Manila Electric Company (MER) Earnings Call Transcript & Summary

Good afternoon, investors and analysts, and welcome to today's briefing. I'm Dinbo Macaranas from the Meralco Investor Relations team, and I will be moderating today's conference call. Before we proceed, please be advised that this teleconference call is recorded. I would also like to remind everyone to please follow the ground rules, which were sent to you beforehand. We will be presenting the first quarter 2022 financial and operating results of Meralco. A copy of the presentation will be downloaded from our website at www.meralco.com.ph under the Investor Relations section. We have members of Meralco's management team in this call, led by our President and CEO, Attorney Ray C. Espinosa. Other corporate officers who will be presenting are the following. Ms. Betty C. Siy-Yap, Senior Vice President and Chief Financial Officer; Mr. Ronnie L. Aperocho, Senior Vice President and Head of Networks; Mr. Ferdinand O. Geluz, First Vice President and Chief Commercial Officer; Attorney Jose Ronald V. Valles; First Vice President and Head of Regulatory Management; Mr. Raymond B. Ravelo, First Vice President and Chief Sustainability Officer. Finally, we also have Mr. Jaime T. Azurin, President and CEO of Meralco PowerGen Corporation. The order of presentation will be as follows. We will begin with the financial highlights, followed by the operating results of both the distribution utility and Meralco PowerGen Corporation. Finally, we will wrap up the presentation with a few words from our President. As in previous briefings, we will allow time for Q&A after the presentation. At this point, I would like to introduce our CFO, Ms. Betty C. Siy-Yap, who will present the financial results.

Good afternoon, ladies and gentlemen. I will be presenting the results for the first quarter ended March 31, 2022. In your screen, you see our financial highlights. So our first quarter 2022 CCNI at was PHP 5.6 billion, 10% higher than the same period in 2021. Consolidated reported net income was also at PHP 5.6 billion, but 28% better than last year's. However, our core EBITDA amounted to PHP 9 billion, up 25% over. Revenues totaled PHP 85.9 billion, 33% higher. Distribution revenue amounted to PHP 15.3 billion, 6% better and consistent with the increase in our volume. Generation, transmission and pass-through charges amounted to PHP 62.6 billion, 30% higher than 2021. Total costs and expenses grew 46% to PHP 80.8 billion, of which purchased power costs amounted to PHP 61.7 billion or 76% of the total. CapEx spend for the first quarter was at PHP 6 billion. Coal and fuel costs including replacement power at PHP 2.5 billion represents that portion which was incurred by Global Business Power. Cash and cash equivalents amounted to PHP 58 million with total borrowings at PHP 86 billion. As reported, our consolidated revenues amounted to PHP 85.9 billion, 39% higher than 2021. The consolidated revenues for the first quarter consists of distribution, accounting for 18%; generation and Transmission, PHP 62.6 billion or 73%; energy fees at PHP 5.4 billion; while other subsidiaries or nonelectric subsidiaries contributed PHP 2.6 billion. Our electric revenues grew 33% mainly on account of 2 major items: The higher volume; and the unprecedented increase in cost of cable, which forms part of our pass-through charges. The higher volume -- higher volume drove the increase in distribution revenue in 2022 on account of the continued easing of quarantine restriction, increasing economic activities which saw commercial volumes growing by 6%. This increase is coming from real estate and education sectors and full operations of retail restaurants and hospital sectors. The residential volume grew with a much warmer temperature and increased mobility to higher -- due to higher vaccination rates and the continuing hybrid work arrangements and home-based learning setup. Industrial volume grew 6% as well, mainly from food and beverage, semiconductor and other industries, which will highlight that the increase in pass-through charges, mainly from the increase in payable -- is mainly from the increase in payable cost and the depreciation of the peso. Of the increase in pass-through charges, PHP 11 billion or 76% is due to the increase in price, which accounted for PHP 3.5 billion or 24% and the remaining 24% is due to power. Our total cost and expenses amounted to PHP 80.8 billion. Purchase Power represents 76% of the total, which increased by 30%. The average residential price increased to PHP 6.80 per kilowatt hour from PHP 3.01 per kilowatt hour with the increased demand in tighter supply conditions. There were approximately 3,700 megawatts of capacities, which were also on outage, which drove the higher residential prices. The increase in Malampaya gas prices to $8.71 per gigajoule from $6.26 last year also impacted on the increase again purchase power cost. The total impact is about PHP 2.42 billion for an equivalent $0.30 per kilowatt hour. The higher purchase power cost is also due to the use of liquid fuel by the first-gen blast with the continued restriction of the Malampaya gas field. Year-to-date average global coal NewCastle index rose to $263.75, metric ton significantly higher than the $88.69 per metric ton in the first quarter of 2021. Peso depreciation was from PHP 48.73 in 2021 to PHP 51.74 in 2022. Our OpEx amounted to PHP 8.2 billion, representing 10% of total costs and expenses. This grew 16% versus last year as spendings of our subsidiaries grew to support their business growth requirements. Expenses pertained largely to manpower, cybersecurity and IT expenses. Depreciation grew 60% to PHP 3.3 billion on account of consolidation depreciation of Global Business Power and recognition of depreciation per completed capital expenditures. Meralco spent a total of PHP 6 billion for capital expenditures, of which 75% was for the distribution of network. This corporate asset renewal improved growth as well as projects in support of the government's Build Build Build program and the Meralco electrification program. The balance of the CapEx -- bulk of the balance of the CapEx pertain to the expense of Atimonan -- spending of Atimonan 1 as well as the solar power plant in Baras, Rizal. Our CCNI for the period was PHP 5.6 billion, 10% higher as mentioned, and our reported net income is 38% higher. The margins are 7% for the year for our CCNI. Our core EBITDA is at PHP 9 billion, 25% lower, and about PHP 8.6 billion for the reported EBITDA, 27% lower, with core EBITDA margin at 10%, both for core income reported EBITDA margins. The next slide shows our generation -- power generation businesses. As summary, PacificLight's performance and contributions are due to the increasing demand in Singapore with the improved pool margin. San Buenaventura showed improved heat rate and 99.95% (sic) [ 99.92% ] plant availability. BulacanSol added to the CCNI with its 99.99% availability. So individually, for PacificLight, it delivered a total of 1,324 gigawatt hours of energy and generated CCNI of SGD 79.3 million or equivalent PHP 3.1 billion for the first quarter of 2022 alone. This is due to the increase in demand and better spot prices. This is a turnaround from the $5.5 million loss same period last year. MGen Engine share, which accounts for 58% translated to PHP 1.8 billion. San Buenaventura underwent almost 25 days of preventive maintenance shutdown and delivered 625 gigawatt hours of energy with an average plant availability of 72.95%%. Fuel efficiency improved driven by the lower heat rate at 9,589 cubic per kilowatt hour [ Technical Difficulty ]. SBPL's first quarter CCNI was at PHP 416.3 billion -- PHP 416.3 million. The 55-megawatt EC plant BulacanSol San Miguel delivered 31 gigawatt hours of energy with total CCNI of PHP 53 million. Meralco's share is PHP 32 million at 60%. Global Business Power delivered a total of 1,032 gigawatt hours of energy for the 3-month period. Out of this 970 megawatts net sellable capacity, 793 megawatts are covered by contracts under PSA's with captive and contestable customers and ASPAs. During the quarter, challenges related to the inability of Cebu Energy and Electric Power to deliver power while the transmission line was undergoing restoration, which was caused by Typhoon. The expiration of the more contract in 2021 also resulted in a portion of uncontracted capacities. Our subsidiaries -- our 3 subsidiaries, Bayad, Radius and MIESCOR, also contributed to the bottom line of Meralco. Bayad, Meralco's payment service partner, contributed PHP 26.5 million to Meralco's CCNI in the first quarter of 2022 as consolidated revenues grew 4% to PHP 486.4 million. Gross transaction value totaled PHP 73 billion, of which PHP 54 billion went through the Bayad app. Bayad currently services a total of 505 billers as of the end of March 2022. Radius, Meralco's wholly owned internet services unit, recognized CCNI of PHP 65.1 million, and consolidated revenues of PHP 427.9 million in 2022. It currently services over 37,000 subscribers through its 8,381 kilometers of fiber optic cable, including 1,501 kilometers of GPON. The services carrier, enterprise, residential and MSME requirements. MIESCOR, the engineering and construction arm of Meralco and its subsidiaries contributed PHP 36 million to Meralco's CCNI in the first quarter as revenues grew 13% to PHP 1.4 billion, driven by EPC contracts and telecoms contracts. Our total debt is at PHP 86 million. This includes debt of subsidiaries of PHP 45 million or 53% of the total. Of this PHP 45 million, PHP 44 million represents debt of our power generation business. Our cash and cash equivalents totaled PHP 58 billion. Short-term investment was at PHP 16 billion. Net debt at the end of the first quarter 2021 was PHP 12 billion and net debt-to-EBITDA was 0.35x. Meralco's debt is comfortably spread to 2026 with no significant maturities under -- until 2025 when our 12-year note matures. Our average interest rate is about 5%, while average maturity is 6 years. All of our debt are in Philippine peso. Our core earnings per share is at PHP 4.99 per share, while the headline EPS is PHP 4.94 per share. That ends my report. Thank you.

Thank you, Ma'am Betty. We will now move to the operating results presentation to be led by our President and CEO, Attorney Ray C. Espinosa, to be followed by the heads of the different business segments.

Good afternoon to everyone. Our energy sales grew 6% versus same period last year at 11,069 gigawatt hours against the strong performance from all of the customer segments. Customer count grew 4% compared to the same period last year at 7.463 million customers on the back of all-time high PCA and OSA energization. Net system input increased by 6% versus last year at 11,690 gigawatt hours, and Meralco peak demand was higher by 10% compared to the same period -- compared to last year at 7,816 megawatts. On service performance system loss was lower by 0.12 percentage points on a 12-month moving average at 6.02%. Our system average interruption frequency index, or SAIFI, was higher by 16% compared to same period last year at 0.274x. Our system average interruption duration index, or SAIDI, was higher by 7% compared to last year at 25.265 minutes. And our Time to Connect was shorter by 6% compared to last year at 1.63 days. The average retail rate of electricity for the period quarter 1 was PHP 8.89, 14% higher compared to last year, principally due to the unprecedented increase in Q1 prices. Ferdie?

We are pleased to report that despite the record outbreak and surge in infections by the highly transmissible Omicron variant in January, the sales for the 3-month period was up 6% compared to last year as establishments and public transportation have been gradually permitted to operate fully due to the Alert Level 1 declared in March. Balance growth was observed for all segments, residential, commercial, industrial, with slight edge for commercial as these segments still trying to recover to at least near prepandemic levels. If we will compare the consolidated sales at 11,069 gigawatt hours compared to its 2019 prepandemic level, this is actually 6% up. Residential and industrial sales is actually 26% and 7% up compared to 2019. On the other hand, commercial sales still lags by 8% versus the same period in 2019. So it's just comparing the numbers to the prepandemic levels. In terms of sales mix, our year-to-date sales mix is still driven by residential at 35%, followed by commercial at 34% and industrial at 31%. Next slide, please. In terms of the segment drivers. Residential grew 5% for the first 6 months of 2021 driven by the continuous strong household energization, ongoing online schooling, hybrid work arrangement and home-based business as well as the relatively warmer temperature for the quarter compared to previous year. Growth was clearly observed in Metro Manila, Bulacan and Cavite. For Metro Manila, sales and per capita sales increased, mainly driven by higher condominium occupancy and driven by the return to on-site work for most of the offices. For Bulacan and Cavite, the continued high volume utilization of socialized and mass housing applications contributed to the sales increase. Well, for commercial, the commercial ramp-up in quarter 1 was driven by the increasing activity in the National Capital Region in CALABARZON as public confidence with user restrictions and [ Technical Difficulty ] for 2021 by 6%. Real estate grew 4% as work-based traffic has now gone back to prepandemic levels. Retail and restaurants grew 6% and 9%, respectively, and show continuous recovery with 100% operations allowed and higher confidence level of consumers to shop and dine out. Hotels also grew 7%, shifting already from the quarantine facility back for recreational use purpose. Well, high growth was also observed for storage and warehouses, which dramatically grow the ramp-up of vaccination activities and the rise in the consumer food and beverage demand for warehousing. Education also grew like by 9% significantly as schools began with hybrid and face-to-face classes as well as the preparation being done for the election as most of the classrooms will be used for this -- as election venue. Industrial continued its steady growth of 5%, driven by the increase in demand of easing restriction. Semicon continues to drive growth at 6% as it tries to meet the global chip demand. Cement also grew 10% as it supports the ongoing construction activities with Build Build Build and private partnership owners. Food and beverage increased 7% as it supports the rise in commercial activity, especially on restaurants and hotels, as well as plastics [indiscernible] grow by 6% to support the said food and beverage and chemical packaging requirements. Major growth areas for industrials are in Batangas and Laguna, specifically in the industrial parks, as well as the manufacturing plants in Bulacan. So we continue to grow our customer base as a result of strong organization performance both for project-covered application, ordinary service applications. As local government units and real estate developers proceed to catch up on deferred projects during the pandemic and operated at full capacity. Our project covered application energization grew by 61% for the first quarter compared to last year, while ordinary service application is slightly below by 2% on account of the slowdown in the first 2 months due to the Omicron variant impact. But for general service application, we saw recovery by the last -- last month of the quarter, which is March, where we recorded a record high energization for the specification of 23,000 households. Well, customer mobility to process applications has been maximizing all the areas now based under Alert Level 1, and all local governments are fully operating to issue the permits required for energization. We also prioritized the bill orders as developers resumed in computing their bulk applications as we catch up on the pandemic backlogs. As a result of the strong energization numbers, our Meralco customer count increased by 4% and reached to 260,000 new customers compared to the same period last year. Our customer base now stands at 7.46 million, while residential remains at high share, 92%; followed by commercial at 7% and industrial at 1%. So that ends the customer report. I'll now turn it over to Ronnie for the network support.

Thank you, Ferdie, and good afternoon to everyone. Our consolidated net system input, or NSI, for the first quarter grew by 6%, driven by the recovery across all segments, as discussed earlier by Mr. Geluz. And in terms of power sourcing, 36% was supplied by our IPPs and old PSA, 32% by the RES's, 24% by the new PSAs, 7% by the WESM and 1% by special contracts. In terms of fuel mix, 35% from natural gas, 32% from coal, 29% from multi-fuel, 33% from liquid fuel and 1% from solar. Next slide, please. Peak demand. Within the Meralco franchise was at 7,816 megawatts, 10% higher than the first quarter 2021, which peaked 7,115 megawatts. So already higher than 2021 full year peak demand of 7,808 megawatts. Peak demand for Luzon at 11,654 megawatts was 11% higher than first quarter 2021 peak of 10,543 megawatts. This has also exceeded already the 2021 peak demand for Luzon of 11,640 megawatts. Both Meralco and Luzon peak demands were recorded on March 23, where the surge in demand was driven by heightened activities amid the lower Alert Level. Moving on to system loss. Our 12 months moving average for March was at 6.02%. This is lower by 0.12 percentage points. The improvement in our system loss is driven by the sales mix that's trending towards the prepandemic levels, especially for commercial and industrial segments. We have also intensified our untitled bridge entities despite the limited police escorts that have been readied by Duterte's campaign and election-related activities. We have also sustained our operational excellence in bringing down the unbilled sales. Okay. Next slide, please. For our S-Factor and GSL, we continued to perform well with the rewards level based on the third RP baseline targets. For networks key indicators, however, there was a 17% increase in our total SAIFI or system average interruption frequency index, a 7% increase in our total SAIDI or system average interruption duration Index integration. These were mostly due to equipment failures and incident caused by the public. Our performance was also affected by a ramp up in CapEx execution, whole relocation versus required power interruption for the safety of our working crews. Our CAIDI, or customer average interruption integration index, however, improved by 9%. The average time to process applications posted another huge improvement of 24%. Last month, it was already at 30% improvement. So we continue to improve the time to process applications. Average time total connect also improved by 6%. For call center performance, there's a huge improvement of 59% from 8.97 seconds to 3.67 seconds average time to answer. For GSL, or guaranteed service levels, we are now on the ninth month of RY 2022 monitoring cycle. There were still 0 violations for GSL 1 and GSL 2, while the 9 incidents for GSL 3 and the number of days of delay for GSL 4 are way below the limits. For our CapEx, our utilization is now close to PHP 4 billion or 18% of our all-time high PHP 21.91 billion CapEx budget. The biggest spending of PHP 1.77 billion is for new connections and for project corporate applications, or PCA. For the first quarter, we energized 2,421 projects and close to 56,000 ordinary service applications. On top of this, we also replaced 1,120 overloaded distribution plus former -- serving mostly residential customers. CapEx spending for asset renewals and loan growth already amounted to around PHP 1.9 billion during the first quarter. We also need to relocate close to 5,000 homes this year, with priority BBB and DPWH road-widening projects. This is an all-time high impact for Meralco. And in March, we already relocated 752 poles or close to 16%. A major load growth project that we completed during the first quarter was the uprating of Calumpit power transformer plants banks from 25 MVA to twice the capacity at 50 MVA. The new 50 MVA power transformer was commissioned last January 25. This is part of our RY 2019 CapEx filing with a budget of PHP 195 million. This project will improve power adequacy and reliability that will benefit the residential, commercial and industrial customers in Calumpit, Hagonoy, Paombong, Pulilan, and Malolos in Bulacan. For BBB and PPP pole relocation updates, we deployed significant resources to clear the ongoing PNR North 1 Rail Transit project of 38 kilometer urban rail which is part of the North-South Commuter Rail or NSCR to connect Malolos to Tutuban, consisting of 6 stations along its route. We have already relocated 368 poles so far and [indiscernible]. Another project is the NLEX-SLEX connector road, an 8-kilometer 4-lane, all-elevated expressway C3 road in Caloocan all the way to PUP Sta. Mesa, Manila to connect to Skywest Stage 3. This project traverses mostly along the existing PNR railroad track. And we have already retired 396 poles and installed 584 poles now in NLEX to fast track the execution of the project. And finally, the Intramuros-Binondo bridge, a 680 meter 4-land steel arch bridge over Pasig River that was inaugurated finally last April 5. This bridge connects Intramuros and Binondo and accommodates over 30,000 motorists daily. For this project, Meralco retired 44 poles and installed 48 news ones for the total time line set by the government and others performance. Thank you. And I'm now turning you over to Ronald Valles for regulatory reports.

Good afternoon. For the regulatory update, let's start with the average retail rate for the first quarter of 2022. The average retail rate increased by 13.6% compared to the first quarter of 2021 mainly due to higher gen charge, higher transmission system cost and subsidies, taxes and universal charge. So the average gen charge of first quarter 2022 registered at 21.3%, increased due to higher fuel costs, higher WESM charges and peso depreciation. So the 9.1% increase in average transmission costs was due to higher ancillary service charges. Following the increase of generation and transmission cost, average system loss charges increased by 59.3%. So without the distribution rate grew up, for quarter 1 2022, distribution rate is at PHP 1.52 per kilowatt hour, which is 0.8% decrease from the same period last year of PHP 1.5396 per kilowatt. So this is due to the shift in sales share towards the commercial sector, and that's a decrease in residential sales share. Since the residential customers have the highest distribution rates among the customer classes, this warranted increase. An additional DRTU, or distribution rate 2 was implemented starting March 2022. Subsidies, taxes, universal charge also increased by 8.3%, mainly due to higher effective taxes following higher generations [indiscernible] gross rates and subsidies implementation of the current [indiscernible] tax starting July 2021 and higher part rates due to lower share of the Noble energy purchase in the first quarter 2022. For our 5RP reset application updates. So last March 16, 2022, Meralco filed its 5RP reset application to the ERC based on our proposed annual revenue requirement of PHP 322 billion. So the 5RP covers RY 2023 to RY 2026. So during the last review, there was no reset, and thus, Meralco only made CapEx filings only RY 2016 to RY 2017 and full and partial UFC approval is expected. For the 5RP on group A utilities, CEPALCO, DECORP, and Meralco required to submit applications last March 11 under the 5RP. Meralco-supplied 5RP tariff is much lower than CEPALCO's PHP 1.62 and DECORP's PHP 2.07. In terms of the CapEx included in our 5RP filing, on a per year basis, Meralco has set a CapEx of PHP 37.53 billion for 2023, PHP 43.5 billion for 2024, PHP 36.37 billion for 2025 and PHP 32.25 billion for 2026. So the proposed CapEx projects are necessary to augment the capacity of the network to meet demand growth [indiscernible]. The CapEx project also include the replacement and refurbishment of aging and obsolete assets as well as the relocation of assets needed for the implementation of government infrastructure and third-party initiated projects. It will also include the purchase and construction of non-network assets required for the normal operation of the electric distribution system. Meralco also plans to deploy automation and technology projects as well as innovative solutions for value -- for various electrification projects. So these projects are necessary to comply with regulatory requirements to maintain the integrity, reliability and efficiency of the electric system and for the continuous improvement in service quality and performance measurement for the benefit of the consumers. For the 5RP, Meralco is proposing the implementation of the advanced metering infrastructure program to its more than 2 million customers, aligned with the objective to support reliable, efficient energy distribution. [indiscernible] 3 new project implementation during the last period. General [indiscernible] complex projects are carried over to the peak regulatory period. These are major projects that are essential for the improvement of the unit operations, but were pushed back due to difficulty such as the COVID-19 pandemic. So these projects are stated information in the first few years of the peak regulatory period. Let's go to the distribution rate true up update. So there is a distribution rate true up that Meralco proposed way past December 2020 [indiscernible] the amount of PHP 13.89 billion, representing the difference between the actual weighted average study, or the AWAT, and the interim average rate covered in the period July 2015 to November 2020. So the ERC approved this proposal and to be implemented over a period of 24 months or fully refunded. So Meralco started implementing this true up last year in March 2021. So last March 2022, we've actually ordered Meralco to refund an additional PHP 4.8 billion to its customers. So this is -- this accounts for the difference of Meralco's average -- weighted average study and interest average rate during the period from December 2020 to December 2021 subject to final evaluation. About -- based on the table, the DRTU 1 and DRTU based on the implementation are in March and April 2022 [indiscernible]. So due to land constraints in DRTU 1 and true up 2, for March 2022, we've implemented as a single refund line item. But [indiscernible] in our April billing will both be reported -- or reported as separate line items. For the CSP updates for our 850-megawatt unsolicited proposal. As mentioned during my last update, TPBAC resubmitted an expression of interest to SMC Global, SunAsi Energy Inc. So last February 21, SMC Global Light and Power submitted a letter informing TPBAC of its withdrawal of participation from CSP. And on April 5, on the submission -- on the bid submission deadline, SunAsia did not submit a bid, but instead submitted a Notice of Nonsubmission of Bid. Since no comparative bid was received, TPBAC declared a failure of bidding. So last April 6, Meralco submitted to the DOE the final invitation to bid and bid requirements for the conduct of the second round of the CSP. So last April 17, the final invitation to bid and bid requirements were approved by the Department of Energy, posted in its portal. The first newspaper publication was made last April 19, and the deadline for submission of expression of interest in on May 2. And finally, for our interim 180-megawatt CSP, that is, of course, to cover the period from February 26 to July 25, 2022. So last March 31, on the expression of interest deadline, the TPBAC did not receive an expression of interest from any prospective bidder and declared a failure of bidding. On April 4, Meralco submitted to the DOE the final invitation to bid and bid requirements for the conduct of the second round of the CSP. However, Meralco proposed an allowance for a possible extension of the contract period for up to 5 months to mitigate the indefinite exposure of Meralco's customers to higher generation costs associated with the running -- with running SPEXMalampaya gas-reliant plants on liquid fuel, given continuous rise of fuel prices. So last April 17, on the final invitation to bid and the bid requirements were approved by the DOE and posted in e-portal. The first newspaper publication was made on April 19, and the deadline for submission of expression of interest is on April 29. So I'm turning you over now to Mr. Ravelo for the sustainability outlook.

Thank you, Attorney Ronald. Good afternoon, everyone. I will be providing our sustainability update for the first quarter of 2022. First, we're pleased to share that our three 2020 corporate reports published last year were all recognized in the 57th Anvil awards. In particular, our annual report entitled Power On received the gold anvil; our sustainability report entitled Live Life received the silver anvil, and finally our One Meralco Foundation annual report Give Hope also received the silver anvil. The AR's Gold Anvil is actually the second international award won by that AR, following the gold CV and the international business awards in 2021. The silver anvil of sustainability report is actually the third of the SR following a silver Stevie at the IBAs and also a gold rank award on the Asia Sustainability Reporting Rating in 2020. The next page, as part of our general diversity and inclusion program called MBRACE, we struck a very important partnership with Don Bosco to put together a women technician scholarship in program. This program has the objective of developing and nurturing a pool of female technicians and engineering graduates to help increase women representation in Meralco with a target of 40% representation by the end of this decade. School year 2022 to 2023 will see the start of this program, and will cover 15 female students to undergo a 1-year TESDA accredited vocational program for technicians. It will also cover full scholarship allowances board and lodging. And will -- as part of this program, we will also have a 4-month internship in Meralco for the female students with an opportunity to be part of the workforce upon graduation. Finally, last March as part of International Women's month, we established our diversity and inclusion policy. This policy articulates and expresses our commitment to advancing workforce diversity into nurturing an inclusive and safe workspace for our employees, while ensuring equal employment opportunities for all. Also included in this policy is our commitment to respect all individual and value differences across many areas, including gender, age and ethnicity, among others. This policy is very much aligned with the United Nations Sustainable Development Goals, or the UN SDGs, in particular, UN SDG no 5 on gender equality and UN SDG no 10 on reduced inequalities. It also supports the principles of the United Nations Women's Empowerment Principles, or WEPS, and Philippine Business Coalition for Women Empowerment, or PBCWE. Finally, it also upholds our commitment to United Nations Global Compact Principle no 6 on the elimination of discrimination in employment. That concludes the sustainability updates. I will now pass the virtual floor on to Mr. Jaime Azurin for the power generation update.

Good afternoon. For the Power Generation group look, for the first quarter of 2022, delivered energy is down by 8% from 3,288 gigawatt hours down to 3,011 gigawatt hours as of March 2022. Global Business Power registered a downward trend of 16% from 1,226 gigawatt hours in March of 2021, down to 1,032 gigawatt hours in March of 2022. This was brought about by scheduled preventive maintenance of our Panay operations as well as the after effect of Typhoon Odette, which prevented our Cebu operations to deliver their power due to damaged transmission lines as well as distribution lines. For San Buenaventura, it's also down by 16% from 743 gigawatt hours in March 2021 down to 624 gigawatt hours in March of 2022. This was brought about by the preventive maintenance scheduled last January of 2022. Next page, please. We have started to ramp up our investments to achieve the 1,500 megawatt renewable energy capacity in the next 7 years. Projects that are under construction right now, which will be delivered between now until the first quarter of 2023, a total of about 188 megawatts, broken down a 75 megawatts in Baras, Rizal, a 68-megawatt solar farm in Ilocos Norte, and 45-megawatt solar farm in Cordon, Isabela. To add this to our existing -- our first solar investment in Bulacan, this will bring us to a total of 240 megawatts of renewable energy by first quarter of 2023. We continue to ramp up our predevelopment works for our other solar projects as well as wind farm and also of battery storage. That ends our report. Thank you.

Thank you, Mr. Azurin and to our executives for the presentation. We will now open the floor for questions to our analysts and investors. [Operator Instructions] Go ahead, Jelline.

I have 2 specific questions relating to the tariff reset. I just wanted to understand what major key projects that's driving the increase in CapEx. If I remember correctly, back in 2011, the average approved CapEx is almost just 1/3 of what you're trying to get approved this time around. And then second, relating to the reset, what's the latest on the treatment for the lapsed period? Is this something that's already straightened out with the ERC?

Jelline, for our 5RP CapEx, yes, it's very long amounts that we have 7-year bid in this previous resets. But bear in mind that our reset is 7-year last period. So for 7 years, we only implemented partial CapEx that were approved by the ERC. So that's for the regulatory 2016 and regulatory 2017. So there are so many catch-up CapEx that we have implemented -- that we have to implement and include in the 5RP filings. These are necessary for the -- to address the low growth and reliability. So the biggest chunk of our CapEx filing up to retain the customer in load growth. And then we also have to submit certain CapEx that need to go by growing regulatory requirements that we're now try on existing -- during the past resets. And also, this is the first time we're implementing our results AMI program CapEx. This amount of CapEx is much bigger than what we have filed in the previous years. So -- and these are just some of the major components of the CapEx that we included in the 5RP filings. With respect to last period, the resolution of the last period in so far as Meralco is concerned would be contained in the 2 pending cases that are still pending with the ERC. As I understand you that these 2 cases involve our case and the case on the interim average rate of Meralco that we have implemented during the last period. So both hearings in these 2 cases have been put together. And I think there are only certain pending incidents that need to be tackled by the ERC and certain activities that have to be filed. And after which, these cases will be submitted for decision. So we hope that the ERC will be able to resolve so far as the Meralco is concerned to resolve the lapsed period issue in May this year. Thank you.

The next question comes from Eunice Dolatre of SB Equities, and she asks, given the ongoing Indonesia coal ban, how is Meralco managing its coal operations to ensure demand requirements are met? What can we expect for fuel costs on the PowerGen segment? Are there any pricing mechanism in place to mitigate impact in the surge of coal prices? What is your coal price outlook?

Yes. Thank you, Eunice. As far as the Indonesia coal bank is concerned, it was relatively since way back in January 20, 2022, although initially, it has caused some logistic concern because there were a lot of orders or your backlog as far as shipping is concerned. As far as the prices, the Global Newcastle, the international index on coal, continues to rise due to the prospective import ban of European countries of Russian coal this coming August of 2022. This implies that the European countries are now looking for other sources of coal outside Russia, and that is putting pressure on the Global Newcastle Index. And right now, the price per metric ton on the Global Newcastle is $370 already. Much, much higher than the normal average of about $80 to $100 per metric ton. What's the other question?

Pricing mechanism.

Pricing mechanism.

The pricing mechanism, mostly imports of long-term contracts for coal are indexed to Global Newcastle Index. So you expect prices here in the Philippines of generation POS will continue to increase. I think that's it, right?

Thank you, sir. The next question comes from German de la Paz of Abacus. And he has 4 questions. First, since purchase power is completely passed through, to which do we attribute the 25% decline in EBITDA? Secondly, can we provide a breakdown of the PHP 2.2 billion other income for the quarter? Third, may I ask how the 13.2% WACC is computed? And finally, what is the next step after filing the -- of recent application last March 15 or, I think, March 11?

German, okay, let me just explain. In our calculation of EBITDA, number one, we exclude equity in earnings. That's an internal definition. So had we included EBITDA -- had we included equity in earnings, our EBITDA this year would have improved by over about PHP 1.8 billion, about PHP 2 billion. Now why is it lower? Because in the other point there also is, last year, we had reversal of provisions which we don't have this year. I guess that's the bulk of that one -- of the difference in EBITDA other than the item. For -- which leads me to your second question, what is the bulk of other income? Well, that's equity in income from PacificLight and San Buenaventura. What's the third question?

The third question is on the WACC.

13.2% WACC. It's computed.

The 13.2% WACC is -- that's actually the recommendation of the independent foreign consultant that Meralco has presented to the ERC and it follows the formula of the ERC in the competition of the WACC. But however, let her note that the ERC allows the distribution utility to propose alternatives formula in the computation of the WACC, or even the discretion, the ERC has the discretion that speaks the rate of return. And so far as the details of the 13.2% WACC, I don't have with me now the details, but it is included in the filings that we have submitted to the ERC. I can give you a copy of the particular computation of the WACC once I'm able to get from the filings. And in so far as the fourth question is concerned, what's the next step after the filing of the reset application last March? There will be hearings scheduled by the ERC time of payment hearings. I think it will start next -- it will start next week or this week, this week rather, and then the next month, first week next month. And then after that, after the hearings, then we expect ERC to make the evaluation and come up with a draft determination.

Thank you, sir. I think Jelline. Jelline, would you like to ask another question?

Yes, I have another set of questions, sir. With regard to the WACC, I understand that prior to this submission, there was a motion for or direction towards a fixed 12% return. Is this something that's still on the table? And then secondly, more on the time line. Just a follow-up on German's question. You said that the whole tariff reset process can be concluded within the time line set by the ERC, which is at -- before July or before the end of term of the Chair. And then third question is with regard to your targets with regard to revenue diversification. With the conclusion of the PLDT telco tower, what's the latest in terms of management targets? I guess, in relation to that, any updates on the Atimonan One project?

Yes. For the first question with respect to the WACC. As I said, that the 13.2% was based on the recommendation of the foreign consultant. It follows the requirement under the 5RP rules that the ERC has released, which requires the distribution Philippines to recommendation as to what WACC will be adopted. So that's why we proposed a 13.2% WACC. However, the same rules of the ERC says that if the ERC is not prevented from coming up with a different rate of return other than the WACC, and specifically, rate of return that is consistent with the legislative and judicial pronouncement. So that necessarily includes the 12% fixed rate of return. With respect to the time line, on your question on the time line, based on the time line of the ERC, we following strictly, the ERC will come up with a draft determination between June and July, and then final determination sometime in September. But after the final determination, as you know, there will be a rate translation process, which will take place for a period of 3 months or 3 months after that. So we expect the final rates that will be implemented insofar as group rate is concerned, then it puts Meralco sometime in the last quarter of this year. This will be implemented at -- start -- effective July 1, which is the start of the 5RP.

The third -- I think the third question relates to telco towers.

On the revenue diversification of MIESCOR, we continue to examine our options after the loss that we suffered in the bidding for the Smart portfolios. We continue to talk to the mobile network operators and to look for the other possible requirements. So we are on the hunt or the lookout for these possible options with all of them. As you may know, PLDT has sold only half of its towers. So there could be a possibility that the other half maybe available sometime next year. So we continue to explore those options.

Thank you, sir. Go ahead.

On A1E, we're still waiting for the bidding of the Meralco. For the next round, I think the next round is about 1,000 megawatts for 2026. That's it.

Thank you. sir. German de la Paz of Abacus has a follow-up. May I ask how much, again, was the provision reversals booked in the first quarter of 2021?

About PHP 4 billion.

Thank you, ma'am. The next question comes from Gio dela Rosa of Regis. Can you share your thoughts on how the depletion of Malampaya is affecting power supply and also power cost? Are you expecting the natural gas plants to run on liquid fuel for the rest of the year?

For the first gen plants?

Will they run on liquid fuel?

Yes, we expect that -- because there is still a gas restriction among the gas plants that are supplying Meralco, we expect some of them to continue running on liquid fuel.

So how will Malampaya affect the power cost and supply? His first question.

Yes. Well, with the continuing gas restriction and the use for liquid fuel, then that will result in -- we expect higher fuel prices beginning next month up to the time that the gas restriction has stopped. The price of liquid fuel is about twice the amount of or the price of natural gas.

I think, Ronald, the more accurate response is the continuing depletion of the Malampaya reserves resource in the duration of the plants with the reliance to Malampaya gas. And therefore, that actually affects the supply side. And at the same time, to the extent that the -- these power plants can run on liquid fuel, they have been running on liquid fuel as well, which makes the supply more expensive. But we will continue to see the continued restriction on Malampaya and the increasing duration of plants that are reliant on Malampaya gas.

If I may add, boss, around -- based on what you said, it's around 900 megawatts of capacity both from Atimonan, Santa Rita and San Lorenzo plant that are restricted because of the restrictions from Malampaya gas. The 900 megawatts is a significant capacity.

Thank you, sirs. Does anybody still have a question?

Cristina Ulang here of FMIC. Sir, given the discussion on the Malampaya and election day and in our recovery, GDP growing and electricity consumption growing, then you just mentioned the rating of the plants connected to Malampaya. Sir, is there going to be power shortage second half of this year? And how will this affect Meralco's income?

I think that the OES come out with its latest forecast showing that there will be possible power shortages. There will be yellow and red alerts after the election. So not to mention the fact that many of these plants would resume the scheduled maintenance and some of these plants may go on forced off day. So that is the situation that we have. So whenever there is a shortage in Luzon, even if Meralco is adequately contracted to serve its franchise area, we effectively are affected by the Luzon-wide shortage, which would mean the system operator would then mandate that we go on manual load dropping to the extent that, I think we represent about 70%, Ronnie? So if there's a shortage, say, of 1,000 megawatts, that means we have to shed around 700 megawatts of load to the shared, to the other distribution utilities and electric coop. And then to the extent that we shed 700 megawatts, that means we would have to go on manual load dropping.

Sir, how does not affect revenues, distribution rates? Do you forgo the revenues? Or you still get it under manual load dropping?

No, under manual load dropping, it means that there's no -- we'll go on brownout so we won't have any revenue for that duration, right?

Yes. Sir, do you have an estimate on just how big is the estimated power shortfall second half? Just your ballpark.

Cristina, based on the Luzon grid forecast of the department of energy, the yellow alert is expected to...

Sir, choppy. I cannot hear. Yes. Sir, I cannot hear. Very critical [Foreign Language] your info. Sir, can you repeat? [Foreign Language]? Sir, can you please repeat?

Based on the latest power outlook of the Department of Energy, that yellow alert is expected to happen or to take place last week of May and early weeks of June this year. And for the rest of the months this year, then we'll be back to normal.

Sir, revenue estimate [Foreign Language].

Estimates, sir, yes.

Are you asking for the capacity?

Yes. Yes, sir.

Guess we'll just get back to you on that.

But it won't mean anything too material for Meralco's revenues and income? Is it something we should be worried about in terms of the earnings impact at this manual load dropping? This is just...

There is a yellow alert. But if we're talking only of the yellow alert, then there will be no manual load dropping yet at that point in time. So the manual load dropping will only happen once there is a red alert. And just based on the forecast of the Department of Energy, there is no red alert happening during the period that I have mentioned to you.

And for the rest of the year, no red alert?

No. And for -- up to the rest of the year. It is based on the latest forecast of the Department of Energy.

So in effect, no power shortage, in effect, yellow alert?

The power shortage can indicate either a yellow or a red alert. So what I'm saying is that based on the forecast of the Department of Energy, there is only...

But Ronald, you should also say that the Department of Energy does not forecast forced outages.

No, it is included. But the amount of forced outage that they forecast is lower than what Meralco forecast.

That's what I'm saying.

Okay.

However, we have to follow the DOE and its forecast and hopefully they are, right?

Hopefully.

Next question comes from Fio De Jesus of Maybank. What is target gearing given interest costs are rising? Is Meralco looking at issuing instruments like green bonds to fund the 1.5 gigawatt new RE capacity? And what are project return targets?

Okay, Fio, overall, yes, certainly, we're reviewing our financing options, whether it's green or otherwise. So for the green, it's something that we're looking at although nothing has been finalized yet. We're also looking at financing on the distribution utilities side. So there's a mix of that. It's just too early for us to discuss the details. On -- well, that definitely depends on what we decide on the -- on our financials. It will determine our gearing. But for now, we're large -- we're still very much -- there's so much room yet. There's so much room for us to gear up.

Project return targets on the RE?

Our project returns on RE is depending on the interest rates between 10% to 12%.

The next question is a follow-up again from Eunice Dolatre of SB Equities. How does price volatility in commodities affect pace of project development, specifically on renewables and BESS? How does this impact your project returns? And secondly, are you in talks of any strategic partnerships to manage project risks?

Well, for renewables as well as for battery storage, the cost of, of course, the solar panels and the battery is very, very important to make projects viable though. Lately, the solar panels are increasing, and the battery storage have not decreased significantly in the same way as solar panels did initially, and now it's ramping up due to increasing demand for solar panels. Now how does this -- of course, the project is negatively impacted by high cost of investment though. So as these projects will materialize, it's a question of timing as well as pricing of the tariffs that you are about -- that you are going to sell on a renewable portfolio. Secondly, are you in talks with any strategic partnerships? We are always open to any partnership as we ramp up our building for a 1,500-megawatt renewal. We are in talks with several parties as we also develop our own projects to be able to hopefully start construction by early next year. Thank you.

I see that Cristina Ulang still has her hand raised. Do you still have follow-up questions, Cristina?

Yes, sir. Yes, sir. Sir, sorry, I'm asking again on the more medium-term prospects for the power shortage given the rated -- the rating of the capacity of all those connected to Malampaya. Sir, in the next 3 years, I'm looking at some documents from DOE. They're projecting some uncontracted requirements after CSP. Sir, so what does this mean for the grid? Is there going to be -- because there's only going to be demeaning for this year and then Mariveles of San Miguel going online. And then in 2023, '24, '25, there won't be any. Sir, am I correct in my interpretation of the medium term power supply? No new baseload plan? Although, of course, you may have your offtake, but the fuel will also is another concern. Sir, can I just get your thoughts on the medium term power supply?

You are right. There are 2 baseload plants that are about to be completed that is still being given to and also of Mariveles. The other projects that may come on stream is based on the 1,800 CST of Meralco wherein San Miguel Excellent Energy as well as Masinloc won that grid, and that is for delivery in 2025. In the meantime, between -- your questions between '23 to '25, the Department of Energy is coming in with the GEA, or the Green Energy Auction, so that it can at least bridge the gap with the upcoming building and delivery of renewable projects like solar, which is shorter in terms of construction and delivery. That's all, thanks.

Sir, okay. Okay. So are you not -- so are you concerned about the intermittence feature that they won't be as good as -- as reliable as the baseload and, therefore, the grid may be more prone to more manual loading and red alerts? Is that a possibility under -- or will San Miguel be adequate in its LNG transition fuel?

Well, as we...

Malampaya.

Yes, the intermittency will, of course, have to be addressed by the National Grid as you ramp up your investments in renewables. There are ways to do that basically either through batteries or a gas plant. So we can react faster than coal plants in terms of intermittency of renewables. Thank you.

Okay. Sir, last [Foreign Language]. Sir, what about the congestion in the transmission? Sir, is there any -- do you see any issue in that respect, the expansions that have not been done in the congested transmission? Is it something that concerns you at all? Or it's something that's manageable in the next 3 years?

Before any power plant is constructed, I'm pretty sure they were able to obtain a system impact study with the National Grid. And that is a major requirement for you to start construction as long as there is an available highway to transmit your power to your client. So those who have constructed or about to construct have already obtained their system impact study with the National Grid.

Thank you, sir. Thank you, Cristina. We have a question also from Jelline Gaza of JPMorgan. Do we have indications for March and April volume growth with market recovery and mobility?

Yes. I think for March, we actually grew 8% March this year compared to March last year.

Jelline, did you mean April and May? Can you just clarify?

I'm referring to March and April.

March 8%, then April indicative is around 5%, 5% to 6% -- 5%, around 5%.

I think that is our last question. That concludes our briefing. We'd like to thank you, everyone, again for joining the call today, and we look forward to seeing you again at the first half 2022 financial and operating results briefing. Thank you, everyone.