Chairman's Message

DEAR SHAREHOLDERS,

The Philippines has performed well in the past few years relative to some of our neighbors. Gross Domestic Product growth in 2015 was recorded at 5.8 percent, driven largely by personal consumption which was funded by substantial remittances from overseas Filipinos, and the low inflation environment. The services sector, mainly the business process outsourcing industry, significantly contributed to output and employment.
 
This strong internal demand translated to growth for Manila Water. Billed volume of the domestic subsidiaries in Metro Manila, Boracay, Cebu, Clark and Laguna collectively grew by 5 percent in 2015. As a stand-alone, billed volume of the flagship Metro Manila East Zone rose by 3 percent, its strongest since 2008. This allowed your company to post a consolidated net income growth of 2 percent to ₱5.96 billion.
 
The strong performance in 2015 is a reflection of the strength of Manila Water. After the conclusion of the arbitration with our regulator in Metro Manila in April, and some of the challenges that this presented, we embarked on a transformation plan to gear the company for expansion, while ensuring regulatory compliance. We reorganized our structure to support our growth and diversification efforts and improve our competitiveness. We also used the time last year to formulate and begin implementation of a five-year strategic plan aimed at taking your company to a new level of growth, and delivering the expectations of our long-term shareholders.
 
In the Metro Manila East Zone concession, the conclusion of the arbitration has given way to an approved business plan, kicking off a huge capital expenditure program that is designed to meet our service obligations to our customers. We spent ₱4.2 billion in capital expenditures in 2015 for used water expansion and network reliability projects. This will go up significantly in 2016 and 2017.  In addition to meeting our capital expenditure commitments, a key goal of our transformation strategy is to preserve the East Zone’s profitability through cost reduction initiatives and by streamlining our operations for increased productivity.
 
Beyond the East Zone, we continued to expand our portfolio of new businesses across the country and in the region. In January 2015, Cebu Water started delivering treated water to the Metropolitan Cebu Water District. Laguna Water signed in June 2015 an amendment to its Concession Agreement with the Provincial Government of Laguna, providing for the expansion of the territorial scope of water supply services to all cities and municipalities of the Province of Laguna, and the addition of used water services as one of Laguna Water’s service obligations, paving the way for the establishment of an integrated sewage and septage system in the province. In July 2015, we signed our second project in Mindanao for a bulk water supply project in Tagum City, the capital of Davao del Norte. More recently, Estate Water signed an agreement with Ayala Land to provide water and used water services to all Ayala Land developments nationwide.
 
As the Philippine economy prepares to integrate more closely with the global and regional economy, we have taken significant steps towards increasing our geographic footprint. We were awarded our first concession-type project in Cu Chi District in Ho Chi Minh City, Vietnam. We feel this is a good opportunity to demonstrate our expertise in water in Vietnam, adding to our two existing bulk water companies in Ho Chi Minh City. In addition, we are laying the groundwork for an entry into the water sector in Indonesia. In November 2015, we signed a Memorandum of Understanding with PDAM Bandung for a demonstration project to reduce non-revenue water in Bandung City, Indonesia. This development marks Manila Water’s initial foray into the country, and the first step in the implementation of other possible partnership frameworks.
 
Moving forward, we will continue to be on the lookout for value creating platforms across the Philippines and in the region. Aside from geographic expansion, we continue to develop new business models and create new products geared towards vertical expansion. We will do all these in order to meet our strategic goal of doubling our net income, and generating 50 percent contribution from our new businesses by 2020.   
 
In closing, let me take this opportunity to sincerely thank my fellow Directors on your company’s Board, the management team, and all of our employees for all of the hard work. I know that everyone put in a tremendous amount of effort to not only surmount our recent regulatory challenges, but more importantly, to quickly shift gears towards an orientation of growth. I believe that the foundations are now in place for some very exciting times, not only in 2016, but over the next five years. I also want to thank all of our customers, partners and our shareholders who have supported us throughout these tough challenges. Rest assured we will continue working very hard to meet our growth targets and exceed your expectations.


FERNANDO ZOBEL DE AYALA

Chairman

President's Report

DEAR SHAREHOLDERS,

I am happy to report to you that Manila Water continued to perform well despite the regulatory obstacles we have encountered. 2015 was marked with the strengthening of our company’s operating efficiencies across its numerous business units and subsidiaries.

THE YEAR THAT WAS
Manila Water’s 18th year was blessed with healthy results following the settlement of a longstanding dispute with our East Zone regulator. Our consolidated revenues grew to ₱16.94 billion in 2015, 4 percent higher than the previous year. This was driven by the excellent operating performance of the East Zone and the strong contribution of our domestic and international subsidiaries. In the East Zone, billed volume grew by 3 percent. Our domestic subsidiaries contributed revenues of ₱2.03 billion, 40 percent higher than the previous year.

Meanwhile, our cost of services and operating expenses increased by 15 percent to ₱5.85 billion. We generated an EBITDA of ₱11.67 billion and an EBITDA margin of 69 percent. Manila Water reported a consolidated net income of ₱5.96 billion which was 2 percent higher than the prior year, setting a new record for Manila Water. Return on average equity was at 16 percent.

The 3 percent billed volume growth of the East Zone to 461.4 million cubic meters has been the best billed volume growth since 2008. Operational efficiencies were sustained at excellent levels: non-revenue water (NRW) at 11.2 percent, collection efficiency at 100 percent, and customer service index at 99.96 percent.  Efficiency gains translated to operating expense savings that were ahead of our target. These factors contributed to the strong performance of the East Zone.

We maximized the market impact and earnings contribution of the new businesses. We reorganized in 2015 to align our organizational structure with our growth strategy of horizontal and vertical expansion, thus giving birth to Manila Water Philippine Ventures (MWPV), Manila Water Asia Pacific (MWAP) and Manila Water Total Solutions (MWTS).

The businesses under the MWPV and MWAP umbrella now serve a population of four million, and has equity resources of ₱9 billion. The total capital expenditures of the domestic businesses under MWPV reached ₱1.39 billion in 2015, 31 percent higher than the previous year.  Consolidated net income of the new businesses grew by 46% over the prior year, and contributing 16% to Manila Water’s total earnings.

We secured landmark financing deals to support both the capital expenditure commitments of the East Zone business and the growth initiatives of our subsidiaries.  We were able to negotiate very competitive terms for a Y40 billion loan to fund the East Zone capital expenditure program. We also secured a P1.1 billion loan for Clark Water and P2.5 billion loan for Laguna Water, the latter of which is the biggest fund-raising activity for a Manila Water subsidiary thus far. We have strengthened our subsidiaries such that they can borrow on their own without any guarantees from the parent company.

FURTHER EXPANSION
Beyond good financial results, it is equally important to note a number of significant developments that further strengthen our business and operating platforms.

In the East Zone, we built and launched major used water systems that will form key pillars in the expansion of used water coverage. We finished in 2015 the construction of the Marikina North Sewerage Treatment Plant (STP) with a 100 million liters per day (mld) capacity and theTaguig North STP with a 75 mld capacity, while the Ilugin STP with a 100 mld capacity is undergoing construction.

We set the stage for further geographic business expansion through MWPV and MWAP.  In MWPV, we forged a strategic partnership with leading property developer, Ayala Land, to undertake the design, build, operations, and maintenance of potable water and used water systems in Ayala Land developments nationwide. We broke into the Mindanao market in the southern Philippines with the start-up of a non-revenue water management project in Zamboanga City and a bulk water supply project in Tagum City. In the region, we expanded our Vietnam operations with the acquisition of our first concession-type project in Cu Chi District where a population of close to 400,000 people are expected to be served with potable piped-water supply for the first time.

Furthermore, we gained initial traction in the third growth leg of the company through Manila Water Total Solutions, which houses our non-regulated after-the-meter services. We improved our performance in the pipe laying business which generated revenues of P136 million, and a net income of P23 million. We blazed a new trail and foundation for growth in a totally new industry with our Healthy Family purified bottled water. Healthy Family had a total bottle sales of 1 million in 2015, a significant step up from our 16,000 sales in 2014. In addition, three new FDA-certified plants with a combined capacity of 43,000 bottles per day were also completed.

ENHANCING THE ORGANIZATION
We continued to build the structure and platforms of Manila Water towards enabling effective execution of our strategic plans. We developed new automated enterprise systems to adapt to new business requirements and bolster productivity, namely, Enterprise Asset Management (EAM) – a comprehensive system that spans the whole asset life cycle, connecting processes and enabling effective decision-making. We enhanced GIS Applications to provide better analytics to the East Zone and Corporate Operations.

“All these efforts work towards our goal of sustaining our commitment of providing world-class water and used water services to our existing customers and our potential consumers.”

In preparation for the next rate rebasing in 2018, we increased our regulatory readiness by creating a new department to focus on regulatory accounting requirements.  Furthermore, a new Records and Information Management System (RIMS) now provides for better records management system and will ensure that documents for regulatory review are in order, easily located and retrieved.

We likewise completed the Capex Optimization project which streamlined the entire project life cycle for more effective and efficient project delivery. This prepared our Strategic Asset Management and Corporate Project Management groups towards managing very large and complex projects at a yearly aggregate throughput of as much as P15 billion.

Talent development was another focus area. We implemented initiatives that strengthen our organizational capabilities and ensure the availability of capable talents as we embark on our expansion program. We revived the Cadetship Program with focus on technical disciplines to build a strong pool of specialists geared for careers in the water business. We developed an employee engagement roadmap, guided by employee survey feedback, towards further strengthening the engagement of the Manila Water workforce.

All these efforts are geared towards fulfilling our commitment of providing world-class water and used water services to our customers.

LOOKING AHEAD TO 2016 AND BEYOND: 2X in 20XX
We look with optimism to the next five years as a period of growth for Manila Water. Our goal is to become an enterprise earning twice as much in 2020 as we did in 2015. We aim to achieve this by keeping our East Zone business steady while aggressively growing our new businesses to make them contribute as much as 50% of the consolidated net income of Manila Water at the end of this decade. From being a monolith organization five years ago, we aspire to be a more expansive, diverse, multi-national and multi-service water company.


GERARDO C. ABLAZA
President and Chief Executive Officer