Operational Highlights

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MERALCO
Cross Sector Industry Briefing
November 12, 2004 PSE Auditorium Ortigas Center,
Pasig City
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Disclaimer

• The information contained herein is necessarily
  based upon a number of assumptions and estimates
  that are inherently subject to significant
  business, economic and competitive uncertainties
  and contingencies, many of which are beyond
  Meralcos control and upon assumptions with
  respect to future business decisions which are
  subject to change.
• Accordingly, Meralco cannot provide an assurance
  that these results will be realized. The
  prospective financial and other information may
  vary materially from actual results. Meralco
  makes no representation that these results will
  be achieved. Investors should not place undue
  reliance on the prospective financial and other
  information contained herein.

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Presentation Highlights

• Introduction
• Operational Financial Highlights
• Key Challenges
• Future Prospects
• Summary

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MERALCO

• Meralco is the leading electricity-distributor in
  the Philippines
• Provides electricity-distribution services to
  part of Luzon which includes the whole of Metro
  Manila and some provinces
• Meralco is considered essential to the economic
  development of the Philippines
• Many of the nations leading companies rely on
  its services to conduct day-to-day business
• Meralco has interests in a number of subsidiaries
  across various industries

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Strategically Important to the Philippines

• MERALCOs Franchise Area
• Area Coverage 9,337 sq km (3 of total land of
  the Philippines)
• Covers 23 cities and 88 municipalities which
  includes Metro Manila, the entire provinces of
  Bulacan, Rizal Cavite parts of the provinces
  of Laguna, Quezon Batangas and 17 barangays in
  Pampanga.
• Accounts for 50 of the countrys GDP
• Home to 98 Special Economic Zones (51 of total
  in the Philippines)
• 4.17 Million customers (Sept 04)
• Franchise Law signed by PGMA in June 2003 to
  grant Meralco a 25-year consolidated franchise.

Franchise Area
MERALCO has a natural monopoly in its franchise
area
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Established and Diversified Customer Base
Customer Demand by Segment (9 mo. 2004)

• MERALCO has an established and diversified
  customer base
• Balanced sales volume between Industrial,
  Residential and Commercial customers
• 1999-2003 CAGR for total customers was 3.8

Total Energy Sales 18,418 MWh
Revenues
(P mn)
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Beneficiary of Electricity Demand Growth

• Government efforts to liberalize the electricity
  sector should
• Reduce electricity prices to consumers, which are
  relatively high by Asian standards
• Stimulate demand and increase consumption of
  electricity, which is low by Asian standards
• Encourage further development of infrastructure,
  expanding electricity access to more potential
  consumers

Consumption per Capita (kWh, June 2004)
Asian Electricity Tariffs (June 2004)

MERALCO is likely to be a significant beneficiary
of electricity demand growth
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Proven EBITDA Generation Ability

• Meralcos business fundamentals are strong and
  EBITDA has consistently risen
• Utility nature of business has resulted in stable
  EBITDA growth
• Strong customer base and natural-monopoly status
  likely to ensure EBITDA stability going forward
• Tariff increases and generation-cost reductions
  in the future will further enhance EBITDA
  generation

Historical EBITDA
as restated
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• Operational
• Highlights

Service Excellence with Integrity
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YTD Sept04 Energy Sales The Commercial Segment
continues to drive sales with a 5.2 growth in
YTD Sept04 vs. the same period last year, with
Retail Trade and Transport segments
pushing growth.
Energy Sales, GWhrs
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Service Quality

• Meralco strives to continuously improve service
  quality and enhance customer satisfaction.

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System Loss
MERALCO has consistently worked towards system
loss reduction.
1986 21.0
1987 20.8
System loss
System Loss,
2003 10.85
Technical Loss
2003 7.52
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• Financial Highlights

Service Excellence with Integrity
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Financial Highlights
Revenues
(P mn)
MERALCO has performed strongly in 2003 and the
first nine months of 2004.
EBITDA
(P mn)
15
Financial Highlights, continued
Total Debt / EBITDA
(P mn)
MERALCO's debt service capability has improved in
2003 and 9 months 2004 due to improved cash flow
from operations
CAPEX
Limited funds curtailed CAPEX to levels slightly
exceeding depreciation expense
(P mn)
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Income Statement Highlights
( Amounts in million pesos )

Operating income surged 8.3 for the 3rd qtr and
38.9 for the nine-months ending September 30,
2004 mainly due to

• 3.8 sales volume increase
• 8.65-centavo rate hike implemented in June 2003
  

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MERALCO Share Price Performance
Based on comparative estimated P/E ratios of
Asian utilities, MERALCO is relatively
undervalued.
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• Key Challenges

Service Excellence with Integrity
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Liability Management
Scheduled Payments (vs. Est. EBITDA)
(in million pesos)

• Meralco is about to complete a refinancing
  program to reschedule debt payments due this year
  and next year.

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Why the Liquidity Problem?

• There are two fundamental reasons for Meralcos
  current liquidity problem.
• Refund Schedule
• Aggressive refund schedule that started in July
  2003 has and will continue to negatively impact
  Meralcos cash position for the next several
  years
• Phase III will be implemented over 12 months of
  2004
• Phase IV schedule is still to be approved by ERC

• Debt Amortization Schedule
• Current debt amortization schedules were prudent
  at time of each
• transaction

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Manage Power Purchase Commitments

• 1. Renegotiated contracts with suppliers
  will redound to lower rates for customers
• Settlement Agreement with NPC was jointly filed
  for approval at ERC
• Amended PPA with First Gas undergoing hearings at
  ERC
• Negotiations with Quezon Power for an amended PPA
  , for completion within the year
• 2. TransCo line rehabilitation in the south
  (Dasma-Biñan 230 kV) will improve dispatch of
  MERALCO IPPs. Estimated date of completion is
  December 15, 2004.
• Will allow consumption of banked gas
• Will lower cost of power to customer
• power plant capacities will be fully utilized
• availment of acceptance shortfall kWhrs

Power Source (2003)
Power Source (1999)
Meralco is shifting power sourcing to more
attractively priced IPPs
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MERALCO Rate Cases Pending at the Courts
Revoked the November 27, 2003 ERC grant of 12
centavo provisional increase for MERALCO

• Supreme Court

Remanded back to ERC MERALCOs rate unbundling
petition due to lack of a CoA Audit

• Court of Appeals

Motion for Reconsideration on both cases have
been filed by both ERC and MERALCO
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Significant Improvements in MERALCOs Regulatory
Environment

• The grant by Congress of a 25- year franchise to
  MERALCO
• ERCs adoption of a Weighted Average Cost of
  Capital (WACC) as
• the reasonable return for the utility
• Regulatory lag on filings for rate increases has
  been shortened
• - EPIRA mandates ERC to act within 75 days on an
  application
• for provisional relief and one year
  from such order to render a
• final decision
• Complete resolution of issues pertaining to
  MERALCOs Deferred
• PPA
• - Allows completion of discussion with Quezon
  Power on
• amended PPA

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Significant Improvements in MERALCOs Regulatory
Environment

• The Generation Rate Adjustment Mechanism (GRAM)
  has been
• replaced by the Automatic Adjustment Mechanism
  for Generation
• and System Loss Rates
• - Provides timely price signals
• - Prevents strain on utilitys working capital
  requirements
• - Results to lower rates for customers
• Significant strides towards cost-based pricing
• - The grant of a P1.23 per kWhr NPC provisional
  rate increase for Luzon
• - Removal of intra-grid and inter-class
  cross-subsidies
• Promulgation of Magna Carta for Residential
  Customers
• - Annual updating of customer deposits reduces
  collection risk
• - Refund schedule of meter deposits manageable
  for MERALCOs cash flow
• - Interest rate on deposits linked to bank
  lending rates

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Significant Improvements in MERALCOs Regulatory
Environment

• Promulgation of Guidelines for the Segregation
  and Setting of Caps
• on the Recoverable Rate of System Losses
• - Recognizes losses attendant to MERALCOs
  sub-transmission
• system
• - Recognizes losses attendant to electricity
  pilferage
• Promulgation of Distribution Wheeling Rate
  Guidelines by
• November 29, 2004
• - Allows adjustments of prices due to inflation
  and foreign-
• exchange movements
• - Performance-based regulation encourages
  efficiency in
• operations and optimal use of assets
• - Forward -looking vs historical test year

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While Meralco billings have been unbundled since
June 2003, end-users remain confused
Communicating the Meralco Bill
0.17 (3)
-0.02 (-0.3)
1.11 (19)
Cross-subsidies
Univ Chgs FT
Meralco Chgs
0.97 (17)
Transmission Chgs (TransCo)
3.60 (62)
Generation Chgs (NPC IPPs)
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Distributors continue to be blamed forincreases
in generation costs, or even asked to absorb such
increases
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Movements of factors affecting Meralcos
generation cost
excludes 16 centavo transmission line cost
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Meralco Charges Distribution, Supply,
andMetering Charges CERA

• Distribution Charge
• Cost of building, operating and maintaining the
  distribution system of Meralco, which brings
  power from high-voltage transmission grids, to
  commercial and industrial establishments and to
  residential end-users
• Metering Charge
• Includes the cost, reading, operation
  maintenance of metering facilities
• Supply Charge
• This includes the cost of rendering service to
  customers, such as billing, collection, customer
  assistance, and associated services
• Currency Exchange Rate Adjustment (CERA)
• Covers adjustments for unavoidable fluctuations
  in the Peso-Dollar exchange rate. Expressed as a
  percentage of Distribution Charge amount
• Currently pegged at 11.87. Changes will be
  subject to ERCs rules on Incremental Currency
  Exchange Rate Adjustment (ICERA)

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MERALCO charges account for 15 of the average
Meralco bill in November
Communicating the Meralco Bill
-0.02 (-0.2)
0.19 (3)
Cross-subsidies
Univ Chgs FT
1.09 (15)
Meralco Chgs
P0.90 (12)
Transmission Chgs (TransCo)
P4.98 (70)
Generation Chgs (NPC IPPs)
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MERALCO Bill Components
Communicating the Meralco Bill
and have not changed since the rates were
unbundled in June 2003
June 2003 November 2004 Differences
Php/ Php/ Php/ kWh kWh kWh

• Meralco Charges 1.09 1.09 0.00 0.00
• Generation 3.57 4.98 1.41 39.47
• Transmission 1.06 0.90 (0.17) -15.60
• Cross-subsidies (0.03) (0.02) 0.01 -44.24
• UC FT 0.15 0.19 0.04 30.77
• TOTAL 5.84 7.15 1.30 22.26

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• Future Prospects

Service Excellence with Integrity
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Retail Open Access Timetable

• Last Sept 21, ERC issued a resolution setting a
  timetable for the
• introduction of retail competition and open
  access
• - Target date for Luzon is July 2006, or only
  about one-and-a-half -years from now

Date Activity
Dec. 2004 Completion of rate unbundling
of all distribution utilities June 2005
Final approval of WESM Price Determination
Methodology Sept 30, 2005 Promulgation of
implementation guidelines Dec. 31, 2005
Full operation of WESM Dec. 31, 2005
Installation of WESM meters by TransCo and
authorized Meter Service
Providers June 30, 2006 Full subsidy
phase-out July 1, 2006 1st Phase (1MW
up) open access in Luzon July 1, 2008 2nd
Phase (750 kW up, single or aggregated load) in
Luzon
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EPIRAs Effects on MERALCOs Revenue
The bulk of MERALCOs revenue streams remains
intact

• Distribution - 70
• Supply - 20
• Metering - 10

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Opportunities with the EPIRA
EPIRA provides opportunities for MERALCO to
take advantage of new revenue streams

• Supply contracts with contestable end users
• Supply outside the franchise area
• Other related ventures

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Outlook for the Philippine Electricity Business

• Philippine Electricity Business will continue to
  grow modestly, in line with Philippine economic
  growth.
• GDP is targeted to grow by 6.0 - 6.9 over the
  next 5 years.
• Over the next 3 years
• GDP to grow 5.5 - 6.5
• Agriculture to grow by 4.1 - 5.1
• Industry to grow by 5.7 - 6.6
• Manufacturing to grow by 5.2 - 6.1
• Services to grow by 6 - 6.9

Sources 2004-2010 Medium Term Philippine
Development Plan National
Economic Development Authority
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• Growth Areas

Dept. Stores / Malls
Call Centers
Major Fastfood
LRT/MRT Stations
2003 Count
58
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328
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18 new Jollibee stores planned for 2005
2 new SM malls 5 non-SM malls energized in
2004 4 SM Malls in 2005 2 nonSM Malls in 2005
Expansion in existing number of seats to 50 in
2004 (Convergys, People Support, Sykes
e-Telecare) double in 2005
3 new stations were energized in 2004
Reason for Optimism
Estimated within Meralco franchise area
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Future Prospects

• Sales growth potential remains strong
• 51 (98) of Special Economic Zones located within
  the franchise area
• Robust forecast for the Commercial Sector
• Steady growth from the Residential Segment

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Summary
Positives

• Electric system performance is at its
• best
• Financial strength is being solidified
• Future prospects are encouraging
• Sales growth potential remains strong
• Revenue base continues to be intact with possible
  new revenue streams due to EPIRA

Key Challenges

• Liability management
• Regulatory environment

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Thank You!