generation facility to take all forms
of pulverised coal and signed con-
tracts with two Indonesian coal
suppliers.
PPA counterparty risk
Because Meralco was to be the prin-
cipal source of revenues for the pro-
ject company, any failure by
Meralco to meet its financial oblig-
ations under the PPA could severely
affect the company’s ability to ser-
vice its debt obligations. At the time
that the PPA was signed, Meralco’s
franchise area covered a population
of 15.5 million, about 23 per cent of
the Philippine population, and
accounted for about half of the
country’s GDP. Between 1992 and
1996 Meralco’s sales and operating
income grew at compounded annu-
al rates of 8.3 per cent and 27 per
respectively. In 1996 the company
had operating cash flow of
US$265.6 million. (Meralco’s con-
solidated financial statements for
1999–2001 are summarised in
Exhibit 11.6 and 11.7. Selected
operating statistics are summarised
in Exhibits 11.8 and 11.9.)
Meralco’s franchise to provide electricity to the City of Manila, which accounts for 75
per cent of its sales, expires in 2003. The franchise was first granted in 1903, then renewed
in 1947 and 1964. When the prospectus was issued Meralco expected it to be renewed, but it
could not guarantee that it would be renewed, or that it would not be modified in some
adverse way.
In a report published in August 1996 Hagler Bailly, a consulting firm specialising in the
power industry that was later acquired by PA Consulting Group, expressed its opinion that the
prospects for the renewal of Meralco’s franchise were excellent because of the company’s
technical and financial strength; the forecast increase in demand for electricity in Manila and
surrounding areas, requiring a strong utility provider; the absence of a credible rival; restric-
tions on foreign ownership that would discourage unfriendly takeover attempts; and the
impracticality of a competitor’s building redundant facilities. Also, because Philippine law
prohibits foreign-controlled corporations from owning Philippine land, Meralco is the owner
and lessor of the land on which the power plant is built. Under the Philippine constitution the
government could condemn any of Meralco’s land at any time with fair compensation.
QUEZON POWER, THE PHILIPPINESExhibit 11.6
Manilla Electric Company and subsidiaries
consolidated income statement, thousands
of Philippine pesos2001 2000 1999
Revenues 132,587,606 106,615,600 88,159,125
Operating expenses
Purchased power 106,278,460 82,718,886 65,158,633
Operations and maintenance 10,390,260 8,566,209 6,996,891
Depreciation and amortisation 5,059,055 4,369,932 3,997,958
Taxes other than income tax 2,981,410 2,404,111 1,889,868
Provision for income tax -
operating 2,024,689 2,408,300 2,869,845
Cost of real estate 1,612,382 1,353,055 1,486,263
Cost of contracts and services 865,905 981,657 866,747
Total revenues 129,212,161 102,802,150 83,266,205
Operating income 3,375,445 3,813,450 4,892,920
Other income (charges)
Interest and other financial
charges - net -3,101,246 -2,048,339 -1,456,707
Purchased power -953,488 -583,497 -1,285,331
Benefit from income tax -
nonoperating 1,186,765 854,025 945,909
Equity in net earnings
of investee companies 605,644 338,827 345,696
Total other income (charges) -2,262,325 -1,438,984 -1,450,433
Income before minority interest 1,113,120 2,374,466 3,442,487
Minority interest -367,426 -115,264 132,593
Net income 1,480,546 2,489,730 3,309,894
Note: US$1 = Ps54.