Gearing Up to Become
a Global Filipino Water Company
2021 Integrated Report
Business Review
East Zone Concession
The East Zone Concession holds the exclusive right to provide water and wastewater services to the eastern side of Metro Manila. The concession area covers 1,400 square kilometers encompassing 23 cities and municipalities with a population of more than 7 million comprising a broad range of residential, semi-business, commercial and industrial customers.
Capital Expenditures in Php Mn
In 2021, the far-reaching effect of COVID-19 pandemic continued to impact the business, greatly affecting customer demand and business operations. Despite the challenges, the Company pushed through with its CAPEX projects to ensure prudent compliance to regulatory/service commitments despite prevailing tariff freeze.
Revenues of the East Zone Concession declined by 6% for the year, with the full year impact of the pandemic on customer consumption weighing down across all sectors. Meanwhile, cost and expenses rose by 11% for the period to Php5.5 Bn, driven by higher direct costs following the ramp up of repairs and maintenance, collection, connection and sanitation activities with the relative easing of community quarantines. This was partly offset by lower power and chemicals costs, aligned with lower production and better water quality at the Cardona Water Treatment Plant. Personnel costs increased due to higher headcount and higher variable pay. Similarly, overhead costs went up due to management and professional fees, higher provisions for expected credit losses (ECL) and consultancy fees.
These movements resulted in a 7% decline in EBITDA with an EBITDA margin of 61%. In all, the Parent Company posted a Net Income of Php3.6 Bn, down 22% vs. previous year. Net Income margin stood at 23%.
As the East Zone Concession remains to be the largest business segment of the group, the Company will continue to protect and strengthen this core as it gears up for growth. Specifically, the Company will continue the ramp-up of CAPEX projects in the areas of water supply security, as well as in the expansion of service coverage and compliance to regulatory standards for wastewater treatment. To name a few of these projects, the East Bay Project Phase 1 is composed of a 50 million liter per day (MLD) water treatment plant with a 25 km transmission pipeline, pumping stations and a 21 km submarine pipeline. Said project will similarly extract water from Laguna Lake as with the now operational 100 MLD Cardona Plant. Furthermore, the Wawa Calawis Phase 1 project is composed of an 80 MLD water treatment plant and 10 km pipe network with reservoir and booster station.
These projects will further augment the water supply available to the customers of the East Zone and ensure water security in the coming years. For wastewater projects, notable to mention is the North and South Pasig Sewerage System Project which is now at 74% completion. This is a 100 MLD Sewage Treatment Plant with a 65 km sewer network. Another is the Mandaluyong West - San Juan South - Quezon City South Sewerage System Project which is composed of a 60 MLD sewage treatment plant with 53 km combined sewer network. This project is targeted for completion in 2025.
These projects will further augment the water supply available to the customers of the East Zone and ensure water security in the coming years. For wastewater projects, notable to mention is the North and South Pasig Sewerage System Project which is now at 74% completion. This is a 100 MLD Sewage Treatment Plant with a 65 km sewer network. Another is the Mandaluyong West - San Juan South - Quezon City South Sewerage System Project which is composed of a 60 MLD sewage treatment plant with 53 km combined sewer network. This project is targeted for completion in 2025.
| (in mcm) | FY 2021 | FY 2020 | FY 2019 |
|---|---|---|---|
| Billed Volume | 488.5 | 506.4 | -4% |
| Billed Connections | 1,033 | 1,018 | -2% |
| (in Million Php) | |||
| Revenues | 16,084 | 17,104 | -6% |
| EBITDA | 9,803 | 10,145 | -7% |
| EBITDA margin | 61% | 62% | |
| Net Income | 3,618 | 4,666 | -22% |
On March 31, 2021, MWSS and the Parent Company executed an RCA following the directive of government to review the provisions of the original CA. The resulting RCA retains important aspects of the original CA such as the Rate Rebasing mechanism, as well as the confirmation of the concession period duration to be until July 31, 2037.
One key feature of the RCA is the change in the rate of return. Specifically, in lieu of a market-driven appropriate discount rate, the Concessionaire is subjected to a 12% fixed nominal discount rate for expenditures. Furthermore, the RCA lowers the yearly inflation factor to 2/3 of the Consumer Price Index adjustment and sets a tariff cap on rate increases equivalent to 1.3x the previous standard rate for water and 1.5x the previous standard rate for wastewater. Another adopted feature of the RCA is the removal of the Foreign Currency Differential Adjustment on the tariff. Lastly, the RCA will be covered by an Undertaking Letter of the Republic which will apply to contracts and obligations existing at the time of execution of the agreement and upholds the provisions with regard to early termination payment.
In line with the execution of the RCA, no tariff increases will be implemented until December 31, 2022 as a way to help alleviate the customers’ plight amid challenges brought about by the COVID-19 pandemic. Service obligations will be adjusted in line with the new standards under the RCA, with corresponding realignments to the 2018 Service Improvement Plan to be finalized with MWSS.
On February 16, 2022, the Parent Company and MWSS signed a Fourth Amendment to the RCA to further extend the effective start date of the RCA up to March 18, 2022 to allow more time for the completion of remaining conditions precedent to the effectivity of the RCA.
On December 10, 2021, the franchise of Manila Water (Republic Act 11601) was signed into law. This grants Manila Water the franchise to establish, operate and maintain a waterworks and sewerage system in the East Zone Service Area of Metro Manila and the Province of Rizal. It confirms the status of Manila Water as a public utility, consistent with the provisions of the Revised Concession Agreement executed between Metropolitan Waterworks and Sewerage System (MWSS) and Manila Water on March 31, 2021.
The franchise shall coexist alongside the RCA, wherein the RCA shall serve as the certificate of public convenience and necessity (CPCN) of Manila Water. Specifically, the RCA contains the terms and conditions of Manila Water’s concession for the provision of water and wastewater services to the East Zone Service Area, Rizal, and Cavite. The RCA will remain valid unless terminated after due notice and hearing.
The term of the RCA is currently until 2037. However, the franchise authorizes MWSS to extend the term of the RCA up to the term of the franchise, when public interest for affordable water security requires and upon application by Manila Water, subject to notice and hearing.
| Key Regulatory Provisions | Original CA | Revised CA |
|---|---|---|
| Rate of Return | Appropriate Discount Rate (ADR) detemined by RO every Rate Rebasing | 12% fixed nominal Rate or Return |
| Customer Price Index (CPI) | Full CPI adjustment annually | CPI at 2/3 |
| Foreign Currency Differential Adjustment (FCDA) | FCDA part of quarterly tariff adjustments | No FCDA mechanism |
| Rate Caps for Water and Wastewater Rates | No rate caps on water and wastewater rates, subject to MWSS charter limits | Rate cap 1.3x for water and 1.5x for wastewater |
| Treatment of Corporate Income Tax (CIT) | CIT included as part of Expenditures | CIT excluded from Expenditures |
| Manila Water Fanchise |
|---|
| 25-year term until 2047 |
| Confirms status of Manila Water as a Public utility |
| Co-exist alongside RCA |
| The RCA shall serve as the certificate of public convenience and necessity (CPCN) of Manila Water |
| Authorizes MWSS to extend RCA term up to 2047, subject to application, notice and hearing |
