Manila Electric Company (MER) Earnings Call Transcript & Summary

Good afternoon, investors and analysts, welcome to today's virtual 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 as well to please follow the ground rules, which were sent to you beforehand. We will be presenting the first half 2022 financial and operating results of Meralco. A copy of the presentation may be downloaded from our website, www.meralco.com.ph, under the Investor Relations section. We have members of the Meralco's management team in this call, led by our president and CEO, Ray C. Espinosa. Other corporate officers who will be presenting on the call are Ms. Betty Siy-Yap, Senior Vice President and Chief Financial Officer; Mr. Ronnie L. Aperocho, Senior Vice President and General Networks; Mr. Ferdinand O. Geluz, First Vice President and Chief Commercial Officer; Atty. Jose Ronald V. Valles, First Vice President and Head of Regulatory Management; Mr. Raymond B. Ravelo, First Vice President and Chief Sustainability Officer. 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'll have a public presentation with a few words from our president -- or if our Chairman joins us later on, then we will have him give the final words. We will allow time for Q&A after the presentations have been completed. At this point, I would now like to introduce our CFO, Ms. Betty C. Siy-Yap, for the financial results.

Good afternoon, investors and analysts. I'll be presenting the results for the first half of 2022. Our financial information shows the following. The first half 2022 consolidated core net income was at PHP 13.1 billion, 15% higher than same period in 2021. Consolidated reported net income was also PHP 13.1 billion but 32% better than last year. Core EBITDA amounted to PHP 24.4 billion, slightly higher than 2021. Revenues totaled PHP 200 billion, 34% higher. Our revenues consist of either electric revenues, energy net sales, consolidated power generation company energy sales and sales of nonelectric subsidiaries. Distribution revenue, which is 16% of electricity revenue, amounted to PHP 30.7 billion, 3% lower as a result of the combined effect of the 6% increase in volume of [indiscernible] asset true-up refund. Generation, transmission and other pass-through charges amounted to PHP 159.4 billion, 39% higher than 2021. We will discuss this in the later slide. Energy sales in the first half of 2022 amounted to PHP 12.6 billion, significantly higher due to the inclusion of 6 months revenue of BulacanSol and Global Business Power. BulacanSol began operations in May of 2021 while Meralco completed its acquisition of the 86% in GBP on March 31, 2021, and we began consolidation in April 2021. Total cost and expenses grew 42% to PHP 187.8 billion, of which purchased power cost, which increased 40%, comprised 79% of the total. Coal and fuel cost and power plant O&M totaled PHP 10 billion. Interest expense for the first half of 2022 was PHP 14.2 billion, which pertains to the requirements of the distribution [indiscernible] and development of our power generation project. We ended the period with cash and cash equivalents of PHP 50 billion while total borrowings stood at PHP 89 billion. Our consolidated revenues grew 34%, PHP 199.6 billion from PHP 149.1 billion. Electric revenues, which account for 97% of total revenues, was the reason for the bulk of the increase in consolidated revenues. The persisting increase in global fuel prices resulted in generation charge, transmission and other pass-through charges increasing or accounting for 78% of total revenues, 3 percentage points higher than 2021, as can be seen on the chart on the right side. The overall generation and other pass-through charges grew 39%. Contribution of power generation business was PHP 13.6 billion of the total electric revenues. The electric revenue also includes [indiscernible] which included a PHP 7.2 billion [indiscernible] by a power supplier. The same amount was [indiscernible]. Distribution revenue, despite the 6% increase in volume, the distribution revenue declined by 3% because of the effect of the asset true-up. As of June 30, 2022, a total of PHP 2.4 billion of the asset true-up has been refunded. And this is out of the total PHP 7.8 billion ordered by the ERC for refund. Total costs and expenses amounted to PHP 187.8 billion, up 42% versus last year. Purchased power costs, which represents 79% of total, increased by 40% to PHP 184.4 billion (sic) [ PHP 148.4 billion ] from PHP 106 billion due to higher cost of power with the spike in global fuel prices. This accounted for half of the pass-through generation costs of Meralco. The average Malampaya natural gas price increased to $9.25 per gigajoule in the first half of 2022 versus $6.72 per gigajoule the previous year. Malampaya gas supply restrictions, which began in March 2021, compelled generation companies to continue using more expensive alternative fuel. Meanwhile, NEWC coal index rose to an average of USD 319.06 per metric ton versus USD 98.91 per metric ton in the same period last year. During the 6 months -- on May 20 this year, average was USD 436.07 per metric ton. Average WESM prices rose to PHP 6.78 per kilowatt-hour from an average of PHP 4.52 amid the tight supply condition that was triggered by increased demand and higher average capacity on outage, which remained at 3,300 megawatt level. Luzon recorded its highest demand of 12,113 megawatts this year on May 12, up by 4% from the 11,640 megawatt peak demand last year. As of end of June, the grid was placed under Yellow Alert for 7 days and Red Alert once. The continued peso depreciation against the U.S. dollar to $54.975 as of the end of June from $48.80 in June of 2021, also weighed on the PPC. The local currency recorded its weakest performance in 6 months -- in June at PHP 55.021, the lowest in nearly 17 years. Today, though, it has reached PHP 56. Operating expenses, meanwhile, went up by 7% to PHP 16.9 billion. GBPC OpEx for the 6 months of 2022 was PHP 1.5 billion while the consolidated 2021 numbers was only for 3 months. This totaled PHP 949.5 million. The [indiscernible] OpEx grew by 2% due to higher corporate-related expenses. Our subsidiary [indiscernible] increased spending related to manpower, cybersecurity and distribution of [indiscernible]. Meralco spent PHP 14.2 billion of capital expenditure, of which 71% was for the distribution within. Calculating for net EBITDA in the first 6 months of the year rose by 15% to PHP 13.1 billion from PHP 11.4 billion in the same period last year at the back of a strong energy deal and earnings. In the first quarter, CCNI amounted to PHP 5.6 billion, 10% higher compared with first quarter of 2021 of PHP 5.1 billion due to the 6% increase in new sales volume and contribution of PacificLight, San Buenaventura and BulacanSol. Reported net income was 28% higher compared to 2021 because the numbers for the 2021, we had noncore [indiscernible] deferred tax assets as a result of the lowering of corporate income tax rate to 25%. Core EBITDA and core net EBITDA were lower in 2021. In Q2, CCNI amounted to PHP 7.5 billion, higher by 19% versus Q2 of 2021 as growth in the [indiscernible] sales volume was [indiscernible] with continuing contribution from the 3 power-generating plants. Increase in reported net income of 35% was higher than the percentage increase in CCNI due to foreign exchange loss recognized in 2022 compared with 2021. Core EBITDA impact in 2022 Q2 was 11% higher. The next chart shows our power generation results of operations. Wholly owned subsidiary, Meralco PowerGen, contributed PHP 2.3 billion to Meralco's CCNI in the first half of 2022, significantly higher compared with PHP 311 million in the previous year and this is driven by strong earnings of the 3 plants mentioned earlier. PacificLight's CCNI reached USD 148 million or an equivalent PHP 5.7 billion, a turnaround from the USD 6 million net loss in the same period last year. This is attributable to the 3% increase in demand and higher margin on spot prices, which averaged USD 194 per megawatt-hour during the period against USD 5.9 per megawatt-hour in the same period last year. PacificLight's 800 megawatt energy plant in Jurong Island, Singapore delivered a total of 2,770 gigawatt-hours total energy for this period. MGen currently has combined direct and indirect interest of 15% in PacificLight. The 455 megawatt supercritical coal-fired plant of San Buenaventura in Mauban, Quezon, which underwent 25 days of preventive maintenance shutdown in the first semester, delivered a total of 1,368 gigawatt-hours of energy with an average plant availability of 86%. SBPL's first half CCNI amounted to PHP 1.5 billion. The 55 megawatt AC plant of PowerSource First Bulacan or BulacanSol in San Miguel, Bulacan, had an average plant availability of 99.73% and delivered a total of 63 gigawatt-hours of solar energy to Meralco under a 20-year ERC-approved PSA. CCNI as of the end of June amounted to PHP 186 million. Global Business Power delivered 2,361 gigawatt-hours of energy during the 6-month period. GBP has ownership in coal and oil plants with net capacity of 970 megawatts, of which 816 are contracted under PSAs with captive and contestable customers and ancillary services procurement agreements. Consolidated interest-bearing debt stood at PHP 89 billion, including PHP 48.7 billion of debt of subsidiaries. Of this amount, of the total PHP 48.7 billion, PHP 47.4 billion pertains to GBP debt [indiscernible] which is actually BulacanSol and PHP 1.3 billion for other subsidiaries. Of the total amount, PHP 34.3 billion are maturing within 1 year. Cash and cash equivalents totaled PHP 50 billion. Short-term investments totaled PHP 18 billion. Net debt at the end of the first half of 2022 was PHP 21.1 billion. We improved long-term investment but our total cash investment could go up to PHP 100 billion. Meralco's debt is covered and spread to 2037. The PHP 12 billion maturity in 2025 pertains to the PHP 7 billion, 12-year fixed rate [indiscernible] in 2030. The Meralco's Board of Directors approved today the declaration of interim cash dividends amounting to PHP 5.806 per share to all shareholders of record as of August 23, payable on September 14, 2022. This represents 50% of Meralco's core earnings per share. That ends my report.

Thank you, Ma'am Betty. We will now move to the operating results presentation to be led by our President and CEO, Atty. Ray C. Espinosa.

Thank you. Good afternoon, everyone. Our energy sales grew 6% versus last year, 23,960 gigawatt-hours. This represents an all-time monthly high in terms of sales driven largely by the double-digit growth of commercial sector, which grew 11% year-to-date, as well as the industrial sector, which grew 4% on a year-to-date basis. Customer count increased by 3% to 7.519 million customers. Net system input rose 6% to 25,289 gigawatt-hours while Meralco peak demand grew to 8,111 megawatts, 4% higher than last year, which was registered on May 13, 2022. On our service performance, system loss was slightly up by 0.03 percentage points to 5.86%. System average interruption frequency index was slightly up also by 1% at 0.660 times. System average interruption duration index was down 4% at 62.508 minutes. And time to connect was shorter by 5% at 1.62 days. Average retail rate was up 18% at PHP 9.33 per kilowatt-hour.

For the customer report, we're happy to report as mentioned that our first half sales significantly surpassed pre-pandemic levels as energy sales increased by 6% last year -- compared to last year driven by double-digit growth in the commercial segment, an increased public confidence, continued reopening of the economy under Alert Level 1 for Metro Manila and the rest of the Meralco franchise. We would also like to highlight that while our [indiscernible] up versus last year, it's also 5% better than pre-pandemic levels in 2019. Residential 19% better versus pre-pandemic levels. Commercial rapidly closing the gap but still 7% lower compared to 2019 while industrial sales also exceeded 2019 by 24%. In terms of sales mix, sales mix already tracking towards pre-pandemic mix [indiscernible] residential and commercial [indiscernible] and industrial 30%. So technically, residential rose 2% from 37% last year while commercial gained additional 2% from 33% last year to 35% this year, while industrial remained at 30%. While we see tempered growth of residential segment of 2% as we expect normalization [indiscernible] versus returning to on-site work, the normal pre-pandemic [indiscernible]. There are a lot of [indiscernible] in this issue particularly due to the election [indiscernible] campaign rallies and protocols in entertainment and leisure and sporting events and cinemas and casinos. Another factor considered in the [indiscernible] household consumption is the increasing prices of commodities, the increase in fuel as well as the early onset of the rainy season and the [indiscernible] consumption. [indiscernible] this decline in household consumption, continued strong household [indiscernible] with significant subdivisions for mass housing projects, horizontal subdivisions and vertical developments in Bulacan, Cavite and in Metro Manila. Commercial segment, now our growth leader [indiscernible] 11% versus last year with increase in commercial activity driven by [indiscernible] for the whole franchise [indiscernible]. The above conditions drove demand in retail, which is up 11% and restaurants, up 21% as [indiscernible] pushed towards 90% capacity as [indiscernible] tenants come back. Hotels also grew 15% as it benefited from the ease of restriction for staycation, dine-in and casino activities. Education likewise grew 27% coming from the use of public schools as polling precincts in the national election as well as preparation for the resumption of the face-to-face school arrangement. [indiscernible] 10% for [indiscernible] on-site work. Industrial segment posted 4% growth driven by increase in demand from easing restriction. However, we are cautious of the effects of inflation, ForEx and global supply chain issues as well as rising fuel cost to the production demand of this sector [indiscernible]. So assumption of a decline in trend in terms of the positive variance [indiscernible] the last 3 months of the year [indiscernible]. While some [indiscernible] semiconductor [indiscernible] drive growth in the industrial segment trying to meet the global chip demand [indiscernible] 6% growth benefited local steel [indiscernible] benefited from the high demand of global [indiscernible] and global prices. Plastics as well as food and beverages increased 7% [indiscernible] to support the higher demand for essential production to support the growing commercial segment demand while an increase [indiscernible] water declined 2% [indiscernible] generators increased due to production as well as [indiscernible] production issues as well as [indiscernible] issues and low dispatch orders for diesel plants. Next slide, please. So in terms of energization numbers, we continue to grow our customer base as a result of strong energization performance both for project-covered application as well as ordinary service application driven by mixed-use buildings, subdivision and telecom customers. On a year-to-date basis, our project-covered applications that were energized grew by 34% and our ordinary service applications energized grew by 6%. As a result of strong energization numbers, Meralco customer [indiscernible] 3.3% or close to 245,000 new customers from our existing [indiscernible] last year. And now our customer count surpassed the 7.5 million mark at 7.519 million. Residential [indiscernible] the highest share at 92%, followed by commercial at 7% while the 1% remaining number is shared by industrial customers and steel plant customers. That ends the customer report and [indiscernible].

Sir, before we proceed, I'd like to recognize the presence of our Chairman, Mr. Manuel V. Pangilinan, who has joined us in the room.

Our consolidated [indiscernible] in the first half of the year grew by 6% [indiscernible] 38% was [indiscernible] market and 1% special [indiscernible]. Fuel mix in the previous year is from [indiscernible] for the first 6 months of the year is 8,111 megawatts on May 13. This surpassed by 4% [indiscernible] in demand from Luzon of 12,113 megawatts [indiscernible] 11,640 megawatts. The increase in peak demand was both for Meralco franchise [indiscernible]. For our system loss, our average 12-month moving average as of June 2022 was at 5.86%. This is slightly higher by 0.03% [indiscernible] increase. The slight increase was [indiscernible] due to the [indiscernible] increased share of commercial segment in our sales mix with our distinct program that those investments are when we get to [indiscernible] last years. For our service performance is at [indiscernible] in the report based on very [indiscernible]. Our networks key indicators, we have -- we had a 1% increase in both [ IP ] due to numerous [indiscernible] power interruptions related to our [indiscernible] platforms due to private PPP, BBB [indiscernible] relocation projects. Our total SAIDI, however, improved by 4% [indiscernible] substantial reduction in our forced outages and the speedy restoration of power outages. For the month of June, the average time to processing applications posted [ another ] improvement from 30%, [indiscernible] 5%. For the first half of the year, we energized 4,500 PCA project-covered applications, 118,800 ordinary service applications. Call center performance, there's a huge improvement of 82% or 19.51 seconds average time to answer [indiscernible]. For our whole ROI 2022 GSL performance, we incurred 136 violations for GSL 1 and 2, 224 incidents for GSL 3 and 38,711 days of delay for GSL 4. These violations are way below the regulatory limits. For GSL 1 and GSL 2, [indiscernible] supply the requirements of [indiscernible]. For CapEx for the first 6 months of the year, we have spent PHP 8.7 billion or 40% of our PHP 21.9 billion budget for the year. Biggest spending of PHP 3.12 billion is for new connections. CapEx spending for asset renewals [indiscernible] PHP 2.35 billion. We are now in the construction phase of [indiscernible] December this year. We currently have our enhanced pole location of close to 5,000 poles this year with priority PPP, BBB, and DPWH road-widening projects, the highest and [indiscernible] relocation thus far. We have already relocated 1,312 poles. There are still more than 3,000 located in [indiscernible]. For major projects that were completed this year, the first one was the Commonwealth Gas-Insulated Switchgear or GIS substation, and this was [indiscernible] April 12, and capacity of [indiscernible] former platforms [ online ] and it is part of our RY 2019 CapEx filing with a budget of [indiscernible]. This project unloaded [ existing ] transformer banks in Diliman and Novaliches, also the increasing power demand in Quezon City [indiscernible] and improve voltage regulation and reduce technical system losses. In April, we also energized a new substation in [indiscernible] it was for the GIS substation, commissioned 83 MVA power transformer bank #1. And the distribution feeders [indiscernible] this is part of our RY 2016 CapEx filing [indiscernible]. This project has to meet the critical loading of Paco transformer banks 1 and 2, and Tegen transformer banks 7 and 9 [indiscernible] area where as of course improve [indiscernible] in the area. Next is the commissioning of Parang, San Mateo 115 kV line which was commissioned on May 6 as part of our San Mateo substation development RY 2017 CapEx filing. So this provides the needed N-1 contingency for Parang, San Mateo and Commonwealth substations, further improving operational switching flexibility. Enhance the reliability of our 115 kV subtransmission system in Rizal sector. This will then reduce technical system loss by 104 MWhr annually, improve voltage regulation in San Mateo and Rodriguez, Rizal. And specific to PPP and BBB projects [indiscernible] for SLEX, NLEX-SLEX connector road [indiscernible] For NLEX-SLEX connector road is an 8 kilometer, 4-lane all-elevated expressway from C3 Road in Caloocan, PUP Sta. Mesa connects to Skyway Stage 3 [indiscernible]. Last month, we relocated 68 poles, including [indiscernible] segment from 176-184 to give way to bored piling, column and crosshead erection [indiscernible]. Finally, for PNR North 1 rail transit project, a 38 kilometer urban rail transit [indiscernible]. We already relocated 470 poles. In June, we relocated 72 poles, allowing completion of bored piling works crucial for the [indiscernible ]. For the regulatory update. For the first half 2022 average retail rate for the first half of 2022 rate is higher than that of the first half of 2021. This was mainly due to the increase in generation of transmission system cost and taxes. The average gen charges for the first half of 2022 was 29.6% increase due to higher fuel cost, peso depreciation and higher WESM prices and kilowatt hour amount paid. Present share comparison 2022 is also higher at 11% as compared to 8% for example, 2021. The 13.6% increase in transmission charge was due to higher and [indiscernible] credit charges and the absence of the transmission over [indiscernible] in the first half of 2020. Following the increase of generation and transmission charges, the system was charged, also registered also at 49.9%. The absence of our system was [indiscernible] in the first half of 2022 also [indiscernible]. On the average provision rate with the distribution rate go up 1, 2 and 3 was PHP 1.21 per kilowatt hour for the first half of 2022. And we note that in provision rate go up, the average rate decrease to PHP 1.55 compared to the first half of 2022 rate of PHP 1.57 due to the [indiscernible] the sales mix over commercial cost financial and decrease in effective commercial and industrial position. Subsidies, taxes and universal charge increased by 12.2%, mainly due to higher effective taxes following higher generation [indiscernible] and system loss rates and the implementation of the current [ yield ] property tax starting July 2021. The higher subsidies in the [ ads enterprise ] subsidy and [indiscernible] also contributed to the increase. For the PBR rate update, we received the decisions recently. The first is the energy decision dated June 10, 2022, for Meralco's assets go up for the DRP and the recomputation of the maximum average prices applicable in the third regulatory period. The decision the commission recognized the [ interwinding ] cost of the business that we are [ opening up ] and the annual month applications and the [indiscernible] line among 2012 to 2013. So you will see in the table the provision a couple of months for this year in the 3RP and the recalculated [indiscernible] as the basis of the recovery. This market computation resulted in PHP [ 1.75 ] billion refund, which we implemented for the provision rate. The next decision is the SC decision on the interim average rate for lapse period. We believe the DOEs decision, which was dated June 16, last July, 13, 2022, this month on the interim average AR for the lapse period. All that in 2015, we propose an IAR of 1.38 [indiscernible] as discussed in the previous slide, due to the revision of Meralco's [indiscernible] for RY 2012 to 2015 was recalculated and these serves as the basis for the revised IAR applicable for the lapse period which started July 2015 and ended June 2022. The decision resulted finally closed the lapsed period and the applicable rates that [indiscernible] IAR. The table shows that ERCs recomputed IAR from 138 '10 to 135 '22. The decision also revised the effective distribution, supply and hindering charges, reflecting the decreased in the average price. Incentive rates will be applied in the [indiscernible] of the cost of Meralco to our customers. And the last decision is the ERC decision of confirmation of the lapse period circulation and the final [ RRP ] fund. So we received this decision dated also June 16, 2022 on [ IR page ] last July 5. The ERC confirm the process in determining the lapse period rates by [indiscernible] the adjustments made in Meralco's 3RP route and the resulting computed interim average paid of [ 1 35 ] in the years you confirm the total upper weighted average rate per watt that we recomputed of 1 35, resulting in a refund of PHP 36.6 billion. So then the [ U.S. ] deducted the previous 2 refunds ordered at PHP 13.9 billion, PHP 4.8 billion, which we already implemented. And the remaining product is at PHP 17.9 billion [indiscernible] amounted to PHP 3.9 billion for a total refund of PHP 21.8 billion. We have implemented these refunds to our customers, which we [indiscernible] report starting in the July 2022. So in summary, they will choose some of the refunds ordered by ERC to help us operate the [ demented ] refunds which we call TRT 1, 2, 3 and 4. TRT 1, 2 and 4 pertains to the PHP 13.9 billion, PHP 4.8 billion and PHP 9.2 billion refund due to the difference between the AWAT and the interim average rate for the entire lapse period from July 2015 to June 2022 for a total of PHP 27.9 billion. So in addition to the AWAT refund the ERC ordered, which we calculated the DRP month resulted in a lower interim average rate for the lapse period. The impact of the recalculated months is the result of the asset to PHP 7.8 billion while the lower IAR of 135 '22 resulted in another refund of PHP 8.7 million for the lapse period. The produces the interest of PHP 3.9 million imposed by the ERC. So overall, related refunds for the PRP, and that's -- give you a total of PHP 48.3 billion. There was another decision that we received this month. This time, the Supreme Court decision on formation within November-December 2013 supply billing month price hike. So we received the decision of the Supreme Court en banc resulting. We consolidated -- preconsolidated decision since the first 2 were filed by consumer groups and the last one filed by Meralco and generation companies, including [indiscernible]. The filing of the petitions by the consumer groups was granted by the December 9, 2013 ERC letter granted Meralco's proposal to implement a staggering collection and the December 2013 deal, made a significant increase in the generation charges. At that time, the total generation cost was at PHP 22.64 billion, translating to PHP 9.11 per kilowatt hour. So the ERC then they implemented PHP [ 7.7 ] per kilowatt hour in December 2013. Additional PHP 1 per kilowatt hour in February 2014 and the balance in March 2014. So the Supreme Court initially issued temporary restraining order on December 23, 2013, for implementation of the ERC order. And this [ PRO watt ] extended indefinitely on December 22, 2013, and February 18, 2014 by the Supreme Court against the [ elevation ] companies NTCP and [ PMS ]. The ERC filed a manifestation in motion last March 6, 2014, [ trade ] that is ordered dated March 3, 2014, to be considered in the resolution of the case. That order of March 3 voided [indiscernible] prices during November and December 2013 to [ finance ] and then posted the regulated prices. The Supreme Court voting [indiscernible] affirmed the validity of the December 9, 2013, ERC letter granting Meralco's proposal on staggered recovery generation costs but nullified the March 3, 2014 order paying that such order was a premature and violative due process. So there were 2 dissenting opinions that are from the Supreme Court. That's the end of the regulatory update, turning you over now to [indiscernible].

Thank you, Attorney. Good afternoon, everyone. On the sustainability front, we're pleased to report that MSCI recently upgraded Meralco to a BBB rating since latest ESG rating. MSCI rates over 8,500 companies on a number of general and industry specific sustainability parameters with the rating system having CCC as the lowest and AAA as the highest rating. The current and latest BBB rating of Meralco is the company's all-time best, and this is following in 2018 and the strength of a couple of weeks from 2019 to 2021. In providing us this rating, MSCI excited Meralco's top performance in a number of areas, in particular, opportunities in renewable energy as well as in human capital development. On the next page, we would likewise news to share that Meralco latest pronouncement of the World Benchmarking Alliance has been included in the SDG2000. The World Benchmarking Alliance is a group of over 200 nonprofit organizations and financial institutions that have developed 7 benchmarks to help guide the private sector towards greater engagement towards the United Nations Sustainable Development Board. Also manages and identifies what they call the SDG2000, which is the list of the 2,000 most influential companies with regard to the achievement of the [indiscernible] the interim report of the [ non-BPA ] was included in the SDG2000, and we're now included in 2 benchmarks coming up, the urban transformation benchmark in 2023 and 2024 [indiscernible]. For the sustainability update, I'm now passing on to Jaime Azurin [indiscernible].

Thank you. For the first half of 2022, the Power Generation group delivered 6,562 gigawatt hours, a 6% decrease from the same period in 2021 at 6,963-gigawatt hours. This was mainly due to outages related to the impact of typhoon Odette in our Cebu plants as well as the scheduled preventative maintenance of our San Buenaventura plant at the start of the year. Following its maintenance, San Buenaventura continues to recover with plant availability at 100% for the month of June. PacificLight's performance on the other hand, reflects the increase in demand and higher margin on spot prices in the Singapore coal market, with energy sales up by 3%. Lastly, our BulacanSol operation remained stable with a 6-month average availability of 99.7%. Next to BulacanSol, we have 3 other solar plants in the pipeline. We target commencement operations in the latter part of this year up to 2023. Total 188 megawatts of solar energy will be completed and these are located in Rizal, Ilocos Norte, and Isabela. Following one Meralco sustainability agenda, we continue to look forward to increasing our renewable energy generation in the next 5 years.

Thank you, sirs RCE, FOG, [ RoLA ], JRVV, RBR and JTA. We will now open the floor for questions.

[Operator Instructions] The first question comes from [indiscernible]. The residential, commercial and industrial equity sales for 2022 produced similar performance numbers, but which amongst the 3 is your top priority to grow currently?

In terms of priority, actually, our priority is to grow them all. Of course, there are certain [indiscernible], for example, like for residential, but I mentioned that mobility is a big issue. So because people tend to do some sort of [indiscernible] compared to last year, perform the normal prepandemic activities like going to the offices to leisure. So the home consumption some sort of desperate terms of growth, but we continue to retain that. But that's by a continuous aggressive utilization of the home solar, which exactly energies close to 245,000 homes compared to last year. So of course, on the per home segment results to decline in terms of consumption because of mobility. And secondly, for commercial, you would like to see this sector returning to its normal level. But of course, there is also this factor of consumer confidence as well as patronage. But it's quite better now compared to last year. But still 7% below our 2019 numbers. Industrial, of course, we also want to support the growth of Industrial as we energized other applications as well as others and reduce emissions. But of course, it really depends on the macroeconomic conditions, especially the challenges they're experiencing now that there are some -- our customers are rethinking growth strategy in the light of increasing fuel prices as well as ForEx and other issues like inflation and global supply chain issues.

I see the hand of Jelline Gaza of JPMorgan Chase.

I have 2 specific questions. First relates to the fifth regulatory period that you're basing. Could you give us some updates? What's the current update on that? Are we expecting to see any final determination soon? And then secondly, on the refund, may I ask how much has been paid so far as of end second quarter? And how should we interpret the final tariff decision for the lapse period beyond June 2022?

For the RP, the hearings are ongoing at the Energy Regulatory Commission. And based on the time line of the energy regulatory commission, we expect to receive the final determination for the RP sometime in October. And the final rates to be implemented for the [ PPP ] sometime early next year, January. And then on the other question, on the refund, there are 3 refunds that we have already implemented. The DRTU-1. We have already refunded a total of PHP 10.1 billion as of June 30, 2022, and this is out of the PHP 13.9 billion that was ordered by the ERC. And for the second one, which is the PHP 4.84 billion, we have already refunded about PHP 1.9 billion as of June 2022. And then for the DRTU-3, which is the PHP 7.76 billion refund as a result of the asset true up, we have already refunded about PHP 2.4 billion of that amount. For the DRTU-4, we are just starting the refund last month, but this is refund from July [ 2020 ]. The last question -- the forecast. Yes, that is after July 2022 since the ERC has already resolved the lapse period date when it lowered the PHP 1.3810 to PHP 1.3522 . Then we will be implementing the rate of PHP 1.3522 starting August really as directed by the ERG. Does that answer the question?

Yes.

The next question will come from Gregg Ilag of BDO.

So my question is, first, what was the driver for the lower income tax expense and then higher other income booked in the first half? And then my second question would be -- and I don't know if this is the correct way to interpret it. How much of the ERC refund, I guess, has already been booked in the previous year's provisions? Is that correct to assume that it's already been, I guess, accounted for given that there was provisions in the previous years?

Gregg, the first question is why is there a lower income tax expense, because for our -- for example, with respect to the refund, because the order came in earlier, which was 2021, a portion of that has already been part -- have been settled already as part of the 2021 income tax. So there's a timing difference between the order and what is -- and how it's recorded in the books. I missed the second question. I wasn't able to take down your second question.

The higher other income booked in the first half as well.

And then the other thing also, Gregg, on the income tax, remember, the corporate income tax rate has come down by 5 percentage points. Okay? And then the second question is higher revenues?

The higher other income booked in the first half. I think it's 4.4.

Okay. It's largely equity income from PacificLight and San Buenaventura because these 2 investments are accounted for at equity.

Okay. Okay. And then last question will be on the refund. I was just wondering if this was -- since it was a previous period on provisions booked by Meralco, I was wondering if that already accounted for the refund. Or I guess how should we, I guess, look at the -- I guess, the booking of the refund moving forward?

Okay. So with respect to the -- well, except for the asset true-up, we've actually adequately provided for any difference between the actual weighted average rate and the interim rate and in fact to the extent -- even to the extent of PHP 1.3522. So those have been covered. However, with respect to the asset true-up of PHP 7.8 billion and the carrying cost of PHP 3.9 billion, this has not been provided, but we do have enough provisions to cover this amount.

The next question comes from Gio dela Rosa of Regis. Meralco and the San Miguel Group apparently filed an application to revise the terms of its power supply agreements in order to allow San Miguel to recoup losses related to Malampaya constraints. Can you enlighten us on the rationale for this and why Meralco would join San Miguel in this application? Does this open the door for other gencos to ask for similar revisions when circumstances change?

So Gio, let me answer first the second question [indiscernible] for other gencos. Right now, it depends on the contract of the -- Meralco with the other gencos. Only those gencos that are affected and has -- and have a CIC or change in circumstances provisions under the power supply agreements may avail of these indeed. With regard to San Miguel, the 2 contracts we signed with San Miguel in 2019 underwent a competitive selection process. And during the competitive selection process, the parameters or the assumptions were established under which the leaders, including San Miguel, plan to submit their own [ tariff ]. So based on the approved parameters, the guidance to them was that they can increase only up to 3.5% of their fuel in the tariff. So the cost today of the fuel versus the -- what they are recovering under the PSA seems to be different. So the amount, I think, for coal right now is more than USD 400 per MMBtu and for gas, it's about more than $9 per gigajoule. So that's much more than what they have assumed under the terms of reference under the bidding, so that's the reason why they're claiming huge losses. So in the part of Meralco, they have filed a claim against -- they have filed a claim, and as Meralco is a party to the contract, we joined them. They invoked the provisions in the contract for the change in circumstance. So under the contract, we need to get regulatory approval before this can be implemented. So since we are a party to the contract, so we have filed the CIC claim together with them before the ERC. And this matter is now with the ERC and awaiting valuation from the ERC.

thank you, Atty. Valles. Next question comes from Eunice Dolatre of SB Equities. She says, "Hi, thanks for the briefing. Would like to ask the following. What are the steps taken by GBPC to mitigate the impact of elevated fuel costs from its fixed rate contracts? And can you share the time line of completion for RE projects under construction and development? And how are the projected returns affected by various factors like interest rates and inflation rates?"

Thank you, Katrine. For the first question, what we have done so far is that we have renegotiated our fixed-price contracts. Some have accepted. Some are still under negotiation. And we hope to complete all of these fixed-price contracts renegotiation by the second half of this year. Now for the time line of the completion of projects, 2 of the 3 projects that we mentioned are already in the middle of construction and will be completed by December of this year or first quarter of 2023. You did mention of the high foreign exchange and interest rates. It has affected one of our projects. That is the one in Isabella, which we have decided to delay for a while until the economic viability of the projects will improve.

Thank you, JT. The next question comes from George Ching of COL Financial. With regards to the ERC decision on the PHP 21 billion refund announced earlier this July pertaining to the RAB revaluation, has this amounted in provision already? Would this affect core net income in the succeeding months?

George, as mentioned earlier, the PHP 21 billion is actually the final true-up of all the refunds for the lapsed period. So it covers the -- what -- or the difference between what our actual weighted average rate and the interim -- and the tariff. Our provision was on that basis, and it actually covers all except the PHP 7.8 billion and the PHP 3.9 billion carrying costs. However, we do have sufficient provisions to cover for this.

Are there any questions? If there's none, we'll ask our chairman to say a few words, sir.

First of all, thank you to all of you for joining us on this, I guess, the annual with respect to the first half results of Meralco. I guess most of the questions evolve around these refunds, and maybe the -- try to make it as simple as I can. The refunds actually relates in the first instance, to -- remember we were given an interim approval to charge PHP 1.38. So there was -- the first round of refunds related to tariffs that we collected over and above the PHP 1.38. And that has largely been completed already. And the second round of refunds to the time that the ERC -- I think about a month or 2 months ago, made a final determination on the tariffs, which is what Ronald described to you as still PHP 1.3522. So that -- from that flowed the -- another round of refunds. Anything collected -- we collected about PHP 1.3522, we were required to refund. There is one last round of refund, which Betty indicated as a true-up, which was together with the interest is about PHP 11.7 billion. Since we were charging -- in relation to the PHP 1.38, since we were billing at PHP 1.38 and collecting on the base of PHP 1.38, And when tariffs actually -- the actual tariffs that we collected for certain periods over the last 7 years have actually been higher than PHP 1.38 in part, mainly because of the customer [ delinqs ], residential being predominant collections at the time because of the pandemic. We were collecting, I think, more than PHP 1.40. So we were required to refund that. So in relation to PHP 1.38 and what we collected higher than that, there is really no impact on the P&L of Meralco. And with -- the final rate was set at PHP 1.3522, again, the refund did not impact the financial accounts of Meralco. What impacted the P&L would be the PHP 11.7 billion as a true-up that Betty mentioned to you. But -- so from a P&L perspective, the -- there's been no material impact on the P&L statement of Meralco. Indeed, on the cash, there has been a reduction in our cash balances. But remember, we've been collecting at rates either at PHP 1.38 or at rates higher than PHP 1.38. So there'll be some impact on the cash balances of Meralco. I won't say it's not significant because PHP 48 billion is a large amount of money to be paid in the next 12 to 18 months. But the kind of cash, cash balances that Meralco has accumulated for the past 7 years, which represent the lapsed period has been also quite significant sitting on the balance sheet of Meralco. Now the -- and this one, we are probably quite reticent about the specific is that when -- the question really is that in relation now to the final determination rate of PHP 1.3522, our booking rate for the past 7 years has been lower than PHP 1.3522, which means that there are significant provisions remaining on the books of Meralco representing the differential between the open rate and the final determination rate of PHP 1.3522. So there are still significant provisions sitting on the books of Meralco that will allow us to bring back to the P&L accounts for the next few years or whatever. But we -- might be included, recorded in the next few years. Hope I did not confuse you further. But that basically is the situation of both from the P&L and a cash situation. Meralco continues to generate quite a significant [ piggy bank ] independent of the various rates that have been charged, mandated by ERC to us. So we see the accounts, EBITDA at PHP 24 billion for the first half and the CapEx is significantly [indiscernible]. So okay. So that's basically it. We look forward to talking to you again when we report the third quarter results.

Sorry, sir, there are just a couple of other guys raising their hand, so I'd like to recognize them as well. First off, we have Mayank from Morgan Stanley.

Can you hear as well?

Yes, Mayank, go ahead.

Okay. A couple of more medium- to long-term strategic questions. One, I think as you recognized, I think some of these cash balances start to fall now. How are you thinking about from a capital allocation perspective going forward the strategy for Meralco because the rates are going to be a bit more volatile? So from the generation side as well as more in terms of overall CapEx next few years, how are you kind of thinking about that?

Well, the first is that the biggest generator of EBITDA is the DU at least for the meantime, for the moment. The priority in terms of capital allocation is the continued expansion and the rehabilitation of the distribution network. The second priority is putting the money or allocating the capital to businesses that would generate the maximum profit for the company. And the way you see that would be the generation plants, MGen and Global Business Power. There will be some capital allocated to certain nonpower-related businesses. For example, MIESCOR has shown significant increases in revenues, but their profits are not yet at that stage where it could move the needle for the consolidated accounts. It offers the promise of being a significant business for Meralco, especially as they're looking at the coin -- the towers business lately. That's of course Bayad Center, which is their own payment gateway. So there are nonpower business that could enhance the profitability and cash flow streams of Meralco moving forward. Have to mention, I think and I believe that they're looking now at certain DUs located in the provinces that could enlarge the footprint of the DUs in the Philippines.

Just a follow-up on that. I think any views around the renewables and the recent auctions that have happened in the light of the rising interest rates? How are Meralco looking at it overall from a returns perspective?

I think Ray has in the past stated [indiscernible] that the medium-term aspiration is to build up to 1,500 megawatts of renewables, mainly solar. So they're really committed to do that. And that's why the capital allocation on the generation side of the business.

And sir, the declining rates on the tariffs as well as the rising interest rates because interest rates are the biggest cost in the P&L for all these renewables, how are you kind of balancing act there?

Well, yes, there are certain rates of return cap-offs, recognizing that because of rising interest rates, the returns must also be raised. The return thresholds must also be raised, right? The tariffs of renewables are obviously slightly lower than the fossil fuels, over the gas and coal. As you know, there's no dependence on imported fuel.

I see Jelline Gaza's hand raised.

Yes. Sir, MVP, just a follow-up on your discussion about the cash balance. Does this have any impact on the dividend outlook for the near term and your excitement with other non-electricity investments, say, telco towers?

We hope not. We will make sure that the dividend payout does not fall below what has been recorded by Meralco [indiscernible] the things that we -- we're very careful about our ability to maintain the dividend payouts for our companies generally, and that includes Meralco [indiscernible].

Our intention is to maintain the dividend payout. It's not to raise it [ in succeeding ] it. But definitely, we are on pace to maintain the same amount of [ dividends ].

Okay. Understand. And then I'd like to drill down further on the discussion of reversal of provisions going forward. Like how is management thinking about the pace and the extent of reversing these provisions that you have set up in the last 7 years?

That's a tough question raised, Jelline. That's a tough question, Jelline, because -- how would you put -- you know how it is -- you're Filipina, right?

Yes.

We are very much a regulated company. So be careful what we report.

We also have Gio dela Rosa's hand raised, Gio, Regis Capital.

Dinbo, can you hear me?

Yes, Gio, go ahead.

I just wanted to clarify the response to my question earlier on the PSA revisions relating to the San Miguel genco contracts. Does the fact that Meralco is one of the parties, and again, correct me if I'm wrong, is one of the parties in this latest application with the ERC mean that Meralco is actually agreeing or is of the same position as San Miguel on this matter? That's the first question. As a follow-up, if yes, I guess my question is why would it agree to such a change. And the next follow-up to that is does this have any implication or does this open the door to similar revisions like for the PSAs, for the plants that are supposed to come in late 2024 and 2025?

Let me answer the question. With respect to the San Miguel contracts, you must understand that in the San Miguel contracts, there is a change in circumstance clause that, based on certain parameters, would allow the power supplier to ask for an increase in the generation rate subject to the approval of the ERC. Now obviously, the rise in fuel prices since December has been unprecedented, and that has become the basis now for San Miguel to ask for a filing with the ERC invoking that clause. I think as far as the parameters are concerned, they fall within the parameters, stipulated in the contract, in the clause. And therefore, we as -- basically, the distribution utility would help to support their claim. Now under this change in circumstance cost, they have recovered only 80%?

Yes, sir.

80% of the on the fuel cost increase. Now as to the other PSAs, I'm not aware that there are other PSAs, particularly the ones that was CSP-ed in the last [ one ], the 1,800 megawatts, which has not yet been implemented because that is still subject to the ERC approval. So beyond what San Miguel has filed, there are no other debt cost remaining.

Thank you very much, sir. Thank you very, Gio. I think that ends our briefing. As we end, I would like to remind everyone that you may listen to a recording of the briefing from our website, under the Investor Relations portion. And thank you very much for attending, and have a good day. We wish to see you again when we release our results for the first 9 months of 2022. Thank you very much, everyone.

Thank you.