Manila Electric Company (MER) Earnings Call Transcript & Summary

Welcome to today's Meralco Briefing. I am [Audio Gap] Mr. Froilan Savet, FVP and Head of Networks; Atty. Jose Valles, SVP and Head of Regulatory Affairs; [indiscernible], President and CEO of Meralco PowerGen Corp. We will begin the presentation with the financial highlights, with the breaking results from Meralco's [indiscernible] and Meralco Corporation. Finally, we would conclude the presentation with a few words from our Chairman and CEO. At this point, I would like to turn the floor now to our Chief Financial Officer, Ms. Betty Siy-Yap, for the financial results.

[Audio Gap] Summary. Consolidated core net income, or CCNI, in the first 6 months of 2024 increased by 21% to PHP 23.2 billion from PHP 19.2 billion in the same period last year, driven by higher sales volume of the distribution utility, higher power, higher contribution from retail electricity business and higher plant availability of power generation in the second quarter of the year. Consolidated reported income meanwhile rose by 26% to PHP 22.4 billion from PHP 17.9 billion, while core EBITDA increased by 20% from PHP 23.2 billion to PHP 39.8 billion this year. The gap between CCNI and consolidated reported net income represents accounting amortization of day 1 gain adjustment equivalent to 1.1 billion, net of foreign exchange gains of PHP 330 million and other nonrecurring gains from the sale of lot at the MGen level. Consolidated revenues grew by 6% to PHP 237.5 billion from PHP 224.8 billion in 2023, mainly due to higher volumes sold by the distribution utility. Cost and expenses increased by 5%, the bulk of which still purchased power, which accounted for 82% of the total. Capital expenditure totaled close to PHP 20 billion, largely for distribution network projects, development of solar projects and acquisition and construction of telecommunications tower. Cash and cash equivalents amounted to PHP 86.6 billion, while consolidated debt balance was PHP 99.6 billion. Okay, this slide shows the core net income composition. Of the total CCNI, our regulated business or the distribution utility business accounted for 55% or PHP 12.8 billion, slightly lower than the 57% achieved last year but higher by 17% in terms of absolute amount on the back of a 13% and 10% growth of residential and commercial sales volume. For our nonregulated businesses, which accounted for the remaining 45%, power generation's contribution was at PHP 6.2 billion or 27% of total from PHP 6.6 billion or 34% share last year with -- since PLP's margins have come down as the Singapore market stabilizes. This was offset by the increase in RES, CCNI from trading gains and improvement in retail prices, and GBP's higher WESM margin and revenues from the reserve market. On the quarterly highlights. For the second quarter of 2024, CCNI was at PHP 131.1 billion (sic) [ PHP 13.1 billion ], 29% higher than last year's PHP 10.2 billion. The DU CCNI contribution was at PHP 7 billion, 8% higher versus the PHP 6.5 billion in 2023, with an 8% increase in sales volume. Contribution of unregulated business was at PHP 6.1 billion, more than 1.6x the CCNI contribution of 3.7% in the second quarter of 2023. Although the blended margin of PacificLight was lower, it generated higher volume at 1,513 gigawatt hours versus 1,078 in the same quarter last year with a scheduled maintenance in 2023 of Unit 20 from April 29 to June 10 and forced outage of Unit 20 resulting in 2 days forced outage from June 17 to 21. Also, contribution of RES improved trading gains and better margins as new agreements contained tariff structures with fuel cost recovery protection. Consolidated revenues grew by 6% to PHP 237.5 billion from PHP 224.8 billion in 2023, mainly due to higher volumes sold by DU. Electric revenues totaled PHP 231 billion or 97% of the total. Generation, transmission and other pass-through charges were 7% higher at PHP 181.8 billion due to higher volume as lower WESM prices decreased in international coal prices and lesser volume purchase using emergency power supply agreement offset the impact of peso depreciation, higher Malampaya natural gas prices and use of liquefied natural gas by First Gas Sta. Rita and San Lorenzo plants. The peso was at PHP 58.61 per U.S. dollar at the end of June this year versus PHP 55.2 in the same period last year. With the ERC-approved interim average rate of PHP 1.35, distribution revenues increased by 9% to PHP 36.4 billion, same as the growth in volume. Energy fee, which totaled PHP 12.8 billion decreased by 10% due to lower fuel and coal prices, coupled with lower plant availability of Cebu Energy in the first quarter of this year. Non-electric revenues were flat at PHP 6.5 billion due to lower awarded EPC projects of Miescor, which was partly offset by higher revenues of MIDC from the increased number of towers. Consolidated -- total cost and expenses was at PHP 212.5 billion. Purchased power costs accounted for 82%. OpEx represented 9% -- OpEx was 9%. Depreciation and combined coal and fuel and power plant O&M accounted for 4%, with other expenses for the remaining 1%. Purchased power costs increased by 4% to PHP 174.4 billion from PHP 167.5 billion, consistent with the movement in pass-through revenues. Operating expenses increased by 8% on account of rigorous maintenance of DU facilities, including those related to overloaded transformers during the high heat index period, higher cost of software maintenance and subscriptions and inclusion of the SPNEC expenses this year following Meralco PowerGen's acquisition of a controlling stake in December of 2023. Depreciation and amortization increased by 12% to PHP 9.2 billion due to the completed capital expenditure projects of the distribution utility, acquired towers under a sale and leaseback arrangement with Globe, completed BTS or build-to-suit towers of MIDC and the completion of the first phase of PH Renewables or the Baras power plant in the first quarter of 2023. The combined coal and fuel and power plant O&M amounted to PHP 7.3 billion, 26% lower with a decrease in fuel and coal prices coupled with the scheduled outages of Cebu Energy in the first quarter. Other expenses largely pertains to reversal of provisions with a settlement of RPT, or real property taxes; accounting adjustment with respect to IFRIC 23 net of provisions for over-recoveries. Our consolidated CapEx at the distribution utility level accounted for 56% of the total PHP 20 billion capital expenditure comprised largely of distribution network projects that include new connections, asset renewal, load growth projects. Power generation CapEx accounted for 13%, largely for the development of 3 solar plants, which are Phase 2 of the Baras solar plant; 49 megawatts of Greenergy; and 18.75 megawatts of Greentech Bongabon; as well as land acquisition for the Terra Solar project. Subsidiary CapEx represented 31%, majority of which pertains to the towers that were acquired. To this date -- well, for the first 6 months, the total purchase or additional tower is 475 from Globe. Okay. On power generation, another major earnings contributor would be power generation. Meralco's wholly owned subsidiary, Meralco PowerGen, delivered a total of 7,633 gigawatt hours of energy in the 6 months. As of end June, MGen had a total power generation capacity of 2,404 megawatt net through its diversified power generation portfolio in the Philippines and Singapore. While the contribution of power generation unit of $6.2 billion was 93% of last year's achievement, the decline in CCNI of PacificLight was much less than expected. PacificLight recorded a CCNI of SGD 148.7 or PHP 6.4 billion from last year's SGD 221.4 million, mainly due to lower margins from the pool and contracted as Singapore market stabilizes. SBPL, which is 51% owned by MGen, has achieved 99% plant availability with the completion of its first-ever major maintenance and has delivered a total of 1,544 gigawatt hours of energy during the first 6 months of 2024 compared with only 1,244 gigawatt hours in the same period last year. It booked core net income of PHP 1.7 billion, flat versus last year with outages at the start of the year related to the scheduled maintenance which resulted in lower capacity fees. Global Business Power generated CCNI of PHP 1.5 billion, 78% better compared with 2023. The higher availability of PEDC resulted in better margins from the spot and reserve markets, which offset the lower revenues from the expiration of the ancillary services procurement agreements in April. MGreen delivered PHP 131 million of, CCNI, 68% better than last year, with total installed capacity of 318.5 megawatt AC. Total energy delivered was 344 gigawatt hours, 106% more than 2023. The volumes were from BulacanSol, a 50-megawatt AC plant; Nuevo Solar, a 68-megawatt plant in Currimao; and 67.5 megawatt of the Baras solar plant; as well as SP Tarlac, or Solar Philippines Tarlac, a 78-megawatt solar plant; and SP Calatagan, which is 50-megawatt AC plant. Our consolidated interest-bearing debt stood at PHP 99.6 billion, including PHP 58.3 billion of debt of our subsidiaries. Meralco's debt maturities are spread through 2039. Debt as of the end of June 2024 was at PHP 9.7 billion and net debt-to-EBITDA is at 0.1x. All of Meralco's consolidated debt are peso-denominated. Cash and cash equivalents amounted to PHP 86.6 billion, while short-term investments totaled PHP 3.2 billion. Our long-term cash investments is at close to PHP 14 billion. Our core earnings per share amounted to PHP 20.590, up 21% versus last year. Today... [Audio Gap]

[Audio Gap] Basically, that customer experience, being connected in less than 2 days after submission of the requirements, is also a very good performance already. For electricity rate for the first half of 2024, there's a reduction of 3.8% at PHP 10.27 per kilowatt hour from the PHP 10.68 per kilowatt hour in first half 2023. Basically reduction was due to the lower WESM cost and lower coal and implemented Malampaya prices, as well as due to the residual effect of the significant reduction of generation charge in June following ERC's deferral of PHP 8.4 billion WESM charges and the splitting of the final main 2024 write-off bill into 4 equal amortizations. I'm now turning you over to my colleagues to discuss the details of these headline numbers, starting with Ferdie Geluz, then Froi Savet and then Ronald Valles. Thank you.

Good afternoon again, everyone. So for the details of our sales, our consolidated sales, as mentioned, is at 26,954 gigawatt hours, so close to 9% increase versus same period last year, driven by sustained growth of our residential and commercial segments as well as modest recovery of Industrial segment. The first half performance was highlighted by breaching 5 billion kilowatt hours in the month of May at 5,058 gigawatt hours. So this is a new milestone for us. And June should have been more than 5 billion kilowatt hours also if not for the typhoon, but we ended just 8 gigawatts hours short at 4,992 in June. So residential posted double-digit growth of more than 12% driven by warmer temperature as well as still robust energization of new homes. There are longer times spent at home with academic calendar shift and hybrid classes due to extreme heat. So the average temperature rose close to 1 degrees centigrade for that period, and of course that contributed to the double-digit growth of our residential segment. Commercial segment likewise increased close to 10%, 9.9% in the first half, with steady consumer demand and business expansions led by real estate, retail and restaurants and hotels. So real estate grew 10% as office occupancy rate continues to surge and ongoing mixed-use developments are driving up energy consumption. Leechiu Properties reported a 24% office leasing surge in first half of this year, fueled by IT BPM and government leasing activity. Retail trade likewise grew 10%, together with restaurant that grew 13%. And the growth is fueled by increasing pace of expansions of retail marts as well as chain marts like Alfamart. So hotels grew 14% as tourism continues to rebound with foreign visitors arrivals up 12% in the first half of 2024. The hotel industry sentiment is positive, especially in the medium term and long term, with the new energizations like Quezon City Solaire, that show the continued acceleration in terms of consumption, Okada also showed growth as well as Makati Shangri-La. Industrial segment bounced back 2.4% on the half with continued recovery of plastics and cement industries as well as sustained performance of food and beverage as well as semiconductor industries. So semicon grew -- have a modest growth of 3% with strong demands from Toshiba, Samsung and Murata that offset the decline of other accounts. So food and beverage grew 5%; plastics, 8%; and cement, 7% with double-digit growth in some key accounts like Solid Cement and Yamamura. So sales mix. For sales mix for the first half, commercial segment lead the sales mix at 38%, residential at 34% and industrial at 28%. So that ends my report. So passing you on to Froi for the networks report.

Good afternoon, everyone. We are pleased to share with you that in the second quarter, we have commissioned 5 major CapEx projects. First, on May 16, we energized Pallocan West GIS Substation. This is the first 69-kV GIS substation in the South area and has an initial capacity of 50 MVA with two distribution feeders. This new substation will relieve the expected critical loadings of Batangas City Banks 1 and 2 and will address the load growth in Batangas City. Second project was the construction of a new control house at Novaliches Substation which was completed on May 31. And this project replaces the original 44-year-old control house building which contains critical equipment and devices essential to our substation daily operations. On June 26, we energized the third project, which is the second bank of the Eton Centris, 115 kV-34.5 kV GIS Substation. With this additional 83 MVA capacity, we will be able to serve the growing power demands in Quezon City, including large load customers in Eton Centris; and the project of the government, which is MRT 7, in the area. Fourth, we commissioned the Napindan 115 kV switching station, which will serve the CAPASCO, Cathay Pacific Steel Corporation on June 28. This new switching station will provide an alternate source to CAPASCO during an outage of any of these sub-transmission lines. Lastly, also on June 28, we energized the new 34.5 kV Switchgear No. 1 that will replace the 30-year-old switchgear at Meycauayan Substation. So this will ensure the continuity of a reliable service in several barangays in Meycauayan, Bulacan. Thank you. I'm now turning you over to Atty. Valles.

Good afternoon. So for the regulatory, let's start with the 5RP application of Meralco. You will recall that last September 2023, Meralco filed an Omnibus motion to withdraw our 5RP application considering the lapse of almost 2 years from the time it was filed without any resolution from the ERC. And we also proposed RY2023 and 2024 be treated similarly as the lapse period with a PHP 1.3522 -- sorry. Last May 10, 2024, we received an ERC order dated April 16, 2024, where the ERC denied our Omnibus motion to withdraw and refile the application and it also directed us to proceed with the original application, but based only on the last 2 remaining years, that is, RY '25 and '26. And the order is without prejudice to the ERC's treatment of the lapsed period of the 5RP. So the hearings resumed last May 13 and May 14, 2024 for Meralco and other intervenors strongly opposed proceeding with the application based only on 2 years for being contrary to the existing RDWR rules for 5RP, which is based on 4-year forecast. So as a consequence, the hearings from May 15 to 24 were canceled pending the issuance of an ERC order resolving our opposition. So last May 27, we filed our motion for reconsideration of the orders they sent April 16, '24. And then as an update on our actual weighted average tariff case last June 16, 2022, you will recall that the ERC already decided in our AWAT case by approving Meralco's AWAT application. And this AWAT decision resolved to close the lapsed period of Meralco from July 1, 2015, to June 30, 2022, through a true-up mechanism, wherein the ERC's last approved final rate for Meralco equivalent to PHP 1.3522 was adopted, and the AWAT in excess of the final rate is refunded to consumers. So several interveners, NASECORE, Mr. Non, Mr. Junia, filed the motions for reconsideration of that decision. The final rate of Meralco, which is the PHP 1.3522, was decided by ERC in a separate case, not the AWAT case, but in the IAR case. And this decision of the ERC has become final and executory because no MR or appeal was filed by any party. So last June 13, 2024, the ERC issued an order denying the motions for reconsideration filed by Mr. Non, Mr. Junia, and NASECORE. In that order, the ERC affirmed that it has the necessary regulatory authority to set the rates of Meralco during the lapse period in the exercise of its quasi-judicial power. And both the IAR, or the interim average rate, and the AWAT cases complied with all the legal and due process requirements, including notices and hearings. And on July 18, we received a copy of the petition for review filed by Alfredo Non before the Court of Appeals. We are now awaiting the order of the Court of Appeals in so far as this petition is concerned. With respect to the PSA of Meralco for the 1,200 megawatt, the ERC -- as the winner of the 1,200 megawatt CSP, SPPC and Meralco filed with the ERC the power supply agreement for approval. And the ERC released an order last May 9 granting the provisional authority to implement the PSA, but imposing several conditions. First, the PA covers only 910 megawatts instead of the full 1,200 megawatt capacity. And Meralco and SPPC must continue to honor and implement the 2019 290 megawatt mid-merit PSA. But despite the reduction, Meralco continued or proceeded to implement 2024 1,200 megawatt, but limiting our nominations to only 910 megawatts pursuant to ERC's provisional authority. So last June 26, we, Meralco and South Premier Power Corporation, jointly filed a motion for partial reconsideration of this order, questioning the ERC's provisional authority, mainly on the grounds that there was a valid assignment already in the 2019 290 megawatt to Sual. And that is the order of the ERC actually contradicted the power supply procurement plan approved by the Department of Energy, which clearly indicated that the capacity that should be contracted should be 1,200 megawatt and not 910 megawatts. Moving on to the CSP of Meralco, the competitive selection process for the 500-megawatt RE requirement effective March 2026. Following the CSP comments on May 25, our Bids and Awards Committee found the bids submitted by the following leaders to be the best bids, with the total offered contract capacities of 500 megawatts. So shown on the screen are the names of the bidders with their expanding contract capacity. So San Roque Hydropower emerged as the winner with the lowest offered price. It offered over 340 megawatts at a rate of PHP 7.10 per kilowatt hour on delivery trade. And then San Roque Hydropower is owned by San Miguel. The other two, Gigasol and Santa Cruz Solar are owned by Ayala or ACEN. Their total delivered rate are at PHP 8.18 and PHP 8.19 per kilowatt hour, which are also below the reserve price of PHP 8.23. So the term of this PSA is for 10 years and tariff structure is a straight energy price without any escalation for a period of 10 years and with a minimum energy offtake equivalent to 45% of the plant capacity factor. So please note that this CSP is in compliance with Meralco's requirement for the -- under RE Law to procure renewable energy certificates equivalent to 45% PCA or 1,000,971 megawatt hours, or REC certificate. So now on the franchise renewal update. As you know, there are three pending bills before the House of Representatives simultaneously filed by Congressman Joey Salceda; Rufus Rodriguez; and former Speaker, Lord Allan Velasco. They all authored renewal of the franchise of Manila Electric Company. And after the initial hearings on May 13, 2024, and May 21, 2024, we have been advised that they will call another final hearing for the resumption of the session in the week after the SONA. So we are expecting that any time in the week of August 12, 2024. So finally, you will see here the filings of formal expressions of support from business groups, industry associations and advocacy groups, all calling for a renewal of Meralco's franchise. They have been filed before the House Committee on Legislative Franchises on various states. Thank you very much.

Thank you for the update. At this point, we would like to recognize the presence of our Chairman and CEO, Mr. Manuel V. Pangilinan. Hi, sir. To proceed with the presentation, we'll transfer the floor to Mr. Manny Rubio, who will discuss the Power Generation business.

Thank you. Good afternoon, everyone. For the Power Generation Group, I'm pleased to report that the group delivered higher energy for the first half of the year, 7,600 gigawatts compared to 7,400 same period last year despite the scheduled maintenance of most of -- all of the plants, actually, half of first quarter of 2024. GBP delivered energy 7% lower than last year because of a duration and its planned outage. However, worth noting is that 3 units of GBP, 1 unit in CATC and 2 units in BATC, a total of 40 megawatts have been given certificate of NGCP to provide contingency reserve so that it can participate in the co-optimized market once it runs, hopefully, by August of this year. San Buenaventura reported 1,554 gigawatt hours generation, up 24% compared to last year. But PacificLight saw a slight decrease because of an upgrade that they did in the first quarter, a turbine efficiency upgrade that made PacificLight one of the most efficient units in Singapore, something that's quite valuable in a very competitive merchant market in Singapore. And lastly, MGreen, the renewable energy unit of MGen, delivered a total of 344 gigawatt hours of energy, supported by the operations of SPNEC subsidiaries, SP Tarlac and SP Calatagan. In May, PacificLight was granted the right to build, own and operate a 100-megawatt hydrogen-ready gas turbine with fast-start generation capacity by the Energy Market Authority, or EMA. It's contracted by the Energy Market Authority and to be delivered later in 2025. This development aligns with our commitment to providing dependable, reliable and sustainable power to Singapore's rising energy demand. This is the equivalent our dispatchable reserve in Singapore. During the same period, MGreen's Greentech Solar Energy, or GSEI; and Greenergy for Global Inc., GGI, secured a 15-year term project financing from Security Bank. GSEI's 18.75 megawatt AC solar plant in Bongabon was granted PHP 791 million loan, while GGI's 49 megawatt AC solar plant in Cordon, Isabela was able to secure PHP 2 billion funding. Moreover, our 75-megawatt AC solar project with Mitsui, Baras -- in Baras, Rizal, is currently undergoing testing and commissioning of the project's Phase 2. Phase 1 has been generating at full capacity since April 2023. And in June, MGreen and Vena Energy closed an investment agreement for the development, construction and operation of the 450-megawatt AC solar project in Pangasinan through 3 Barracuda Energy Corp. The project is expected to commence its construction by the third quarter of 2024 and achieve commercial operations by fourth quarter of 2025. For Terra Solar, we're happy to share that it has completed 54% overall early project development as of second week of July. Key progress areas include land control, PV land is 49% complete and the transmission line right of way is 34% complete. Permits for pre-development is 58% complete. Solar farm development's 88% complete. Procurement, 61% complete. Interconnection development's 35% complete. While PV site clearing is ongoing at 23%. The Terra Solar project remains on track for key milestones with significant progress anticipated in the coming months and completion targets for major components are set for December '24 and January 2025, which are basically awarding of EPCs for transmission lines and EPC for the PV portion and the battery. The project is expected to be completed in two phases: Phase 1 to be delivered hopefully by Q1, Q1 2026; and Phase 2 by Q4 -- Q2 2027. Looking forward, we anticipate further progress in our efforts to low-carbon transition as we continue to dedicate ourselves to providing cleaner and more sustainable energy to the Philippine market. Thank you very much.

Thank you, Manny, for the presentation. We will now proceed with a Q&A. [Operator Instructions] The floor is now open for your questions.

I'm Jelline Gaza from JPMorgan. My first question relates to the generation segment, Sir Manny. I noticed that GBPC had a strong earnings for the second quarter. Is this sustainable? And how much of the total net income is attributable to the profits from the reserve market or any PEDC-related one-offs, if ever?

First question. We believe that the profit is sustainable given that the fixed price contracts have been resolved, which actually was the reason for the poor performance in the last 2 years. The revenue, the income after the income from the co-optimize market in the 2 months that the co-optimize market was running for, if I'm not mistaken, 10 megawatts of one PEDC unit was around PHP 450 million. Of course, we don't know yet the new price forecasts for the co-optimized market, given that there have been base load capacities that have been certified, including CEDC and PEDC for Visayas. But our estimate is that, for base load contingency reserve in Visayas, it will only be able to provide maybe as much as 80 megawatts from 150-megawatt demand. So I think the diesel units in Visayas will still run, so that should give you an idea of how much clearing prices would be in the co-optimized market.

My second question is on regulatory. Can you please comment on any projected changes in EPIRA? And how you are expecting this to transform given the pending bills that we have at the Lower House and at the Senate.

There are actually various bills pending before the Congress for the amendment or -- sorry. Can you hear me without the mic? Anyway, so there are pending bills in the House of Representatives. The one that is very prominent is the bill filed by former Speaker Lord Allan Velasco and still pending deliberation, but it's mainly focused on the restructuring of the Energy Regulatory Commission. And in so far as that bill is concerned, we have actually expressed our full support for that bill because, as you can see, many of the issues that are haunting us today in terms of the regulatory is with respect to the delays in how cases are being resolved. So we believe that restructuring the agency is one of the ways to address that problem. And the proposal is to add more commissioners or more members of the commission to help in unclogging the docket of the commission. And the other bills are mainly on the grid limits, but we have submitted our comments there. We're actually asking for the lifting of the grid limits considering that we believe that the grid limits do not serve the purpose of the government of encouraging more investors to come in because there are only actually limited investors today in power generation and distribution and in supply. So if you increase the grid limits, then you're actually discouraging more investors to come in. So we're actually asking the -- or proposing, instead of increasing the limit, reducing or lifting the limit on grid limits, the cross ownership provision and also the contracting capacity limits. But we are still studying the other aspects of EPIRA which we can comment on, and we probably be able to finish this in a week from now and submit that to the House of Representatives or to the Department of Energy for consideration.

How about SBN 2348? Is that -- the Senate Bill No. 2348 by Senator Tulfo. Is that something that...

Is that the one on the indigenous fuel?

The one about the market share limits.

Yes, that's the same. That's the same as the House Bill. It has the same focus as the House bills filed before the House of Representatives, the limiting cross-ownership provision. So we are also making representations to the Senate in so far that is concerned, and we're essentially proposing that, to lift the limit on ownership and grid limits and the prohibition on cross-ownership.

And my last question is on the LNG deal. Can we please have any updates about the remaining hurdles, such as the approval of the PCC as well as the [ excellent ] PSA?

PCC? We've received an approval for the first phase, but we haven't heard from PCC whether this will go with -- to the second phase. Hopefully, it doesn't go to the second phase. But we're confident that we'll probably close this matter out by around September. The PSAs, as reported by Ronald. For SPPC, 910 was given approval by the ERC, and we filed for a motion for reconsideration to bring it up to 1,200. We have no approval yet for the [ Excellent ] energy 1,200.

We have a question online from Melissa Leong from UBS. Melissa, we'll unmute you now.