufficient taxable profit will be available to allow all
or part of the deferred income tax assets to be utilized. Unrecognized deferred income tax assets
are reassessed at each reporting date and are recognized to the extent these have become probable
that future taxable profit will allow the deferred income tax assets to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply
in the period when the asset is realized or the liability is settled, based on tax rates and tax laws
that are enacted or substantively enacted as at the reporting date.

Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable
right exists to offset current income tax assets against current income tax liabilities and the
deferred taxes relate to the same taxable entity and the same taxation authority.

Deferred income tax items are recognized in correlation to the underlying transaction either in
profit or loss or directly in equity.

Earnings per Share

Basic earnings per share is calculated by dividing the net income for the period attributable to
equity holders of the parent by the weighted average number of common shares outstanding
during the period.

*SGVFS002843*
- 36 -

Diluted earnings per share is calculated by dividing the net income for the period attributable to
equity holders of the parent by the weighted average number of shares outstanding, adjusted for
the effects of any dilutive potential common shares.

Contingencies

Contingent liabilities are not recognized in the consolidated financial statements. These are
disclosed in the notes to consolidated financial statements unless the possibility of an outflow of
resources embodying economic benefits is remote. Contingent assets are not recognized unless the
realization of the assets is virtually certain. These are disclosed in the notes to consolidated
financial statements when an inflow of economic benefits is probable.

Events After the Reporting Date

Post reporting date events that provide additional information about the MERALCO Group’s
financial position at the reporting date (adjusting events) are reflected in the consolidated financial
statements. Post reporting date events that are not adjusting events are disclosed in the notes to
consolidated financial statements, when material.

Equity

Common stock is measured at par value for all shares issued. Incremental costs incurred directly
attributable to the issuance of new shares are shown as a deduction from equity, net of any related
tax. The amount of proceeds and/or fair value of consideration, net of incremental costs incurred
directly attributable to the issuance of new shares, received in excess of par value is recognized as
additional paid-in capital.

Employee stock purchase plan cost represents the cumulative compensation expense recognized
based on the amount determined using an option pricing model. The 14 th and last ESPP, which
was awarded in 2009 fully vested in October 2012. Since 2009, there have been no ESPPs
awarded.

Change in the ownership interest of a subsidiary, without loss of control, is accounted for as an
equity transaction and presented as “Excess of acquisition cost over carrying value of non-
controlling interest acquired”.

Other comprehensive income comprises items of income and expense, including reclassifications,
which are not recognized in profit or loss as required or permitted by PFRS.

Retained earnings includes net income attributable to the equity holders of the Parent and reduced
by dividends on common stock. Dividends are recognized as a liability and deducted from
retained earnings when they are declared. Dividends approved after the financial reporting date
are disclosed as events after the financial reporting date.

Non-controlling interests represent the equity interests in CEDC and MIESCOR and its
subsidiaries, which are not held by MERALCO.

*SGVFS002843*
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5. Management’s Use of Significant Judgments, Accounting Estimates and Assumptions

The preparation of the MERALCO Group’s consolidated financial statements requires


management to make judgments, estimates and assumptions that affect the reported amounts of
revenues, expenses, assets and liabilities, and the disclosure of contingent assets and liabilities, at
the end of the reporting period. However, uncertainty about these assumptions and estimates could
result in outcomes that require a material adjustment to the carrying amount of the asset or liability
affected in future periods.

Judgments

In the process of applying the MERALCO Group’s accounting policies, management has made the
following judgments, which have the most significant effect on the amounts recognized in the
interim consolidated financial statements.

Determination of Functional Currency

The functional currencies of the entities under the MERALCO Group are the currencies of the
primary economic environment in which each entity operates. It is the currency that mainly
influences the revenue and cost of rendering services.

Based on the economic substance of the underlying circumstances, the functional and presentation
currency of MERALCO and its subsidiaries, except LOIL, is the Philippine peso. The functional
and presentation currency of LOIL is the U.S. dollar.

Operating Lease Commitments

As Lessor

As a lessor, the MERALCO Group has several lease arrangements. Based on the terms and
conditions of the arrangements, it has evaluated that the significant risks and rewards of
ownership of such properties are retained by the MERALCO Group. The lease agreements do not
transfer ownership of the assets to the lessees at the end of the lease term and do not give the
lessees a bargain purchase option over the assets. Consequently, the lease agreements are
accounted for as operating leases.

As Lessee

As a lessee, MERALCO Group has commercial lease arrangements covering certain office spaces,
payment offices and substation sites and towers. The MERALCO Group has determined, based on
the evaluation of the terms and conditions of the arrangements, that it has not acquired any
significant risks and rewards of ownership of such properties because the lease arrangements do
not transfer to the MERALCO Group the ownership over the assets at the end of the lease term and
do not provide the MERALCO Group a bargain purchase option over the leased assets.
Consequently, the lease agreements are accounted for as operating leases.

Arrangements that Contain a Lease

MERALCO’s Purchased Power Agreements or PPAs with Independent Power Producers, or IPPs
and Purchase Supply Agreements or PSAs with Successor Generating Companies or SGCs qualify
as leases on the basis that MERALCO and the IPPs and SGCs have ‘take or pay’ or TOP
arrangements where payments for purchased power are made on the basis of the availability of the
power plant and not on actual consumption. In determining the lease classification, it is judged
that substantially all the risks and rewards incident to the ownership of the IPPs’ and SGCs’ power

*SGVFS002843*
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plants are with the IPPs and SGCs, respectively. Thus, the PPAs and PSAs are classified as
operating leases. Accordingly, capacity fees, fixed operating and transmission line fees that form
part of purchased power expense are accounted for similar to a lease.

Components of purchased power expense, which have been accounted for similar to a lease,
amounted to P=58,906 million and P=14,423 million for the nine months ended September 30, 2013
and 2012, respectively. These are recognized as “Purchased Power” in the interim consolidated
statements of income.

See Note 25 – Revenues and Purchased Power.

Contingencies

The MERALCO Group has possible claims from or obligation to other parties from past events
and whose existence may only be confirmed by the occurrence or non-occurrence of one or more
uncertain future events not wholly within its control. Management has determined that the present
obligations with respect to contingent liabilities and claims with respect to contingent assets do not
meet the recognition criteria, and therefore has not recorded any such amounts.

See Note 30 – Contingencies and Legal Proceedings.

Estimates and Assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty as at
the reporting date that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial period are discussed in the following:

Estimating Useful Lives of Utility Plant and Others, Intangible Assets with Finite
Lives and Investment Properties

The MERALCO Group estimates the useful lives of utility plant and others, intangible assets with
finite lives and, investment properties based on the periods over which such assets are expected to
be available for use. The estimate of the useful lives of the utility plant and others, intangible
assets with finite lives and investment properties is based on management’s collective assessment
of industry practice, internal technical evaluation and experience with similar assets. The
estimated useful lives are reviewed at least at each financial year-end and are updated if
expectations differ from previous estimates due to physical wear and tear, technical or commercial
obsolescence and legal or other limitations on the use of such assets. It is possible, however, that
future results of operations could be materially affected by changes in estimates brought about by
changes in the factors mentioned in the foregoing. The amounts and timing of recorded expenses
for any period would be affected by changes in these factors and circumstances. A reduction in the
estimated useful lives of utility plant and others, intangible assets with finite lives and investment
properties would increase recorded operating expenses and decrease noncurrent assets.

The total depreciation and amortization of utility plant and others amounted to P=4,411 million and
=4,112 million for the nine months ended September 30, 2013 and 2012, respectively. Total
P
carrying values of utility plant and others, net of accumulated depreciation and amortization,
amounted to P=110,668 million and P =109,312 million as at September 30, 2013 and December 31,
2012, respectively.

Total depreciation of investment properties amounted to P=6 million for each of the nine months
ended September 30, 2013 and 2012, respectively. Total carrying value of investment properties,

*SGVFS002843*
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net of accumulated depreciation, amounted to P=1,528 million and P


=1,634 million as at
September 30, 2013 and December 31, 2012, respectively.

Total amortization of intangible assets with finite lives amounted to P=128 million and P
=59 million
for the nine months ended September 30, 2013 and 2012, respectively. Total carrying value of
intangible assets with finite lives, net of accumulated amortization, amounted to P=1,232 million
and P=1,021 million as at September 30, 2013 and December 31, 2012, respectively.

See Note 8 – Utility Plant and Others, Note 10 – Investment Properties and Note 11 – Other
Noncurrent Assets.

Impairment of Nonfinancial Assets

PFRS requires that an impairment review be performed when certain impairment indicators are
present. These conditions include obsolescence, physical damage, significant changes in the
manner by which an asset is used, worse than expected economic performance, drop in revenues
or other external indicators, among others. In the case of goodwill, at a minimum, such asset is
subject to an annual impairment test and more frequently whenever there is an indication that such
asset may be impaired. This requires an estimation of the value in use of the cash generating unit
to which the goodwill is allocated. Estimating the value in use requires preparation of an estimate
of the expected future cash flows from the cash generating unit and choosing an appropriate
discount rate in order to calculate the present value of those cash flows.

Determining the recoverable amount of utility plant and others, investment properties, investments
in and advances to associates and joint ventures, goodwill and other noncurrent assets, requires
(i) the determination of future cash flows expected to be generated from the continued use as well
as ultimate disposition of such assets and (ii) making estimates and assumptions that can
materially affect the consolidated financial statements. Future events may cause management to
conclude that utility plant and others, construction in progress, investment properties, investments
in and advances to associates and joint ventures, and other noncurrent assets are impaired. Any
resulting impairment loss could have a material adverse impact on the MERALCO Group’s
consolidated financial position and results of operations.

The preparation of estimated future cash flows involves significant estimations and assumptions.
While management believes that the assumptions are appropriate and reasonable, significant
changes in the assumptions may materially affect the assessment of recoverable values and may
lead to future impairment charges under PFRS.

The carrying values of nonfinancial assets as at September 30, 2013 and December 31, 2012
subject to impairment review are as follows:

September 30, December 31,


2013 2012
Account (Unaudited) (Audited)
(Amounts in millions)
Utility plant and others P
=110,668 =109,312
P
Investments in and advances to associates and joint
ventures 11,072 1,815
Investment properties 1,528 1,634
Receivable from the BIR 577 577
Intangible assets 1,232 1,021
Goodwill 36 36

*SGVFS002843*
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See Note 8 – Utility Plant and Others, Note 9 – Investments in and Advances to Associates and
Joint Ventures, Note 10 – Investment Properties and Note 11 – Other Noncurrent Assets.

Goodwill

The MERALCO Group’s consolidated financial statements and the results of operations reflect
acquired businesses after the completion of the respective acquisition. MERALCO Group accounts
for the acquisition of businesses using the acquisition method of accounting, which requires
extensive use of accounting judgments and estimates to allocate the purchase price to the fair
market values of the acquiree’s identifiable assets and liabilities and contingent liabilities, if any,
at the acquisition date. Any excess in the purchase price over the estimated fair market values of
the net assets acquired is recorded as goodwill in the consolidated statement of financial position.
Thus, the number of items, which involve judgments made in estimating the fair market value to
be assigned to the acquiree’s assets and liabilities can materially affect the MERALCO Group’s
financial operations.

Realizability of Deferred Tax Assets

The MERALCO Group reviews the carrying amounts of deferred tax assets at the end of each
reporting period and reduces these to the extent that it is no longer probable that sufficient taxable
income will be available to allow all or part of the deferred income tax assets to be utilized.
Assessment on the recognition of deferred tax assets on deductible temporary differences is based
on the level and timing of forecasted taxable income for the subsequent reporting periods. This
forecast is based on past results and future expectations on revenues and expenses as well as future
tax planning strategies. Management believes that sufficient taxable profit will be generated to
allow all or part of the deferred tax assets to be utilized. The amounts of the deferred tax assets
considered realizable could be adjusted in the future if estimates of taxable income are revised.

Based on the foregoing assessment, following are the relevant interim consolidated information
with respect to deferred tax assets:

December 31,
September 30, 2012
2013 (As restated -
(Unaudited) see Note 4)
(Amounts in millions)
Recognized deferred tax assets P
=14,733 =13,338
P
Unrecognized deferred tax assets 149 93

See Note 29 – Income Taxes and Local Franchise Taxes.

Determination of Fair Values of Financial Assets and Liabilities

Where fair value of financial assets and financial liabilities recorded in the consolidated statement
of financial position cannot be derived from active markets, they are determined using valuation
techniques including the discounted cash flows model. The inputs to these models are taken from
observable markets where possible, but when this is not feasible, a degree of judgment is required
in establishing fair values. The judgments include considerations of inputs such as liquidity risk,
credit risk and volatility. Changes in assumptions about these factors could affect the reported fair
value of financial instruments.

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Total fair values of financial assets and liabilities as at September 30, 2013 amounted to
=81,259 million and P
P =92,358 million, respectively, while the total fair values of financial assets
and liabilities as at December 31, 2012 amounted to P=84,815 million and P =94,630 million,
respectively.

See Note 28 – Financial Assets and Liabilities.

Estimating Allowance for Doubtful Accounts

If there is objective evidence that an impairment loss has been incurred in the trade and other
receivables balance of the MERALCO Group, an estimate of the allowance for doubtful accounts
related to trade and other receivables that are specifically identified as doubtful of collection is
made. The amount of allowance is evaluated by management on the basis of factors that affect the
collectibility of the accounts. In such case, use of judgment based on the best available facts and
circumstances, including but not limited to, the length of the MERALCO Group’s relationship with
the customer and the customer’s credit status based on third party credit reports and known market
factors, to record specific reserves for customers against amounts due in order to reduce the
MERALCO Group’s receivables to amounts that management expects to collect is applied. These
specific reserves are reevaluated and adjusted as additional information received affect the
amounts estimated.

In addition to specific allowance against individually significant receivables, an assessment for


collective impairment allowance against credit exposures of the customers, which were grouped
based on common credit characteristics, although not specifically identified as requiring a specific
allowance, have a greater risk of default than when the receivables were originally granted to
customers is done. This collective allowance is based on historical loss experience using various
factors, such as historical performance of the customers within the collective group, deterioration
in the markets in which the customers operate, and identified structural weaknesses or
deterioration in the cash flows of customers.

Total asset impairment provision for trade and other receivables and other current assets
recognized in the interim consolidated statements of income amounted to P=579 million and
=655 million for the nine months ended September 30, 2013 and 2012, respectively. Trade and
P
other receivables, net of asset impairment, amounted to P=26,194 million and P
=28,077 million as at
September 30, 2013 and December 31, 2012, respectively.

See Note 13 – Trade and Other Receivables and Note 15 – Other Current Assets.

Estimating Net Realizable Value of Inventories

Inventories consist of materials and supplies used in the power distribution and services segments.
The excess of cost over net realizable value relating to inventories consists of collective and
specific provisions. The cost of inventories is written down whenever the net realizable value of
inventories becomes lower than the cost due to damage, physical deterioration, obsolescence,
change in price levels or other causes. The lower of cost or net realizable value of inventories is
reviewed on a periodic basis. Inventory items identified to be obsolete and unusable are written-
off and charged as expense in the interim consolidated statement of income.

The carrying values of inventories amounted to P=2,139 million and P


=1,371 million as at
September 30, 2013 and December 31, 2012, respectively.

See Note 14 – Inventories.

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Estimation of Retirement Benefit Costs

The cost of defined benefit pension plans and other post-employment benefits as well as the
present value of the pension obligation are determined using actuarial valuations. The actuarial
valuation involves making various assumptions. These include the determination of the discount
rates, expected rates of return of assets, future salary increases, mortality rates and future pension
increases. Due to the complexity of the valuation, the underlying assumptions and its long-term
nature, defined benefit obligations are highly sensitive to changes in these assumptions. All
assumptions are reviewed at each reporting date. The pension benefit liability and other post-
employment benefit as at September 30, 2013 and December 31, 2012 amounted to P=5,807 million
and P=6,241 million, respectively.

In determining the appropriate discount rate, management considers the interest rates of
government bonds in the respective currencies, with extrapolated maturities corresponding to the
expected duration of the defined benefit obligation. The underlying bonds are further reviewed for
quality, and those having excessive credit spreads are removed from the population of bonds on
which the discount rate is based, on the basis that they do not represent high quality bonds.

The mortality rate is based on publicly available mortality tables for the specific country and is
modified accordingly with estimates of mortality improvements. Future salary increases and
pension increases are based on expected future inflation rates for the specific country.

See Note 26 – Expenses and Income and Note 27 – Long-term Employee Benefits.
Insurance Liabilities Arising from Insurance Contracts

RSIC estimates the expected ultimate costs of claims reported and claims incurred but not yet
reported at reporting date. It takes a significant period of time to establish with certainty the
ultimate cost of claims.

The primary technique adopted by RSIC’s management in estimating the cost of claims incurred
but not yet reported is using the past claims settlement trend to predict the future claims settlement
trend. At each reporting date, estimates of prior period claims are reassessed for adequacy and any
changes are charged to provisions. Insurance contract liabilities are not discounted for the time
value of money.

As at September 30, 2013 and December 31, 2012, gross carrying values of insurance liabilities
arising from insurance contracts (included in “Other noncurrent liabilities” account) amounted to
=438 million and P
P =625 million, respectively.

Provision for Asset Retirement Obligations

Provision for asset retirement obligations is recognized in the period in which they are incurred if
a reasonable estimate of fair value can be made. This requires an estimation of the cost to restore
or dismantle, on a per area basis, depending on the location, and is based on the best estimate of
the expenditure required to settle the obligation at the future restoration/dismantlement date,
discounted using a pre-tax rate that reflects the current market assessment of the time value of
money and, where appropriate, the risk specific to the liability.

No asset retirement obligation was recognized since the amount is immaterial.

*SGVFS002843*
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Provisions

MERALCO is involved in various legal proceedings as discussed in Note 30 – Contingencies and


Legal Proceedings. MERALCO’s estimate for probable costs for the resolution of these claims,
assessments and cases has been developed in consultation with external counsels handling the
defense in these claims, assessments and cases and is based upon thorough analysis of potential
outcome.

MERALCO, in consultation with its external legal counsels, does not believe that these
proceedings will have a material adverse effect on the interim consolidated financial statements. It
is possible, however, that future financial performance could be materially affected by changes in
the estimates or the effectiveness of management’s strategies relating to these proceedings.

MERALCO recognized provisions amounting to P =21,273 million and P


=19,411 million as at
September 30, 2013 and December 31, 2012, respectively.

See Note 20 – Provisions.

Revenue Recognition

The MERALCO Group’s revenue recognition policies require the use of estimates and
assumptions that may affect the reported amounts of its revenues and receivables.

Revenues from sale of electricity by MERALCO and CEDC are billed based on customer-specific
billing cycle cut-off date for each customer, while recording of related power purchase cost in the
accounts is based on calendar month as provided in the terms of the Power Supply Agreement or
PSAs. The recognition of unbilled revenues for billing cycles with earlier than month-end cut-off
dates requires the use of estimates.

The difference between the amount initially recognized based on provisional invoices and the
settlement of the actual billings by the generators is taken up in the subsequent period.
Management believes that such use of estimates will not result in material adjustments in future
periods.

Revenues and costs from construction contracts of MIESCOR are recognized based on the
percentage of completion method. This is measured principally on the basis of the estimated
completion of a physical proportion of the contract work as determined from the reports of the
contractors and project consultants. There is no assurance that such use of estimates may not result
in material adjustments in future periods.

6. Discontinued Operations

In 2011, upon approval by the BOD of MERALCO of the divestment plan by MERALCO of its
investment in common shares of Rockwell Land through the declaration of property dividends,
MERALCO reclassified the related assets, liabilities and cumulative other comprehensive income
of Rockwell Land as “Assets of discontinued operations”, “Liabilities of discontinued operations”
and “Unrealized fair value gains on AFS investments of discontinued operations”, respectively, in
the consolidated statement of financial position as at January 1, 2012.

On February 27, 2012, the BOD of MERALCO approved the declaration of its investment in
common shares of Rockwell Land as property dividends in favor of all-Filipino common

*SGVFS002843*
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stockholders as at March 23, 2012. Foreign common stockholders were paid the cash equivalent
of the property dividends. Such property dividends were paid on May 14, 2012, within five (5)
trading days after approval of the property dividend by the SEC and registration of the Rockwell
Land shares under the Securities Regulation Code and the listing thereof with the PSE on
May 11, 2012. As at the date of declaration, MERALCO owned 3,176,474,995 common shares
at P
=1.46 per share with a total cost of P
=4,638 million. On April 25, 2012, the SEC approved the
property dividend declaration.

The assets and liabilities of Rockwell Land classified as “Assets of discontinued operations” and
“Liabilities of discontinued operations”, respectively, in the consolidated statement of financial
position as at January 1, 2012 are as follows:

Amount
(In millions)
Noncurrent Assets:
Property and equipment =465
P
Investment properties 6,297
Other noncurrent assets 362
Current Assets:
Cash and cash equivalents 769
Trade and other receivables 2,782
Land and development costs 5,950
Other current assets 1,724
=18,349
P

Noncurrent Liabilities:
Interest-bearing long-term financial liabilities =2,867
P
Deposits from pre-selling condominium units 284
Deferred tax liabilities - net 146
Other noncurrent liabilities 470
Current Liabilities:
Trade and other payables 5,258
Income tax payable 88
=9,113
P

The financial performance of Rockwell Land for the four months ended April 30, 2012 are
presented as “Income from discontinued operations, net of income tax” in the 2012 consolidated
statement of income. The details are presented as follow:

Amount
(In millions)
Revenues =1,501
P
Cost and expenses 1,288
Gross profit 213
Interest and other financial income 130
Interest and other financial expenses (72)
Others 779
Income before income tax 1,050
Provision for income tax (83)
Income from discontinued operations, net of income tax =967
P

*SGVFS002843*
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The net cash flows for the four months ended April 30, 2012 are as follow:

Amount
(In millions)

Operating activities =104


P
Investing activities (5)
Financing activities 1,085
Net cash flows =1,184
P

Included in accumulated other comprehensive income as at January 1, 2012 are unrealized fair
value gains on AFS financial assets of discontinued operations amounting to P=14 million.

7. Segment Information

Each operating segment of the MERALCO Group engages in business activities from which
revenues are earned and expenses are incurred (including revenue and expenses relating to
transactions with other business segments within the MERALCO Group). The operating results of
each of the operating segments are regularly reviewed by MERALCO’s chief operating decision-
maker (Management Committee) to determine how resources are to be allocated to the operating
segments and to assess their performances for which discrete financial information is available.

For management purposes, the MERALCO Group’s operating businesses are organized and
managed separately according to the nature of services provided, with each segment representing a
strategic business unit that offers different products and/or services, as follows:

§ Power

The Power segment consists of (a) electricity distribution, (b) power generation and (c) RES.
In 2010, the MERALCO Group declared its strategic decision to re-enter into the power
generation business. On June 6, 2011, MERALCO informed the ERC of its intention to
become a local RES consistent with EPIRA.

Electricity distribution – This is principally electricity distribution and supply of power on a


pass-through basis covering the MERALCO franchise area and the CEDC franchise area in the
Luzon Grid. Electricity distribution within the MERALCO franchise area accounts for
approximately 55% of the power requirements of the country. CEDC’s service area covers the
CSEZ.

Power generation – The MERALCO Group’s strategic decision to re-enter the power
generation business through MGen began with an investment in Redondo Peninsula Energy,
Inc. or RP Energy. RP Energy is undertaking the ongoing development of a 2 x 300MW
Circulating Fluidized Bed or CFB, coal-fired power generation plant in the Subic Freeport
Zone. Simultaneously, MGen is in various stages of pre-development of other power
generation projects in the Philippines. It has recently acquired of an effective 28% equity in
PacificLight Power Pte Ltd. in Jurong Island, Singapore, and 20% equity interest in Global
Business Power Corporation or GBP. GBP has a total of 627 MW gross capacity in operations
and 82 MW under construction in Visayas.

RES – This covers the sourcing and supply of electricity to qualified contestable customers.
The MERALCO Group will serve as a local RES within its franchise area only under the brand

*SGVFS002843*
- 46 -

MPower. Starting June 26, 2013, certain qualified contestable customers sourced their
electricity supply from MPower.

§ Other Services

The services segment is involved principally in electricity-related services such as electro-


mechanical engineering, construction, consulting and related manpower as well as light rail-
related maintenance services, e-transaction and bills collection, insurance and e-business
development and energy systems management. These services are provided by MIESCOR,
MBI, MLI and Miescorrail (collectively known as “MIESCOR Group”), CIS, Bayad Center
and CFSI (collectively referred to as “CIS Group”), RSIC, LOIL, Finserve, e-MVI and MEI.

MERALCO’s real estate segment, which was provided by Rockwell Land, is involved in luxury
residential and commercial real estate development and leasing. In 2012, the accounts of Rockwell
Land were deconsolidated from those of MERALCO as discussed in Note 6 – Discontinued
Operations.

The Management Committee monitors the operating results of each business unit separately for
the purpose of determining resource allocation and assessing performance. Performance is
evaluated based on net income for the period, core earnings before interest, taxes, and depreciation
and amortization or core EBITDA; and consolidated core net income. Net income for the period is
measured consistent with reported consolidated net income in the consolidated financial
statements.

Core EBITDA is measured as net income excluding depreciation and amortization, impairment of
noncurrent assets, interest and other financial charges, interest and other financial income, equity
in net earnings of associates and joint ventures, foreign exchange gain or loss, mark-to-market
gain or loss, provision for income tax and other non-recurring gain or loss, if any.

Consolidated core net income for the period is measured as net income attributable to equity
holders of MERALCO adjusted for foreign exchange gain or loss, mark-to-market gain or loss,
impairment of noncurrent assets and other non-recurring gain or loss, net of tax effect of the
foregoing adjustments.

Billings between operating segments are done on an arm’s-length basis in a manner similar to
transactions with third parties. Segment revenues, segment expenses and segment results include
transfers among business segments. Those transfers are eliminated on consolidation.

The MERALCO Group mainly operates and generates substantially all its revenues in the
Philippines (i.e., one geographical location). Thus, geographical segment information is not
presented. The MERALCO Group has no revenues from transactions with a single external
customer accounting for 10% or more of its revenues from external customers.
Power Other Services Inter-segment Transactions Total
For the Nine Months Ended September 30
Note 2013 2012 2013 2012 2013 2012 2013 2012
(Amounts in millions)

Revenues P
= 205,321 =213,093
P P
= 3,839 =2,830
P (P
=1,063) (P
=1,174) P
= 208,097 =214,749
P

Segment results 23,714 20,565 937 842 – – 24,651 21,407


Depreciation and amortization (4,389) (4,047) (156) (130) – – (4,545) (4,177)
Interest and other financial income 27 955 2,049 (5) 22 – – 950 2,071
Equity in net gains(losses) of associates
and joint ventures 9 (407) 242 – – 9 (243) (398) (1)
Interest and other financial charges 27 (1,055) (1,183) (3) (5) – – (1,058) (1,188)
Derivative mark-to-market gains(losses) (24) 40 – – – – (24) 40
(Forward)

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Power Other Services Inter-segment Transactions Total


For the Nine Months Ended September 30
Note 2013 2012 2013 2012 2013 2012 2013 2012
(Amounts in millions)
Provision for income tax – net (P
=5,648) (P
=5,049) (P
=237) (P
=217) P
=– =–
P (P
=5,885) (P
=5,266)
Non-controlling interests – – – – (47) (131) (47) (131)
Net income from discontinued
operations – – – 967 – – – 967
Net income attributable to equity
holders of the Parent P
= 13,146 =12,617
P P
= 536 =1,479
P P
= 13,644 =13,722
P

Power Other Services Inter-segment Transactions Total


For the Three Months Ended September 30
Note 2013 2012 2013 2012 2013 2012 2013 2012
(Amounts in millions)

Revenues P
= 65,620 =70,629
P P
= 1,157 =863
P (P
=378) (P
=343) P
= 66,399 =71,149
P

Segment results 7,991 6,454 332 194 – – 8,323 6,648


Depreciation and amortization (1,477) (1,287) (46) (46) – – (1,523) (1,333)
Interest and other financial income 27 224 463 (6) 9 – – 218 472
Equity in net earnings of associates and
joint ventures 9 (669) 36 – – 319 (25) (350) 11
Interest and other financial charges 27 (349) (364) (1) – – – (350) (364)
Derivative mark-to-market gain (24) 19 – – – – (24) 19
Provision for income tax – net (1,993) (1,521) (84) (52) – – (2,077) (1,573)
Non-controlling interests – – – – (14) (11) (14) (11)
Income from discontinued operations – – – – – – – –
Net income attributable to equity
holders of the Parent P
= 3,703 =3,800
P P
= 195 =105
P P
= 4,203 =3,869
P

The inter-segment revenues mainly represent revenues of services and others segment to the
power segment. The following table shows the reconciliation of the consolidated EBITDA to
reported consolidated net income:

Unaudited
For the Nine Months Ended For the Three Months Ended
September 30 September 30
2013 2012 2013 2012
(Amounts in millions)

Consolidated EBITDA P
=24,403 =22,548
P P
=8,352 =6,648
P
EBITDA of discontinued operations – (1,143) – –
EBITDA of continuing operations 24,403 21,405 8,352 6,648
Depreciation and amortization (4,545) (4,177) (1,523) (1,333)
Interest and other financial income 950 2,071 218 472
Interest and other financial charges (1,058) (1,188) (350) (364)
Equity in net gains and (losses) of
associates and a joint venture (398) (1) (350) 11
Derivative mark-to-market gain (24) 40 (24) 19
Foreign exchange gain (loss) 248 2 (29) –
Consolidated income before income
tax 19,576 18,152 6,294 5,453
Provision for income tax (5,885) (5,266) (2,077) (1,573)
Income from continuing operations 13,691 12,886 4,217 3,880
Income from discontinued
operations, net of income tax – 967 – –
Reported consolidated net income P
=13,691 =13,853
P P
=4,217 =3,880
P

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The following table shows the reconciliation of the consolidated core net income to the
consolidated net income:

Unaudited
For the Nine Months Ended For the Three Months Ended
September 30 September 30
2013 2012 2013 2012
(Amounts in millions)

Reported consolidated core net


income for the period P
=13,558 =12,892
P P
=4,384 =3,869
P
Add (deduct) non-core items,
net of tax:
Mark-to-market gain (loss) (17) 28 (17) 14
Foreign exchange gain (loss) 263 2 (8) –
Other non-core income (losses) (160) 800 (156) (14)
Net income for the period
attributable to equity holders
of the Parent 13,644 13,722 4,203 3,869
Net income for the period
attributable to non-controlling
interest 47 131 14 11
Reported consolidated net income P
=13,691 =13,853
P P
=4,217 =3,880
P

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8. Utility Plant and Others


The movements in utility plant and others are as follows:
September 30, 2013 (Unaudited)
Office Furniture,
Fixtures and
Subtransmission Buildings and Communication Other Transportation Construction in
and Distribution Land Improvements Equipment Equipment Equipment Others Progress Total
(Amounts in millions)
Cost:
Balance at beginning of period P
= 132,426 P
= 15,259 P