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COVER SHEET

P W - 1 0 2
S.E.C Registration Number

M A N I L A E L E C T R I C C O M P A N Y

(Company's Full Name)

L O P E Z B U I L D I N G , O R T I G A S A V E N U E ,

B R G Y U G O N G , P A S I G C I T Y

(Business Address: No. Street City / Town / Province)

ATTY. WILLIAM S. PAMINTUAN 8632-8014


Contact Person Company Telephone Number

1 2 - 3 1 1 7 - C 0 5 3 0
Month Day FORM TYPE Month Day
Fiscal Year Annual Meeting

Secondary License Type, if Applicable

1 7 - C
Dept. Requiring this Doc. Amended Articles Number/Section

Total Amount of Borrowings

Total No. of Stockholders Domestic Foreign

To be accomplished by SEC Personnel concerned

File Number LCU

Document I.D. Cashier

STAMPS
SECURITIES AND EXCHANGE COMMISSION

SEC FORM 17-C

CURRENT REPORT UNDER SECTION 17


OF THE SECURITIES REGULATION CODE
AND SRC RULE 17.2(c) THEREUNDER

1. Date of Report: March 1, 2023

2. SEC Identification Number: PW-102

3. BIR Tax Identification Code: 000-101-528-000

4. Name of Issuer as specified in its Charter: Manila Electric Company

5. Country of Incorporation: Philippines

6. Industry Classification: (SEC use only)

7. Address of principal office: Lopez Building, Ortigas Avenue, Barangay Ugong,


Pasig City

8. Issuer’s telephone numbers: (02) 86328014 Area Code: 1605

9. Former name or former address: Not Applicable

10. Securities registered pursuant to Sections 18 and 12 of the SRC or Sections 4


and 8 of the RSA:

Number of Shares of
Common Stock Outstanding

1,127,098,705
(As of December 31, 2022)

Debt Securities: Php 7.0 Billion Bonds


11. Item Number reported: Item 9 (Other Events)

Please find attached 2022 Audited Consolidated Financial Results of the Company.
(Please refer to attached document)

SIGNATURE

Pursuant to the requirements of the Securities Regulation Code, the issuer has
duly caused this report to be signed on its behalf by the undersigned hereunto duly
authorized.

MANILA ELECTRIC COMPANY


Issuer

WILLIAM S. PAMINTUAN
Senior Vice President
Assistant Corporate Secretary &
Information Disclosure Officer

Date: March 1, 2023

Cc: Disclosure Department


Listings and Disclosure Group
Philippine Stock Exchange

Issuer Compliance and Disclosure Department


Philippine Dealing & Exchange Corp.
SyCip Gorres Velayo & Co. Tel: (632) 8891 0307
6760 Ayala Avenue Fax: (632) 8819 0872
1226 Makati City ey.com/ph
Philippines

INDEPENDENT AUDITOR’S REPORT

The Board of Directors and the Stockholders


Manila Electric Company and Subsidiaries
Lopez Building, Ortigas Avenue
Barangay Ugong, Pasig City, Metro Manila

Opinion

We have audited the consolidated financial statements of Manila Electric Company (the Company) and its
subsidiaries (the Group), which comprise the consolidated statements of financial position as at
December 31, 2022 and 2021, and the consolidated statements of income, consolidated statements of
comprehensive income, consolidated statements of changes in equity and consolidated statements of cash
flows for each of the three years in the period ended December 31, 2022, and notes to the consolidated
financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects,
the consolidated financial position of the Group as at December 31, 2022 and 2021, and its consolidated
financial performance and its consolidated cash flows for each of the three years in the period ended
December 31, 2022 in accordance with Philippine Financial Reporting Standards (PFRSs).

Basis for Opinion

We conducted our audits in accordance with Philippine Standards on Auditing (PSAs). Our responsibilities
under those standards are further described in the Auditor’s Responsibilities for the Audit of the
Consolidated Financial Statements section of our report. We are independent of the Group in accordance
with the Code of Ethics for Professional Accountants in the Philippines (Code of Ethics) together with the
ethical requirements that are relevant to our audit of the consolidated financial statements in the Philippines,
and we have fulfilled our other ethical responsibilities in accordance with these requirements and the Code
of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit
of the consolidated financial statements of the current period. These matters were addressed in the context of
our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do
not provide a separate opinion on these matters. For each matter below, our description of how our audit
addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the
Consolidated Financial Statements section of our report, including those in relation to these matters.
Accordingly, our audit included the performance of procedures designed to respond to our assessment of the
risks of material misstatement of the consolidated financial statements. The results of our audit procedures,
including the procedures performed to address the matters below, provide the basis for our audit opinion on
the accompanying consolidated financial statements.

*SGVFS169563*
A member firm of Ernst & Young Global Limited
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Revenue from sale of electricity

The Group’s revenue from its electricity distribution business represents 93% of its consolidated revenues
and arise from its service contracts with a large number of customers that are classified as either
commercial, industrial or residential, located within the Group’s franchise area. This matter is significant
to our audit because the revenue recognized depends on (a) the complete capture of electric consumption
based on the meter readings over the franchise area taken on various dates; (b) the propriety of rates
computed and applied across customer classes including the application of adjustments promulgated by
the Energy Regulatory Commission (ERC); and (c) the reliability of the information technology (IT)
systems involved in processing the billing transactions.

Notes 2, 23, 24, 30 and 32 provide the relevant disclosures related to the rate-making regulations and
regulatory policies of the ERC.

Audit response

We obtained an understanding and evaluated the design of, as well as tested the controls over, the
customer master file maintenance, accumulation and processing of meter data, and interface of data from
the billing system to the financial reporting system. In addition, we performed a test recalculation of the
bill amounts using the ERC-approved rates, adjustments and formulae, as well as actual pass-through
costs incurred, and compared them with the amounts reflected in the billing statements. We involved our
internal specialist in understanding the IT processes and in understanding and testing the IT general
controls over the IT systems supporting the revenue process.

Adequacy of allowance for expected credit losses for receivables

Under PFRS 9, Financial Instruments, the Group is required to estimate the expected credit loss (ECL)
for its financial assets, particularly its trade receivables, which represent 10% of the consolidated assets of
the Group as of December 31, 2022. The allowance for ECL and the provision for ECL as at and for the
year ended December 31, 2022 amounted to = P7,115 million and =P2,311 million, respectively.

The Group’s use of the ECL model is significant to our audit as it involves the exercise of significant
management judgment. Key areas of judgment include: segmenting the Group’s credit risk exposures;
defining default; determining assumptions to be used in the ECL model; and incorporating forward-
looking information (called overlays), including the impact of the coronavirus pandemic, in calculating
ECL.

The disclosures in relation to allowance and provisions for ECL using the ECL model are included in
Notes 5, 13 and 27 to the consolidated financial statements.

Audit response

We obtained an understanding of the methodologies and models used for the Group’s varying credit
exposures and assessed whether these considered the requirements of PFRS 9 to reflect an unbiased and
probability-weighted outcome and the best available forward-looking information.

*SGVFS169563*
A member firm of Ernst & Young Global Limited
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We (a) assessed the Group’s segmentation of its credit risk exposures based on homogeneity of credit risk
characteristics; (b) tested the definition of default against historical analysis of accounts and credit risk
management policies and practices in place, (c) tested historical loss rates by inspecting historical
collections, recoveries and write-offs (d) checked the classification of outstanding exposures to their
corresponding aging buckets; and (e) checked the forward-looking information used for overlay through
statistical test and corroboration using publicly available information and our understanding of the
Group’s receivable portfolios and industry practices, including the impact of the coronavirus pandemic.

Further, we checked the data used in the ECL models, such as the historical aging analysis and default
and recovery data, by reconciling data from the billing system to the loss allowance analysis/models and
financial reporting systems. To the extent that the loss allowance analysis is based on credit exposures
that have been disaggregated into subsets with similar risk characteristics, we traced the disaggregation
from source systems to the loss allowance analysis.

We reviewed the completeness of the disclosures made in the consolidated financial statements.

Retirement and other long-term post-employment benefits

The Group has defined retirement and other long-term post-employment benefits plans covering all
regular employees. The valuation of the retirement benefits obligation involves significant management
judgment in the use of assumptions. The valuation also requires the assistance of an external actuary
whose calculations depend on certain assumptions, such as discount rates and future salary increases,
which could have a material impact on the results. Thus, we considered this as a key audit matter.

Note 26 to the consolidated financial statements provides the relevant disclosures related to this matter.

Audit response

We involved our internal specialist in the review of the scope, bases, methodology and results of the work
by the external actuary, whose professional qualifications, capabilities and objectivity were also taken
into consideration. We evaluated the key assumptions used by comparing the employee demographics
and attrition rates against the Group’s human resource data, and the discount rate and mortality rate
against external data. We inquired from management about the basis of salary increase rate and compared
it against the Group’s historical data and future plans. Moreover, we reviewed the required disclosures in
the consolidated financial statements.

Provisions and contingencies

The Group is involved in certain proceedings and claims for which it has recognized provisions for
probable costs and/or expenses and/or has disclosed relevant information about such contingencies. This
matter is significant to our audit because the determination of whether any provision should be recognized
and the estimation of the potential liability resulting from these assessments require significant judgment
by management. The inherent uncertainty over the outcome of these matters is brought about by the
differences in the interpretation and implementation of the relevant laws and regulations.

Notes 2, 19, 22 and 29 to the consolidated financial statements provide the relevant disclosures related to
this matter.

*SGVFS169563*
A member firm of Ernst & Young Global Limited
-4-

Audit response

We examined the bases of management’s assessment of the possible outcomes and the related estimates
of the probable costs and/or expenses that are recognized and/or disclosed in the Group’s consolidated
financial statements and involved our internal specialists when necessary. We discussed with
management the status of the claims and/or assessments and obtained correspondences with the relevant
authorities and opinions from the internal and external legal counsels. We evaluated the position of the
Group by considering the relevant laws, rulings and jurisprudence. We also reviewed the disclosures on
provisions and contingencies in the Group’s consolidated financial statements.

Accounting for business combination

As disclosed in Note 3 to the consolidated financial statements, in 2021, MERALCO PowerGen


Corporation, a wholly owned subsidiary of the Company, acquired an additional 86% interest in Global
Business Power Corporation (GBPC) for a total consideration of = P32,575 million. The acquisition was
accounted for as a business combination under PFRS 3, Business Combinations and reported in the 2021
consolidated financial statements based on provisional purchase price allocation. In 2022, the fair values
of the net assets acquired were remeasured and the purchase price allocation was thus finalized. Apart
from the significance of the amounts involved, we consider the accounting for this acquisition as a key
audit matter because the determination of the fair values of the assets acquired and liabilities assumed
from GBPC requires significant management judgment and estimation based on the available
information, specifically about the acquired property and equipment and intangible assets, as at the
acquisition date.

Audit response

We reviewed the share purchase agreements covering the acquisition and assessed whether the acquisition
has been appropriately accounted for. We reviewed the final purchase price allocation and evaluated
management’s basis in determining the fair values of the assets acquired and liabilities assumed from
GBPC using the available information as of the acquisition date. We assessed the competence,
capabilities and objectivity of the external appraiser who was engaged to prepare the appraisal report used
in the final purchase price allocation, by considering their qualifications, experience and reporting
responsibilities. We involved our internal specialist in evaluating the methodologies and assumptions
used in arriving at the fair values of the property and equipment and intangible assets. We also assessed
the adequacy of the related disclosures in Note 3 to the consolidated financial statements.

Other Information

Management is responsible for the other information. The other information comprises the information
included in the SEC Form 20-IS (Definitive Information Statement), SEC Form 17-A and Annual Report for
the year ended December 31, 2022 but does not include the consolidated financial statements and our
auditor’s report thereon. The SEC Form 20-IS (Definitive Information Statement), SEC Form 17-A and
Annual Report for the year ended December 31, 2022 are expected to be made available to us after the date
of this auditor’s report.

Our opinion on the consolidated financial statements does not cover the other information and we will not
express any form of assurance conclusion thereon.

*SGVFS169563*
A member firm of Ernst & Young Global Limited
-5-

In connection with our audits of the consolidated financial statements, our responsibility is to read the other
information identified above when it becomes available and, in doing so, consider whether the other
information is materially inconsistent with the consolidated financial statements or our knowledge obtained in
the audits, or otherwise appears to be materially misstated.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial
Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in
accordance with PFRSs, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to
fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Group’s
ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using
the going concern basis of accounting unless management either intends to liquidate the Group or to cease
operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a
whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that
includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit
conducted in accordance with PSAs will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these
consolidated financial statements.
As part of an audit in accordance with PSAs, we exercise professional judgment and maintain professional
skepticism throughout the audit. We also:

 Identify and assess the risks of material misstatement of the consolidated financial statements, whether
due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a
material misstatement resulting from fraud is higher than for one resulting from error, as fraud may
involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

 Obtain an understanding of internal control relevant to the audit in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Group’s internal control.

 Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates
and related disclosures made by management.

 Conclude on the appropriateness of management’s use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions
that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude
that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related

*SGVFS169563*
A member firm of Ernst & Young Global Limited
-6-

disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s
report. However, future events or conditions may cause the Group to cease to continue as a going
concern.

 Evaluate the overall presentation, structure and content of the consolidated financial statements,
including the disclosures, and whether the consolidated financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.

 Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the Group to express an opinion on the consolidated financial statements. We
are responsible for the direction, supervision and performance of the audit. We remain solely
responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in internal
control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other matters
that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were
of most significance in the audit of the consolidated financial statements of the current period and are
therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation
precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a
matter should not be communicated in our report because the adverse consequences of doing so would
reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is Narciso T. Torres, Jr.

SYCIP GORRES VELAYO & CO.

Narciso T. Torres, Jr.


Partner
CPA Certificate No. 84208
Tax Identification No. 102-099-147
BOA/PRC Reg. No. 0001, August 25, 2021, valid until April 15, 2024
SEC Partner Accreditation No. 84208-SEC (Group A)
Valid to cover audit of 2021 to 2025 financial statements of SEC covered institutions
SEC Firm Accreditation No. 0001-SEC (Group A)
Valid to cover audit of 2021 to 2025 financial statements of SEC covered institutions
BIR Accreditation No. 08-001998-111-2020, November 27, 2020, valid until November 26, 2023
PTR No. 9566006, January 3, 2023, Makati City

February 27, 2023

*SGVFS169563*
A member firm of Ernst & Young Global Limited
MANILA ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

Note December 31
2021
(As restated -
2022 Note 3)
(Amounts in millions)

ASSETS
Noncurrent Assets
Utility plant, generation plant and others 7 and 10 =243,323
P =225,326
P
Investments in associates and interests
in joint ventures 8 and 23 31,888 23,317
Investment properties 9 1,495 1,496
Intangible assets 7 and 10 21,691 15,054
Deferred tax assets – net 28 22,657 27,143
Financial and other noncurrent assets 2, 11, 15, 26, 27 and 30 43,920 53,125
Total Noncurrent Assets 364,974 345,461

Current Assets
Cash and cash equivalents 12 and 27 55,832 55,007
Trade and other receivables 13, 24 and 27 54,683 45,013
Inventories 14 10,629 9,817
Financial and other current assets 11, 15, 23 and 27 33,143 28,317
Total Current Assets 154,287 138,154
Total Assets =519,261
P =483,615
P

EQUITY AND LIABILITIES


Equity Attributable to Equity Holders
of the Parent
Common stock 16 =11,273
P =11,273
P
Additional paid-in capital 4,111 4,111
Equity reserve (111) (116)
Employee stock purchase plan 16 1,049 1,049
Unrealized fair value gains on financial assets at
fair value through other comprehensive
income (“FVOCI”) 11 311 502
Remeasurement adjustments on retirement
and other post-employment liabilities 26 7,282 2,681
Share in remeasurement adjustments on
associates’ retirement liabilities 8 (16) (25)
Cumulative translation adjustments of associates 8 (30) 306
Cumulative translation adjustments of
subsidiaries 51 40
Treasury shares 16 (11) (11)
Retained earnings 16 85,755 75,394
Equity Attributable to Equity Holders
of the Parent 109,664 95,204
Non-controlling Interests 3 and 16 14,445 10,124
Total Equity 124,109 105,328

(Forward)

*SGVFS169563*
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Note December 31
2021
(As restated -
2022 Note 3)
(Amounts in millions)

Noncurrent Liabilities
Interest-bearing long-term financial liabilities -
net of current portion 17 and 27 P68,757
= P52,720
=
Customers’ deposits - net of current portion 18, 22 and 27 31,590 30,901
Long-term employee benefits 26 2,893 10,257
Provisions 19, 22 and 29 12,657 13,554
Refundable service extension costs -
net of current portion 22 and 27 4,653 5,334
Deferred tax liabilities - net 28 5,427 5,959
Other noncurrent liabilities 2, 5, 7, 24 and 29 63,450 97,981
Total Noncurrent Liabilities 189,427 216,706

Current Liabilities
Notes payable 21 and 27 29,491 28,834
Trade payables and other current liabilities 16, 22, 23, 27 and 29 163,902 119,067
Customers’ refund 2, 20 and 27 2,905 2,929
Income tax payable 92 1,637
Current portion of long-term employee benefits 26 3,750 –
Current portion of interest-bearing long-term
financial liabilities 17 and 27 5,585 9,114
Total Current Liabilities 205,725 161,581
Total Liabilities 395,152 378,287
Total Liabilities and Equity =519,261
P =483,615
P

See accompanying Notes to Consolidated Financial Statements.

*SGVFS169563*
MANILA ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31


Note 2022 2021 2020
(Amounts in millions, except per share data)

REVENUES
6, 23, 24, 30
Sale of electricity and 32 =413,950
P =309,238
P =267,946
P
Sale of other services 23 12,579 9,309 7,358
426,529 318,547 275,304
COSTS AND EXPENSES
Purchased power 24 and 30 322,645 224,915 204,420
Coal and fuel 22,577 8,793 –
Depreciation and amortization 7, 9, 10 and 25 16,031 12,499 8,555
Salaries, wages and employee benefits 25 and 26 15,836 15,892 12,301
Contracted services 8,440 7,074 6,348
Provision for probable losses and expenses from
claims 2, 19 and 29 5,831 10,175 15,526
Taxes, fees and permits 2,132 1,939 1,069
Power plant operations and maintenance cost 1,906 1,103 –
Provision for expected credit losses (“ECL”) 13 2,498 506 1,827
Other expenses 23 and 25 8,452 6,312 4,267
406,348 289,208 254,313
OTHER INCOME (EXPENSES)
Equity in net earnings of associates and joint ventures 8 12,035 3,127 1,233
Interest and other financial charges 17, 18 and 21 (3,754) (3,728) (1,594)
Interest and other financial income 11 and12 2,063 2,197 2,323
Foreign exchange gains (losses) 1,011 487 (839)
2, 5, 7, 8, 23, 30
Others and 32 3,700 1,573 301
15,055 3,656 1,424
INCOME BEFORE INCOME TAX 35,236 32,995 22,415
PROVISION FOR (BENEFIT FROM)
INCOME TAX 28
Current 4,122 8,728 10,295
Deferred 2,526 184 (4,029)
6,648 8,912 6,266
NET INCOME =28,588
P =24,083
P =16,149
P

Attributable To
Equity holders of the Parent 31 =28,431
P =23,498
P =16,316
P
Non-controlling interests 157 585 (167)
=28,588
P =24,083
P =16,149
P

Earnings Per Share Attributable


to Equity Holders of the Parent 31
Basic P25.23
= P20.85
= P14.48
=
Diluted 25.23 20.85 14.48

See accompanying Notes to Consolidated Financial Statements.

*SGVFS169563*
MANILA ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31
Note 2022 2021 2020
(Amounts in millions)

NET INCOME =28,588


P =24,083
P =16,149
P

OTHER COMPREHENSIVE INCOME


Items that will be reclassified to profit or
loss in subsequent years:
Unrealized fair value gains (losses) on fair value through other
comprehensive (“FVOCI”) financial assets 11 (280) 139 100
Cumulative translation gains (losses) of subsidiaries 11 18 (10)
Cumulative translation gains (losses) of associates (336) 300 (756)
Net other comprehensive income (loss) that will be reclassified to
profit or loss in subsequent years (605) 457 (666)
Items that will not be reclassified to
profit or loss in subsequent years:
Remeasurement gains (losses) on retirement and other post-
employment liabilities 26 6,135 8,671 (5,186)
Income tax effect (1,534) (2,168) 1,557
4,601 6,503 (3,629)
Unrealized fair value gains (losses) on equity securities at
FVOCI 99 43 (3)
Income tax effect (10) (4) –
89 39 (3)
Share in remeasurement gains (losses) on associates’ retirement
liabilities 8 9 (12) (1)
Net other comprehensive income (loss) that will not be reclassified
to profit or loss in subsequent years 4,699 6,530 (3,633)

OTHER COMPREHENSIVE INCOME (LOSS), NET OF


INCOME TAX 4,094 6,987 (4,299)

TOTAL COMPREHENSIVE INCOME,


NET OF INCOME TAX =32,682
P =31,070
P =11,850
P

Total Comprehensive Income Attributable To


Equity holders of the Parent =32,525
P =30,485
P =12,017
P
Non-controlling interests 157 585 (167)
=32,682
P =31,070
P =11,850
P

See accompanying Notes to Consolidated Financial Statements.

*SGVFS169563*
MANILA ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020

Equity Attributable to Equity Holders of the Parent


Remeasure-
Unrealized ment Share in
Fair Value Adjustments Remeasure-
Gains (Losses) on ment
on Retirement Adjustments Cumulative
Employee Financial and Other on Translation Cumulative Equity
Stock Assets Post- Associates’ Adjustments Translation Attributable Non-
Common Additional Purchase at Employment Retirement of Adjustments Treasury Retained to Equity controlling
Stock Paid-in Equity Plan FVOCI Liabilities Liabilities Associates of Shares Earnings Holders of Interests Total
(Note 16) Capital Reserve (Note 16) (Note 11) (Note 26) (Note 8) (Note 8) Subsidiaries (Note 16) (Note 16) the Parent (Note 3 and 6) Equity
(Amounts in millions)

At January 1, 2022 = 11,273


P = 4,111
P (P
= 116) = 1,049
P = 502
P = 2,681
P (P
= 25) = 306
P = 40
P (P
= 11) = 75,394
P = 95,204
P = 10,124
P = 105,328
P
Net income – – – – – – – – – – 28,431 28,431 157 28,588
Other comprehensive income (loss) – – – – (191) 4,601 9 (336) 11 – – 4,094 – 4,094
Total comprehensive income (loss) – – – – (191) 4,601 9 (336) 11 – 28,431 32,525 157 32,682
Dividends – – – – – – – – – – (18,070) (18,070) (95) (18,165)
Others – – 5 – – – – – – – – 5 4,259 4,264
– – 5 – – – – – – – (18,070) (18,065) 4,164 (13,901)
At December 31, 2022 = 11,273
P = 4,111
P (P
= 111) = 1,049
P = 311
P = 7,282
P (P
= 16) (P
= 30) = 51
P (P
= 11) = 85,755
P = 109,664
P = 14,445
P = 124,109
P

At January 1, 2021 =11,273


P =4,111
P (P
= 116) =1,049
P =324
P (P
= 3,822) (P
= 13) =6
P =22
P (P
= 11) =66,414
P =79,237
P =1,494
P =80,731
P
Net income – – – – – – – – – – 23,498 23,498 585 24,083
Other comprehensive income (loss) – – – – 178 6,503 (12) 300 18 – – 6,987 – 6,987
Total comprehensive income (loss) – – – – 178 6,503 (12) 300 18 – 23,498 30,485 585 31,070
Dividends – – – – – – – – – – (14,518) (14,518) (1,358) (15,876)
Effect of consolidation of Global
Business Power Corporation
(“GBPC”) – – – – – – – – – – – – 9,359 9,359
Others – – – – – – – – – – – – 44 44
– – – – – – – – – – (14,518) (14,518) 8,045 (6,473)
At December 31, 2021 =11,273
P =4,111
P (P
= 116) =1,049
P =502
P =2,681
P (P
= 25) =306
P =40
P (P
= 11) =75,394
P =95,204
P =10,124
P =105,328
P

*SGVFS169563*
Equity Attributable to Equity Holders of the Parent
Remeasure-
Unrealized ment Share in
Fair Value Adjustments Remeasure-
Gains (Losses) on ment
on Retirement Adjustments Cumulative
Employee Financial and Other on Translation Cumulative Equity
Stock Assets Post- Associates’ Adjustments Translation Attributable Non-
Common Additional Purchase at Employment Retirement of Adjustments Treasury Retained to Equity controlling
Stock Paid-in Equity Plan FVOCI Liabilities Liabilities Associates of Shares Earnings Holders of Interests Total
(Note 16) Capital Reserve (Note 16) (Note 11) (Note 26) (Note 8) (Note 8) Subsidiaries (Note 16) (Note 16) the Parent (Note 6) Equity
(Amounts in millions)
At January 1, 2020 =11,273
P =4,111
P (P
= 116) =1,049
P =227
P (P
= 193) (P
= 12) =762
P =32
P (P
= 11) =67,108
P =84,230
P =1,011
P =85,241
P
Net income – – – – – – – – – – 16,316 16,316 (167) 16,149
Other comprehensive income (loss) – – – – 97 (3,629) (1) (756) (10) – – (4,299) – (4,299)
Total comprehensive income (loss) – – – – 97 (3,629) (1) (756) (10) – 16,316 12,017 (167) 11,850
Dividends – – – – – – – – – – (17,010) (17,010) 644 (16,366)
Others – – – – – – – – – – – – 6 6
– – – – – – – – – – (17,010) (17,010) 650 (16,360)
At December 31, 2020 =11,273
P =4,111
P (P
= 116) =1,049
P =324
P (P
= 3,822) (P
= 13) =6
P =22
P (P
= 11) =66,414
P =79,237
P =1,494
P =80,731
P

See accompanying Notes to Consolidated Financial Statements.

*SGVFS169563*
MANILA ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
Note 2022 2021 2020
(Amounts in millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax =35,236
P =32,995
P =22,415
P
Adjustments for:
Provision for probable losses and expenses from
claims – net 2 and 29 (15,022) 7,951 14,473
Depreciation and amortization 7, 9 and 10 16,031 12,499 8,555
Interest and other financial charges 17, 18 and 21 3,754 3,728 1,594
Interest and other financial income 11 and12 (2,063) (2,197) (2,323)
Equity in net earnings of associates and joint
ventures 8 (12,035) (3,127) (1,233)
Impairment losses 2,601 – –
Provision for expected credit losses (“ECL”) 2,548 557 1,827
Others (592) 12 (151)
Operating income before working capital changes 30,458 52,418 45,157
Decrease (increase) in:
Trade and other receivables (15,083) 11,127 (27,922)
Inventories (812) (2,136) (926)
Financial and other current assets (4,100) (2,573) 184
Increase (decrease) in:
Trade payables and other current liabilities 18,253 (12,832) 18,215
Customers’ deposits 1,143 1,244 1,282
Customers’ refund (24) (20) (83)
Long-term employee benefits (1,336) 2,855 1,573
Cash generated from operations 28,499 50,083 37,480
Income tax paid (3,317) (6,902) (7,608)
Net cash flows provided by operating activities 25,182 43,181 29,872

CASH FLOWS FROM INVESTING ACTIVITIES


Acquisition of Global Business Power Corporation
(“GBPC”) – net of GBPC’s cash upon acquisition 3 – (16,476) –
Additions to:
Debt securities at amortized cost 11 (18,587) (23,115) (15,949)
Financial assets at FVOCI 11 (26,267) (42,458) (92,057)
Utility plant, generation plant and others 7 (33,663) (26,260) (19,662)
Intangible assets 10 (8,533) (976) (896)
Investments in associates and interests in joint
ventures 8 (504) (992) (466)
Short-term investments (2,784) (435) (5,472)
Investment properties 9 (3) (1) –
Proceeds from maturity of:
Financial assets at FVOCI 30,396 43,070 85,268
Debt securities at amortized cost 22,707 14,059 23,999
Short-term investments 3,025 – 23,680
Interest and other financial income received 2,033 2,184 2,657
Proceeds from disposal of utility plant, generation plant
and others 914 161 353
Dividends received from associates and joint ventures 4,039 1,778 475
Increase (decrease) in minority interests 4,164 (1,364) 651
Decrease in financial and other noncurrent assets 982 1,358 195
Net cash provided by (used in) investing activities (22,081) (49,467) 2,776
(Forward)

*SGVFS169563*
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Years Ended December 31


Note 2022 2021 2020
(Amounts in millions)

CASH FLOWS FROM FINANCING ACTIVITIES


Proceeds from availment of:
Interest-bearing long-term financial liabilities 17 =32,507
P P24,513
= =2,578
P
Notes payable 21 2,920 22,880 179
Payments of:
Notes payable (2,263) (17,419) (199)
Dividends 16 (16,890) (13,748) (16,796)
Interest-bearing long-term financial liabilities 17 (18,679) (7,388) (3,669)
Interest and other financial charges (241) (215) (1,446)
Proceeds from disposal of non-controlling interests 6 – –
Increase (decrease) in other noncurrent liabilities 367 2,238 (938)
Net cash provided by (used in) financing activities (2,273) 10,861 (20,291)

NET INCREASE IN CASH AND CASH


EQUIVALENTS 825 4,575 12,357

CASH AND CASH EQUIVALENTS


AT BEGINNING OF YEAR 55,007 50,912 38,262

NET UNREALIZED FOREIGN EXCHANGE LOSSES


(GAINS) – (480) 293

CASH AND CASH EQUIVALENTS


AT END OF YEAR 12 =55,832
P =55,007
P =50,912
P

See accompanying Notes to Consolidated Financial Statements.

*SGVFS169563*
MANILA ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Corporate Information

The businesses of Manila Electric Company (“MERALCO”) and its subsidiaries (the “MERALCO
Group”) consist of the unregulated and regulated segments of the energy supply chain; engineering
design services; construction and consulting services; payment fulfilment and bills collection
services; after-the-meter and energy management services; and telecommunication and information
technology services.

The regulated and unregulated segments of the energy supply chain of the MERALCO Group consist
of electricity distribution, power generation, retail electricity supply, and management of electric
distribution facilities.

As a distribution utility (“DU”), MERALCO holds a 25-year congressional franchise under Republic
Act (“RA”) No. 9209 valid through June 28, 2028 to construct, operate, and maintain the electric
distribution system in the cities and municipalities of Bulacan, Cavite, Metro Manila, and Rizal and
certain cities, municipalities and barangays in the provinces of Batangas, Laguna, Pampanga, and
Quezon. The Energy Regulatory Commission (“ERC”) granted MERALCO a consolidated Certificate
of Public Convenience and Necessity (“CPCN”) for the operation of electric service within its
franchise area, which shall be valid within the franchise period.

Clark Electric Distribution Corporation (“Clark Electric”), a 65%-owned subsidiary of MERALCO is


a registered private distribution utility with a franchise granted by Clark Development Corporation
(“CDC”) to own, operate and maintain the electric distribution system within the Clark Freeport Zone
and the sub-zones. The Clark Electric franchise is valid through October 2047.

Through a 60% owned subsidiary, Shin Clark Power Holdings, Inc. (“Shin Clark”), MERALCO
together with a consortium, composed of Axia Power Holdings Philippines Corporation (a wholly-
owned subsidiary of Marubeni Corporation), KPIC Netherlands BV [a wholly-owned subsidiary of
the Kansai Electric Power, Inc. (“Kansai”)], and Chubu Electric Power Co., Inc. (“Chubu”), hold a
90% interest in Shin Clark Power Corporation (“Shin Clark Power”). Shin Clark Power is a
company formed with Bases Conversion and Development Authority (“BCDA”) through a 25-year
joint venture agreement to provide electricity distribution services within the New Clark City
(“NCC”). NCC consists of a 9,450 hectare development within the Clark Special Economic Zone
located in Capas and Bamban towns in the Tarlac province.

MERALCO also manages the electric distribution facilities of Pampanga Electric Cooperative II
(“PELCO II”) through Comstech Integration Alliance, Inc. (“Comstech”) under a 25-year Investment
Management Contract (“IMC”) and that of the Cavite Economic Zone (“CEZ”) under a 25-year
concession agreement with Philippine Economic Zone Authority (“PEZA”).

MERALCO Group’s participation in retail electricity supply (“RES”) is directly through the local RES
units, MPower and Cogent Energy, and indirectly through affiliate RES entities, Vantage Energy
Solutions and Management, Inc. (“Vantage”), MeridianX Inc. (“MeridianX”), Phoenix Power
Solutions, Inc. (“Phoenix Power”) and Global Energy Supply Corporation (“GESC”). Clarion
Energy Management Inc. (“Clarion”), a wholly owned subsidiary of Clark Electric, is awaiting
issuance of license by the ERC.

*SGVFS169563*
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MERALCO PowerGen Corporation (“MGen”) is MERALCO’s power generation investment vehicle.


Global Business Power Corporation (“GBPC”), which has 970 MW of coal and diesel capacities, is a
wholly owned subsidiary of MGen. Through MGen Renewable Energy, Inc. (“MGreen”), MGen has
80 MWdc/50 MWac utility scale solar facility in San Miguel, Bulacan and is in the process of
developing 143 MWac of renewable power plants. MGen also holds a 58% interest in PacificLight
Power Pte Ltd. (“PacificLight Power”), which owns and operates a 2 x 400 MW liquefied natural gas
plant in Jurong Island, Singapore.

MERALCO’s related businesses include engineering, design, construction and consulting services,
bill collection services, distribution and energy management services, development, leasing and
management of communication towers and infrastructure, and communication, information system
and technology services.

MERALCO is owned directly by two (2) major shareholder groups, Metro Pacific Investments
Corporation (“Metro Pacific”) and JG Summit Holdings, Inc. (“JG Summit”). As at
December 31, 2022, Metro Pacific has combined direct equity interests in MERALCO and indirect
ownership through its wholly owned subsidiary, Beacon Electric Asset Holdings, Inc. Metro Pacific’s
combined direct and indirect ownership interests in MERALCO totaled 47.46% while JG Summit has
26.37% direct ownership interest in MERALCO. First Philippine Holdings Corporation (“First
Holdings”) and First Philippine Utilities Corporation have a combined direct equity ownership of
3.95% in MERALCO. The balance of MERALCO’s common shares is held by institutional investors
and the public.

The shares of MERALCO are listed and traded in the Philippine Stock Exchange (“PSE”) with ticker
symbol, MER.

The registered office address of MERALCO is Lopez Building, Ortigas Avenue, Barangay Ugong,
Pasig City, Metro Manila, Philippines.

The consolidated financial statements were approved and authorized for issue by the BOD on
February 27, 2023.

2. Rate Regulations

As distribution utilities (“DUs”), MERALCO and Clark Electric are subject to the rate-making
regulations and regulatory policies of the ERC. Billings of MERALCO and Clark Electric to
customers are itemized or “unbundled” into a number of bill components that reflect the various
activities and costs incurred in providing electricity distribution services. The adjustment to each bill
component is governed by mechanisms promulgated and enforced by the ERC, mainly: [i] the “Rules
Governing the Automatic Cost Adjustment and True-up Mechanisms and Corresponding
Confirmation Process for Distribution Utilities”, which govern the recovery of pass-through costs,
including over- or under-recoveries of the bill components, namely, (a) generation charge,
(b) transmission charge, (c) system loss (“SL”) charge, (d) lifeline and inter-class rate subsidies, and
(e) local franchise and business taxes as modified by Rules on Recovery of Pass-Through Taxes (Real
Property, Local Franchise, and Business Taxes) of Distribution Utilities; and [ii] the “Rules for the
Setting of Distribution Wheeling Rates” (“RDWR”), as modified, which govern the determination of
MERALCO’s distribution, supply, and metering charges.

*SGVFS169563*
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The following is a discussion of matters related to rate-setting of MERALCO and Clark Electric:

Performance-Based Regulations (“PBR”)

MERALCO

MERALCO is among the Group A entrants to the PBR, together with two (2) other private DUs.

Rate-setting under PBR is governed by the RDWR. Under PBR, tariffs are set once every Regulatory
Period (“RP”) based on a rate setting framework which includes the regulatory asset base (“RAB”) of
each DU, and the required operating and capital expenditures to meet operational performance and
service level requirements responsive to the need for adequate, reliable and quality power, efficient
service, and growth of all customer classes in the franchise area as approved by the ERC. PBR also
employs a mechanism that penalizes or rewards a DU depending on its network and service
performance.

Rate filings and settings are done on a RP basis. One (1) RP consists of four (4) Regulatory Years
(“RYs”). A RY for MERALCO begins on July 1 and ends on June 30 of the following year.

Maximum Average Price (“MAP”) for the 3rd RP

After rate setting process for a RP, MERALCO goes through a rate verification process to set the MAP
for each RY within the RP. In each of RYs 2012, 2013, 2014 and 2015, MERALCO filed for the
respective MAP with the ERC. The ERC provisionally approved the MAPs for each of the RY.

On April 29, 2022, MERALCO received an Order from the ERC dated March 8, 2022, which resolved
the true-up value of MERALCO’s regulatory asset base for the 3rd RP. On such basis, the ERC
adjusted the MAPs for RYs 2012, 2013, 2014 and 2015. The ERC then granted interim relief, which
among other things, directed MERALCO to implement the refund of = P7.8 billion or equivalent to
=0.2583 per kWh. MERALCO implemented the refund beginning its May 2022 billing. In a Decision
P
dated June 10, 2022, the interim approval of the ERC was rendered permanent and MERALCO was
directed to continue implementing the refund. As at December 31, 2022, the amount has been fully
refunded.

Interim Average Rate beginning RY 2016

On July 10, 2015, the ERC provisionally approved an interim average rate (“IAR”) of P=1.3810 per
kWh (excluding efficiency adjustment) and the rate translation per customer class, which was
reflected in the customer bills starting July 2015.

In a letter dated July 4, 2019, the ERC authorized the continued implementation of the interim
average rate but directed MERALCO, as well as other DUs, to refund any remaining amount
pertaining to regulatory reset costs for the previous RPs.

On July 13, 2022, MERALCO received the June 16, 2022 Decision of the ERC which approved a
revised and final IAR of =
P1.3522 per kWh as the final distribution rate for the period from
July 1, 2015 to June 30, 2022. The ERC likewise approved the corresponding distribution rate
structure based thereon. MERALCO was authorized to continue implementing the ERC-approved IAR
of P
=1.3522 per kWh until otherwise directed. MERALCO implemented the Decision beginning its
August 2022 billing.

*SGVFS169563*
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MERALCO recognized provisions for any resulting over-recoveries. The movements in and the
balance of the “Other noncurrent liabilities” and “provision for probable losses and expenses from
claims” accounts in the consolidated statements of financial position and “consolidated statements of
income” include these provisions, consistent with the limited disclosure as allowed in Philippine
Financial Reporting Standards (“PFRSs”) as it may prejudice the position of MERALCO.

Distribution Rate True-Up (“DRTU”) Applications

On January 27, 2021, the ERC approved MERALCO’s application to refund to its customers
P13,886 million of over-recoveries (DRTU 1) representing the difference between the Actual
=
Weighted Average Tariff (“AWAT”) for the period July 1, 2015 to November 2020 and the then IAR
of P
=1.3810 per kWh, as provisionally approved by the ERC on July 10, 2015.

Thereafter, there were three (3) other DRTU refunds ordered: (a) DRTU 2 totaling =P4,837 million
representing the difference between the AWAT for the period December 2020 to December 2021 and
the then IAR of P=1.3810 per kWh; (b) DRTU 3 of P=7,755 million related to 3RP asset true-up
adjustments; and (c) DRTU 4 amounting to = P21,769 million based on ERC approved revised and final
IAR of =
P1.3522 per kWh.

MERALCO implemented the foregoing refunds. As at December 31, 2022, a total of =


P38.3 billion
have been credited to the bills of customers.

As at December 31, 2022, the outstanding balance of DRTU for refund amounted to = P9,581 million,
presented as part of “Provisions” under “Trade payables and other current liabilities” account in the
consolidated statement of financial position.

CAPEX for 4th RP, RY 2020 to RY 2022

Absent the final rules governing the 4th RP and 5th RP rate setting, MERALCO filed its applications
for approval of authority to implement its CAPEX program for each of the RYs beginning
July 1, 2015. This is consistent with the provisions of Section 20(b) of Commonwealth Act No. 146,
as amended, otherwise known as the Public Service Act.

Except with respect to partial approval by the ERC of the RY 2016 CAPEX amounting to = P15,466
million and provisional authority granted by the ERC to implement certain projects for RY 2017
amounting to =P8,758 million, all other applications remain pending with the ERC. As at February
27, 2023, MERALCO is awaiting the final resolution of the ERC.

Pending ERC’s approval, MERALCO manifested several projects as “urgent” or “emergency in


nature” and proceeded with the implementation of said CAPEX.

Regulatory Reset Process Application

On March 16, 2022, MERALCO filed its application for the approval of its annual revenue
requirement and performance incentive scheme for the 5th RP (July 1, 2022 to June 30, 2026) based
on ERC-promulgated RDWR. As at February 27, 2023, hearings on the case are ongoing.

*SGVFS169563*
-5-

Clark Electric

Clark Electric is among the four (4) Group D entrants to the PBR. Similar to MERALCO, it is subject
to operational performance and service level requirements approved by the ERC. The RY for Clark
Electric begins on October 1 and ends on September 30 of the following year.

3rd and 4th RP PBR Reset for Clark Electric

Pending the issuance by the ERC of the final rules to govern the 3rd and 4th RPs of Group D entrants,
Clark Electric continued to bill its customers using the last approved MAP for RY 2015. Similarly,
Clark Electric filed and manifested as urgent its CAPEX requirements with the ERC to be able to
implement such projects immediately.

As at February 27, 2023, the applications remain pending with the ERC.

Clark Electric recognized provisions for any resulting over-recoveries. The movements in and the
balance of the “Other noncurrent liabilities” and “provision for probable losses and expenses from
claims” accounts in the consolidated statements of financial position and “consolidated statements of
income” include these provisions, consistent with the limited disclosure as allowed in Philippine
Financial Reporting Standards (“PFRSs”) as it may prejudice the position of Clark Electric.

Supreme Court (“SC”) Decision on Unbundling Rate Case

On May 30, 2003, the ERC issued an Order approving MERALCO’s unbundled tariffs that resulted in
a total increase of P
=0.17 per kWh over the May 2003 tariff levels. However, on August 4, 2003,
MERALCO received a Petition for Review of the ERC’s ruling filed by certain consumer and civil
society groups before the Court of Appeals (“CA”). On July 22, 2004, the CA set aside the ERC’s
ruling on MERALCO’s rate unbundling and remanded the case to the ERC. Further, the CA opined
that the ERC should have asked the Commission on Audit (“COA”) to audit the books of MERALCO.
The ERC and MERALCO subsequently filed separate motions asking the CA to reconsider its
decision. As a result of the denial by the CA of the motions on January 24, 2005, the ERC and
MERALCO elevated the case to the SC.

In an En Banc decision promulgated on December 6, 2006, the SC set aside and reversed the CA
ruling saying that a COA audit was not a prerequisite in the determination of a utility’s rates.
However, while the SC affirmed ERC’s authority in rate-fixing, the SC directed the ERC to request
COA’s assistance to undertake a complete audit of the books, records and accounts of MERALCO. In
compliance with the directive of the SC, the ERC requested COA to conduct an audit of the books,
records and accounts of MERALCO using calendar years 2004 and 2007 as test years.

The COA audit, which began in September 2008, was completed with the submission to the ERC of
its report on November 12, 2009.

On February 15, 2010, the ERC issued its Order directing MERALCO and all intervenors in the case
to submit, within 15 days from receipt of the Order, their respective comments on the COA report.

*SGVFS169563*
-6-

On June 21, 2011, the ERC maintained and affirmed its findings and conclusions in its Decision dated
March 20, 2003 and Order dated May 30, 2003. The ERC stated that the COA recommendation to
apply disallowances under PBR to rate unbundling violates the principle against retroactive rate-
making. An intervenor group filed a MR of the said Order. On September 5, 2011, MERALCO filed
its comment on the intervenor’s MR. On February 4, 2013, the ERC denied the intervenor’s MR. The
intervenor filed a Petition for Review before the CA and MERALCO filed its comment thereon on
May 29, 2014. In compliance with the CA’s directive, MERALCO filed its Memorandum in
August 2015. In a Resolution dated September 29, 2015, the CA declared the case submitted for
decision. In a Decision dated February 29, 2016, the CA dismissed the Petition for Review and
affirmed the orders dated June 21, 2011 and February 4, 2013 of the ERC.

On March 22, 2016, the intervenors filed a MR on the CA Decision dated February 29, 2016. The
same was denied by the CA through a Resolution dated August 8, 2016.

On October 11, 2016, MERALCO received a Petition for Review on Certiorari filed by the
intervenors before the SC appealing the dismissal of its Petition. MERALCO, COA and the ERC have
filed their respective comments to the Petition. On June 22, 2017, MERALCO received the Motion for
Leave to Intervene and Admit Comment-in-Intervention filed by other DUs that sought to intervene
in the case. In a Resolution dated October 3, 2017, the SC granted the Motion for Leave to Intervene
and Comment-in-Intervention. On November 13, 2019, MERALCO received a Decision dated
October 8, 2019 partially granting the Petition filed by the National Association of Electric
Consumers for Reforms Inc. (“NASECORE”), which among other things, (i) voided the adoption by
the ERC of the current or replacement cost in the valuation of MERALCO’s RAB; and (ii) remanded
the case to ERC to determine, within 90 days from finality of the Decision, (1) the valuation of the
RAB of MERALCO; and (2) the parameters whether expenses that are not directly and entirely related
to the operation of a DU shall be passed on wholly or partially to consumers.

MERALCO, the other DUs and the ERC filed their respective motions for reconsideration which are
pending before the SC. Two (2) new DUs filed their respective motions for leave to intervene and to
file their motions for reconsideration. As at February 27, 2023, the case is pending before the SC.

Applications for the Confirmation of Under- or Over-recoveries of


Pass-through Charges

MERALCO

The ERC issued resolutions to govern the recovery of pass-through costs, including under- or over-
recoveries with respect to the following bill components: generation charge, transmission charge, SL
charge, lifeline and inter-class rate subsidies, senior citizen discounts, local franchise and business
taxes, including the timelines for DUs to file their respective application and post-verification.

On various dates, the ERC provisionally approved MERALCO’s applications for net over-recoveries
of generation, transmission, net lifeline subsidy, SL and net senior citizens discount totalling
=657.4 million (February 2011 to October 2013) and P
P =6,927 million (January 2014 to December
2016). As at February 27, 2023, hearings covering the provisional approval are still ongoing.

Separately, MERALCO also filed for recovery of net under-recoveries of generation charge for special
programs of =
P250.7 million, excluding carrying charges, covering the period March 2007 to
December 2011. As at February 27, 2023, the ERC has not acted on such application.

Further, on September 1, 2020, MERALCO filed an application with the ERC to confirm its net
generation charge under-recoveries of =
P2,382 million, net transmission charge over-recoveries of

*SGVFS169563*
-7-

P440 million, net lifeline subsidy over-recoveries of P


= =31 million, net SL over-recoveries of
=971 million, and net senior citizen discount over-recoveries of =
P P3 million from January 2017 to
December 2019. In an Order dated December 16, 2020, the ERC granted interim relief to implement
the refund/collection. MERALCO started implementation of the Order in its January 2021 billing.
Hearings have been completed on January 21, 2021.

Clark Electric

Clark Electric filed an application for the approval of the calculations for the Automatic Cost
Adjustment and True-up Mechanism for generation, transmission and system loss rates on
April 1, 2014 covering the period January 2011 to December 2013 in conformity with ERC
resolutions. After a Clarificatory Meeting with the ERC, Clark Electric filed a Manifestation for the
implementation of the January 2017 ERC Decision starting in its March 2022 billing. Refund is
ongoing.

Clark Electric also completed ERC orders to refund/collect over- and under-recoveries related to
generation, transmission, system loss charges covering the years 2014 to 2019.

Application for Approval of the Staggered Recovery and Payment of the Differential
Generation Charge for February 2017 Supply

On January 31, 2017, MERALCO filed an Application seeking the ERC’s approval of the staggered
recovery and payment scheme for the generation charge for the February 2017 supply month to
mitigate the impact of scheduled outages and maintenance of certain generation power plants. On
March 6, 2017, the ERC provisionally approved the recovery of the incremental fuel cost through a
staggered scheme. The incremental fuel cost was included in the March 2017 until May 2017 billings
to customers. As at February 27, 2023, the ERC has not issued its decision.

Application for the Recovery of Differential Generation Costs

On February 17, 2014, MERALCO filed for the recovery of the unbilled generation costs for
December 2013 supply month amounting to = P11,075 million. An amended application was filed on
March 25, 2014 to adjust the unbilled generation costs for recovery to =P1,310 million, following the
receipt of the Wholesale Electricity Spot Market (“WESM”) billing adjustments based on regulated
Luzon WESM prices. The first hearing was conducted on May 26, 2014. The ERC suspended the
proceedings, pending resolution of issues of related cases at the SC involving generation costs for the
November and December 2013 supply months and the regulated WESM prices for the said period. As
at February 27, 2023, the proceedings remain suspended and MERALCO is awaiting further action of
the ERC on this matter. However, the SC issued a Decision dated August 3, 2021 which voided the
March 3, 2014 Order of the ERC which imposed regulated WESM prices for the November and
December 2013 supply months. The Decision is now final and executory with the issuance by the SC
of its Resolution dated October 11, 2022 which denied the motions for reconsideration filed by the
ERC and the petitioners.

Deferred Purchase Price Adjustment

On October 12, 2009, the ERC released its findings on MERALCO’s implementation of the collection
of the approved pass-through cost under-recoveries for the period June 2003 to January 2007. The
ERC directed MERALCO to refund to its customers = P268 million of deferred purchased power
adjustment (“PPA”) transmission line costs related to Quezon Power (Philippines) Limited Company
(“QPPL”) and deferred accounting adjustments incurred along with = P184 million in carrying charges,
or an equivalent P
=0.0169 per kWh. MERALCO implemented the refund beginning November 2009

*SGVFS169563*
-8-

until September 2010. However, the ERC has yet to rule on MERALCO’s deferred PPA under-
recoveries of =
P106 million, which is not a transmission line fee. On November 4, 2009, MERALCO
filed an MR with the ERC. As at February 27, 2023, the MR is still pending resolution by the ERC.

Applications for Recovery of Local Franchise Tax (“LFT”)

MERALCO has filed distinct applications with request for provisional authority to implement new
LFT rates based on Ordinances from the cities of Manila, Quezon, Binan, Makati, Valenzuela, Taguig
and Pasig. Some hearings have been completed and are awaiting final approval. Applications for
recovery of taxes paid have been filed and pending decision of the ERC.

SC Decision on the =
P 0.167 per kWh Refund

Following the SC’s final ruling that directed MERALCO to refund affected customers = P0.167 per kWh
for billings made from February 1994 to April 2003, the ERC approved the release of the refund in
four (4) phases. On December 18, 2015, MERALCO filed a Motion seeking the ERC’s approval for
the continuation of the implementation of the refund to eligible accounts or customers under Phases I
to IV, three (3) years from January 1, 2016 or until December 31, 2018. In said Motion, MERALCO
likewise manifested to the ERC that, in order to give eligible customers, the opportunity to claim their
refund, and, so as not to disrupt the SC Refund process, MERALCO shall continue implementing the
refund even after the December 2015 deadline, until and unless the ERC directs otherwise. In its
Order dated December 18, 2019, the ERC granted MERALCO’s Motion and authorized MERALCO to
continue with the implementation of the SC Refund to eligible accounts or customers under Phases I
to IV until June 30, 2019 and submit a proposed scheme on how the unclaimed refund will be utilized
for purposes of reducing the distribution rates of customers. On February 18, 2019, MERALCO filed a
Partial Compliance with Manifestation and Motion. On March 8, 2019, MERALCO filed a
Compliance with Manifestation and Motion. On July 12, 2019, MERALCO filed its Compliance with
Manifestation informing the ERC that on July 1, 2019, MERALCO deposited all the unclaimed
amounts of the SC Refund as of June 30, 2019 in a separate bank account. MERALCO further
manifested in said Compliance that it shall continue with the processing of the refund claims of
eligible customers and should the refund claims of these customers be evaluated to be valid,
MERALCO shall, for the benefit of the customers, withdraw the refund amount from the bank
account, release the same to the concerned customers and accordingly inform the ERC of the refunds
paid. On September 10, 2019, MERALCO filed an Urgent Manifestation and Motion with respect to
the Order dated December 19, 2018 of the ERC. The ERC has yet to rule on the Urgent Manifestation
and Motion by MERALCO. In its letter dated July 23, 2020, MERALCO informed the ERC of the
updated balance of the SC Refund. As at February 27, 2023, MERALCO continues to process the
refund claims of eligible customers.

In a letter dated February 3, 2021, the ERC informed MERALCO that it will be undertaking an audit
and verification of MERALCO’s refunds, which included MERALCO’s SC refund. The audit has been
completed and as at February 27, 2023, MERALCO is awaiting further action of the ERC on the
matter.

See Note 20 – Customers’ Refund.

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Violation of the ERC’s Advisories during the Enhanced Community Quarantine (“ECQ”)
and Modified ECQ

In a Decision dated August 20, 2020, the ERC imposed a = P19 million fine on MERALCO for alleged
violation of the following ERC’s directives: (1) failure to clearly indicate that the bills were
estimated; and (2) failure to comply with the mandated installment payment arrangement.

In addition, the ERC also directed MERALCO to set to zero the distribution, supply, and metering
(“DSM”) charges of lifeline consumers whose monthly energy consumption do not exceed
100 kWh for one (1) month billing cycle effective in the next billing cycle immediately upon receipt
of the ERC Decision. The cost of the discount shall not be charged to the non-lifeline consumers.

On September 11, 2020, MERALCO filed its Motion for Partial Reconsideration with respect to the
directive to set to zero the DSM charges of lifeline consumers. On the same date, MERALCO also
paid the =P19 million fine imposed by the ERC. As at February 27, 2023, the Motion for Partial
Reconsideration remains pending with the ERC. However, MERALCO implemented the directive to
set to zero the DSM charges of lifeline consumers in its October 2020 billing subject to the resolution
of its Motion for Partial Reconsideration.

3. Basis of Preparation and Statement of Compliance

Basis of Preparation

The accompanying consolidated financial statements have been prepared on a historical cost basis,
except for MERALCO’s utility plant and others and investment properties acquired before January 1,
2004, which are carried at deemed cost; and fair value through other comprehensive income
(“FVOCI”) financial assets, which are measured at fair value.

All values are rounded to the nearest million peso, except when otherwise indicated.

Statement of Compliance

The consolidated financial statements of MERALCO and its subsidiaries have been prepared in
compliance with PFRSs.

Basis of Consolidation

The consolidated financial statements comprise the financial statements of MERALCO and its directly
and indirectly owned subsidiaries, collectively referred to as the MERALCO Group. The following
table presents such subsidiaries and the respective percentage of ownership:

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2022 2021
Place of Percentage of Ownership
Subsidiaries Incorporation Principal Business Activity Direct Indirect Direct Indirect
Corporate Information Solutions, Inc. Philippines e-Transactions
(“CIS”) 100 – 100 –
Customer Frontline Solutions, Inc. Philippines Tellering services
(“CFSI”) – 95 – 95
CIS Bayad Center, Inc. (“Bayad”) Philippines Bills payment collection – 95 – 95
Meralco Energy, Inc. (“MServ”) Philippines Energy systems management 100 – 100 –
eMeralco Ventures, Inc. (“e-MVI”) Philippines e-Business development 100 – 100 –
Paragon Vertical Corporation Philippines Information technology
(“Paragon”) (“IT”) and multi-media
services – 100 – 100
Radius Telecoms, Inc. (“Radius”) Philippines Telecommunication services – 100 – 100
MGen Philippines Development of power
generation plants 100 – 100 –
Calamba Aero Power Corporation1 Philippines Power generation – 100 – 100
Atimonan Land Ventures Philippines Real estate
Development Corporation – 100 – 100
Atimonan One Energy, Inc. (“A1E”) 2 Philippines Power generation – 100 – 100
MPG Holdings Phils., Inc. Philippines Holding company – 100 – 100
MPG Asia Limited (“MPG Asia”) British Virgin Holding company
Islands – 100 – 100
Solvre, Inc. 1 Philippines Retail electricity supplier – 100 – 100
MGen Renewable Energy, Inc. Philippines Renewable energy
(“MGreen”) – 100 – 100
LagunaSol Corporation Philippines Renewable energy
(“LagunaSol”) 1 – 100 – 100
Nortesol III Inc. (“NorteSol”) 1 Philippines Renewable energy – 70 – 70
Powersource First Bulacan Solar, Inc. Philippines Renewable energy
(“First Bulacan”) – 60 – 60
Greentech Solar Energy, Inc. Philippines Renewable energy
(“GSEI”) – 100 – 100
CACI Power Corporation Philippines Power generation – 60 – 60
PH Renewables Inc. (“PHRI”) Philippines Power generation – 60 – 60
Greenergy For Global Inc. Philippines Renewable energy
(“Greenergy”) – 57 – 28
GBPC Philippines Holding company – 100 – 100
ARB Power Ventures, Inc. Philippines Holding company – 100 – 100
Toledo Power Company (“TPC”) Philippines Power generation – 100 – 100
Toledo Holdings Corporation Philippines Real estate 100 100
Global Trade Energy Resources Corp. Philippines Trading of coal – 100 – 100
Panay Power Holdings Corporation Philippines Holding company – 89 – 89
Panay Energy Development Philippines Power generation
Corporation (“PEDC”) – 89 – 89
Panay Power Corporation Philippines Power generation 89 89
GBH Power Resources, Inc. Philippines Power generation – 100 – 100
Global Formosa Power Holdings, Inc. Philippines Holding company – 93 – 93
Cebu Energy Development Philippines Power generation
Corporation (“CEDC”) – 52 – 52
GESC Philippines Retail electricity supplier – 100 – 100
Mindanao Energy Development Philippines Power generation
Corporation – 100 – 100
Global Hydro Power Corporation Philippines Power generation – 100 – 100
Global Luzon Energy Development Philippines Power generation
Corporation (“GLEDC”) – 57 – 57
Lunar Power Core, Inc. Philippines Holding company – 57 – 57
Global Renewable Power Corporation Philippines Renewable energy – 100 – 100
(Forward)

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2022 2021
Place of Percentage of Ownership
Subsidiaries Incorporation Principal Business Activity Direct Indirect Direct Indirect
MSpectrum, Inc. (“Spectrum”) Philippines Renewable energy 100 – 100 –
Vantage Philippines Retail electricity supplier 100 – 100 –
Meralco Financial Services Corporation Philippines Property management and 100 – 100 –
(“Finserve”) leasing
Lighthouse Overseas Insurance Limited Bermuda Insurance 100 – 100 –
(“LOIL”)
MRAIL, Inc. (“MRail”) Philippines Engineering, construction and 100 – 100 –
maintenance of mass
transit system
eSakay, Inc. (“eSakay”) Philippines Maintenance and operation of 100 – 100 –
transport service networks
MIESCOR2 Philippines Engineering, construction and 100 – 99 –
consulting services
Miescor Builders Inc. (“MBI”) Philippines Electric transmission and – 100 – 99
distribution operation and
maintenance services
Miescor Logistics Inc. (“MLI”) Philippines General services, – 100 – 99
manpower/maintenance
Miescor Infrastructure Development Philippines Construction and leasing of – 51 – 99
Corporation (“MIDC”) 3 communication towers
and other infrastructure
Clark Electric Philippines Power distribution 65 – 65 –
Clarion Energy Management Inc. Philippines Retail electricity supplier
(“Clarion”) 1 – 65 – 65
Comstech Philippines Management of power
distribution 60 – 60 –
MeridianX Inc. Philippines Retail electricity supplier – 60 – 60
Meridian Power Ventures Limited Hongkong Investment holdings
(“MPV Limited”) 1 100 – 100 –
Shin Clark Philippines Holding company 60 – 60 –
Shin Clark Power Philippines Power distribution – 54 – –
Phoenix Power 1 Philippines Retail electricity supplier 100 – 100 –
1 Has not started commercial operations.
2 MIESCOR Retirement Fund has less than 1% equity interest in MIESCOR.
3 On April 8, 2022, MIESCOR signed a 51%-49% joint venture agreement with Connect Infrastructure (Philippines) Pte. Limited, to
develop a common tower business and use MIDC as the vehicle.

The MERALCO Group controls an investee if and only if it has (a) power over the investee;
(b) exposure, or rights, to variable returns from its involvement with the investee; and (c) the ability
to use its power over the investee to affect its returns.

When the MERALCO Group has less than majority of the voting or similar rights of an investee, it
considers all relevant facts and circumstances in assessing whether it has power over an investee,
including (a) the contractual arrangement with the other vote holders of the investee; (b) rights arising
from other contractual arrangements; and (c) the MERALCO Group’s voting rights and potential
voting rights.

The MERALCO Group re-assesses whether or not it controls an investee if facts and circumstances
indicate that there are changes to one (1) or more of the three (3) elements of control. Consolidation
of a subsidiary begins when the MERALCO Group obtains control over the subsidiary and ceases
when it loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary
acquired or disposed of during the year are included in the consolidated financial statements from the
date it gains control until the date it ceases to control the subsidiary.

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The consolidated financial statements are prepared using uniform accounting policies for like
transactions and other events with similar circumstances. All intra-group balances, income and
expenses, unrealized gains and losses and dividends resulting from intra-group transactions are
eliminated in full.

Non-controlling interests represent the portion of profit or loss and net assets of subsidiaries not
attributed, directly or indirectly, to MERALCO.

Non-controlling interests is presented separately in the consolidated statement of income,


consolidated statement of comprehensive income and within equity in the consolidated statement of
financial position, separately from equity attributable to equity holders of the parent.

Total comprehensive income within a subsidiary is attributed to the non-controlling interest even if
such results in a deficit.

A change in the ownership interest of a subsidiary, without a change of control, is accounted for as an
equity transaction. In transactions where the non-controlling interest is acquired or sold without loss
of control, any excess or deficit of consideration paid over the carrying amount of the non-controlling
interest is recognized as part of “Equity reserve” account in the equity attributable to the equity
holders of the parent.

If the MERALCO Group loses control over a subsidiary, it: (a) derecognizes the assets (including
goodwill) and liabilities of the subsidiary; (b) derecognizes the carrying amount of any
non-controlling interest; (c) derecognizes the cumulative translation adjustments deferred in equity;
(d) recognizes the fair value of the consideration received; (e) recognizes the fair value of any
investment retained; (f) recognizes any surplus or deficit in profit or loss; and (g) reclassifies
MERALCO’s share of components previously recognized in the consolidated statement of
comprehensive income to the consolidated statement of income.

Business Combination

Effective March 31, 2021, MGen has a 100% interest in GBPC upon the acquisition of the combined
86% interests of Beacon Powergen Holdings Inc. (“BPHI”), a wholly owned subsidiary of Metro
Pacific and JG Summit in GBPC to MGen for consideration of = P21,212 million and = P11,363 million,
respectively, net of adjustments in accordance with the terms of the respective Share Purchase
Agreements (“SPA”).

In 2022, MGen settled 100% of the total purchase price consideration in accordance with the terms of
SPA.

The details of the purchase consideration are as follows:

Amounts In
millions
Cash paid =19,545
P
Liability 13,030
Total purchase consideration =32,575
P

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The net assets recognized in the December 31, 2021 financial statements were based on a provisional
assessment of their fair values while MERALCO sought an independent valuation for the land and
buildings owned by GBPC. The valuation had not been completed on the date the 2021 consolidated
financial statements were approved for issue by the BOD.

In March 2022, the valuation was completed and the 2021 comparative information was restated to
reflect the adjustments to the provisional amounts. The fair values of the assets and liabilities of
GBPC as at the date of acquisition are as follow (amounts in millions):

As previously
reported As restated
Generation plant and others =47,218
P =46,765
P
Investment in associates 10,447 10,314
Intangible assets 13,833 13,500
Deferred tax assets 765 682
Cash and cash equivalents 9,584 9,584
Trade and other receivables 5,247 5,247
Inventories 2,197 2,197
Other assets 2,153 3,288
Interest-bearing long-term financial liabilities (28,323) (28,323)
Deferred tax liabilities (5,265) (5,502)
Retirement benefits liability (1,055) (1,055)
Trade and other payables (7,518) (7,529)
Other liabilities (1,932) (1,932)
Net identifiable assets acquired 47,351 47,236
Less:
Non-controlling interests 9,474 9,359
Fair value of pre-existing 14% ownership in
GBPC 5,302 5,302
Net assets acquired =32,575
P =32,575
P

MERALCO elected to measure the non-controlling interest in the acquiree at the proportionate share
of its interest in the acquiree’s identifiable net assets.

The remeasurement of the fair value of MGen’s existing 14% ownership in GBPC resulted in a gain
of P
=228 million. This amount has been recognized as part of “Other income” account in the 2021
consolidated statement of income.

From the date of acquisition, GBPC contributed =P18,191 million of revenue and =
P306 million net
income in MERALCO Group’s revenues and net income, respectively, in 2021. If the acquisition had
taken place at the beginning of 2021, the MERALCO Group’s consolidated revenues and net income
would have been = P323,559 million and =P24,666 million, respectively.

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4. Significant Accounting Policies, Changes and Improvements

Changes in Accounting Policies and Disclosures

The accounting policies adopted in the preparation of the consolidated financial statements are
consistent with those of previous year except with respect to the adoption of the following new
standards and amendments and improvements to existing standards, which were effective beginning
January 1, 2022.

Amendments to PFRS 3, Reference to the Conceptual Framework

The amendments are intended to replace a reference to the Framework for the Preparation and
Presentation of Financial Statements, issued in 1989, with a reference to the Conceptual Framework
for Financial Reporting issued in March 2018 without significantly changing its requirements. The
amendments added an exception to the recognition principle of PFRS 3, Business Combinations to
avoid the issue of potential ‘day 2’gains or losses arising for liabilities and contingent liabilities that
would be within the scope of PAS 37, Provisions, Contingent Liabilities and Contingent Assets or
Philippine-IFRIC 21, Levies, if incurred separately.

At the same time, the amendments add a new paragraph to PFRS 3 to clarify that contingent assets do
not qualify for recognition at the acquisition date.

The amendments are effective for annual reporting years beginning on or after January 1, 2022 and
apply prospectively. The amendments do not have material effect on the consolidated financial
statements of the MERALCO Group.

Amendments to PAS 16, Plant and Equipment: Proceeds before Intended Use

The amendments prohibit entities from deducting the cost of an item of property, plant and
equipment, any proceeds from selling items produced while bringing that asset to the location and
condition necessary for it to be capable of operating in the manner intended by management. Instead,
an entity recognizes the proceeds from selling such items, and the costs of producing those items, in
profit or loss.

The amendment is effective for annual reporting years beginning on or after January 1, 2022 and
must be applied retrospectively to items of property, plant and equipment made available for use on
or after the beginning of the earliest year presented when the entity first applies the amendment.

The amendments do not have impact on the consolidated financial statements of the MERALCO
Group.

Amendments to PAS 37, Onerous Contracts – Costs of Fulfilling a Contract

The amendments specify which costs an entity needs to include when assessing whether a contract is
onerous or loss-making. The amendments apply a “directly related cost approach”. The costs that
relate directly to a contract to provide goods or services include both incremental costs and an
allocation of costs directly related to contract activities. General and administrative costs do not relate
directly to a contract and are excluded unless they are explicitly chargeable to the counterparty under
the contract.

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The amendments are effective for annual reporting years beginning on or after January 1, 2022. The
amendments do not have material impact on the consolidated financial statements of the MERALCO
Group.

Annual Improvements to PFRSs 2018-2020 Cycle

Amendments to PFRS 1, First-time Adoption of Philippines Financial Reporting Standards,


Subsidiary as a first-time adopter

The amendment permits a subsidiary that elects to apply paragraph D16(a) of PFRS 1 to measure
cumulative translation differences using the amounts reported by the parent, based on the parent’s
date of transition to PFRS. This amendment is also applied to an associate or joint venture that elects
to apply paragraph D16(a) of PFRS 1.

The amendment is effective for annual reporting years beginning on or after January 1, 2022 with
earlier adoption permitted. The amendments do not have material impact on the consolidated
financial statements of the MERALCO Group.

Amendments to PFRS 9, Financial Instruments, Fees in the ’10 per cent’ test for
derecognition of financial liabilities

The amendment clarifies the fees that an entity includes when assessing whether the terms of a new
or modified financial liability are substantially different from the terms of the original financial
liability. These fees include only those paid or received between the borrower and the lender,
including fees paid or received by either the borrower or lender on the other’s behalf. An entity
applies the amendment to financial liabilities that are modified or exchanged on or after the beginning
of the annual reporting year in which the entity first applies the amendment.

The amendment is effective for annual reporting years beginning on or after January 1, 2022 with
earlier adoption permitted. The amendments do not have material impact on the consolidated
financial statements of the MERALCO Group.

Amendments to PAS 41, Agriculture, Taxation in fair value measurements

The amendment removes the requirement in paragraph 22 of PAS 41 that entities exclude cash flows
for taxation when measuring the fair value of assets within the scope of PAS 41.

An entity applies the amendment prospectively to fair value measurements on or after the beginning
of the first annual reporting year beginning on or after January 1, 2022 with earlier adoption
permitted. The amendments do not have material impact on the consolidated financial statements of
the MERALCO Group.

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Effective beginning on or after January 1, 2023

Amendments to PAS 12, Deferred Tax related to Assets and Liabilities arising from a Single
Transaction

The amendments narrow the scope of the initial recognition exception under PAS 12, so that it no
longer applies to transactions that give rise to equal taxable and deductible temporary differences.

The amendments also clarify that where payments that settle a liability are deductible for tax
purposes, it is a matter of judgement (having considered the applicable tax law) whether
such deductions are attributable for tax purposes to the liability recognized in the financial statements
(and interest expense) or to the related asset component (and interest expense).

An entity applies the amendments to transactions that occur on or after the beginning of the earliest
comparative year presented for annual reporting periods on or after January 1, 2023. The amendments
are not expected to have a material impact on the consolidated financial statements of the MERALCO
Group.

Amendments to PAS 8, Definition of Accounting Estimates

The amendments introduce a new definition of accounting estimates and clarify the distinction
between changes in accounting estimates and changes in accounting policies and the correction of
errors. Also, the amendments clarify that the effects on an accounting estimate of a change in an
input or a change in a measurement technique are changes in accounting estimates if they do not
result from the correction of prior period errors.

An entity applies the amendments to changes in accounting policies and changes in accounting
estimates that occur on or after January 1, 2023 with earlier adoption permitted. The amendments are
not expected to have a material impact on the consolidated financial statements of the MERALCO
Group.

Amendments to PAS 1 and PFRS Practice Statement 2, Disclosure of Accounting Policies

The amendments provide guidance and examples to help entities apply materiality judgements to
accounting policy disclosures. The amendments aim to help entities provide accounting policy
disclosures that are more useful by:

 Replacing the requirement for entities to disclose their ‘significant’ accounting policies with a
requirement to disclose their ‘material’ accounting policies, and
 Adding guidance on how entities apply the concept of materiality in making decisions about
accounting policy disclosures

The amendments to the Practice Statement provide non-mandatory guidance. Meanwhile, the
amendments to PAS 1 are effective for annual periods beginning on or after January 1, 2023. Early
application is permitted as long as this fact is disclosed. The amendments are not expected to have a
material impact on MERALCO Group.

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Effective beginning on or after January 1, 2024

Amendments to PAS 1, Classification of Liabilities as Current or Non-current

The amendments clarify paragraphs 69 to 76 of PAS 1, Presentation of Financial Statements, to


specify the requirements for classifying liabilities as current or non-current. The amendments clarify:

 What is meant by a right to defer settlement


 That a right to defer must exist at the end of the reporting year
 That classification is unaffected by the likelihood that an entity will exercise its deferral right
 That only if an embedded derivative in a convertible liability is itself an equity instrument would
the terms of a liability not impact its classification

The amendments are effective for annual reporting years beginning on or after January 1, 2024 and
must be applied retrospectively.

The MERALCO Group is currently assessing the impact the amendments will have on current
practice and whether existing loan agreements may require renegotiation.

Effective beginning on or after January 1, 2025

PFRS 17, Insurance Contracts

a comprehensive new accounting standard for insurance contracts covering recognition and
measurement, presentation and disclosure. Once effective, PFRS 17 will replace PFRS 4, Insurance
Contracts. This new standard on insurance contracts applies to all types of insurance contracts (i.e.,
life, non-life, direct insurance and re-insurance), regardless of the type of entities that issue them, as
well as to certain guarantees and financial instruments with discretionary participation features. A few
scope exceptions will apply.

The overall objective of PFRS 17 is to provide an accounting model for insurance contracts that is
more useful and consistent for insurers. In contrast to the requirements in PFRS 4, which are largely
based on grandfathering previous local accounting policies, PFRS 17 provides a comprehensive
model for insurance contracts, covering all relevant accounting aspects. The core of PFRS 17 is the
general model, supplemented by:

 A specific adaptation for contracts with direct participation features (the variable fee approach)
 A simplified approach (the premium allocation approach) mainly for short-duration contracts

On December 15, 2021, the FRSC amended the mandatory effective date of PFRS 17 from
January 1, 2023 to January 1, 2025. This is consistent with Circular Letter No. 2020-62 issued by the
Insurance Commission which deferred the implementation of PFRS 17 by two (2) years after its
effective date as decided by the IASB.

PFRS 17 is effective for reporting periods beginning on or after January 1, 2025, with comparative
figures required. Early application is permitted. The MERALCO Group is currently assessing the
impact the amendments will have on current practice and whether existing loan agreements may
require renegotiation.

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Deferred Effectivity

Amendments to PFRS 10, Consolidated Financial Statements, and PAS 28, Sale or
Contribution of Assets between an Investor and its Associate or Joint Venture

The amendments address the conflict between PFRS 10 and PAS 28 in dealing with the loss of
control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments
clarify that a full gain or loss is recognized when a transfer to an associate or joint venture involves a
business as defined in PFRS 3. Any gain or loss resulting from the sale or contribution of assets that
does not constitute a business, however, is recognized only to the extent of unrelated investors’
interests in the associate or joint venture.

On January 13, 2016, the Financial Reporting Standards Council deferred the original effective date
of January 1, 2016 of the said amendments until the IASB completes its broader review of the
research project on equity accounting that may result in the simplification of accounting for such
transactions and of other aspects of accounting for associates and joint ventures.

The MERALCO Group is currently assessing the impact of adopting the amendments.

Significant Accounting Policies

The principal accounting policies adopted in the preparation of the consolidated financial statements
are as follows:

Utility Plant, Generation Plant and Others

Utility plant, generation plant and others, except land, are stated at cost, net of accumulated
depreciation, amortization and impairment losses, if any. Costs include the cost of replacing part of
such utility plant, generation plant and other properties when such cost is incurred, if the recognition
criteria are met. All other repair and maintenance costs are recognized as incurred in the consolidated
statement of income. The present value of the expected cost for the decommissioning of the asset
after use is included in the cost of the respective asset if the recognition criteria for a provision are
met.

Land is stated at cost less any impairment in value.

The MERALCO Group’s utility plant, generation plant and others acquired before January 1, 2004 are
stated at deemed cost. The revalued amount recorded as at January 1, 2004 was adopted as deemed
cost as allowed by the transition provisions of PFRS 1. The balance of revaluation increment was
closed to the retained earnings account.

See Note 16 – Equity for the related discussion.

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Depreciation and amortization of utility plant, generation plant and others are computed using the
straight-line method over the following estimated useful lives:

Asset Type Estimated Useful Lives


Subtransmission and distribution 10-40 years, depending on the life
of the significant parts
Boilers and powerhouse 3-25 years
Communication towers, buildings and improvements 15-40 years
Data transmission cables and communication 5-15 years
equipment
Office furniture, fixtures and other equipment 5-20 years
Transportation equipment 5-10 years
Others 2-20 years

An item of utility plant, generation plant and others is derecognized upon disposal or when no future
economic benefits are expected from its use or disposal. Any gain or loss arising as a result of the
derecognition of the asset (calculated as the difference between the net disposal proceeds and the
carrying amount of the asset) is included in the consolidated statement of income in the year the asset
is derecognized.

The asset’s residual values, useful lives and methods of depreciation and amortization are reviewed,
and adjusted prospectively, if appropriate, at each reporting year to ensure that the residual values,
periods and methods of depreciation and amortization are consistent with the expected pattern of
economic benefits from items of utility plant, generation plant and others.

Construction in Progress

Construction in progress is stated at cost, which includes cost of construction, plant and equipment,
capitalized borrowing costs and other direct costs. Construction in progress is not depreciated until
such time that the relevant assets are substantially completed and available for their intended use.

Borrowing Costs

Borrowing costs are capitalized if they are directly attributable to the acquisition, construction or
production of a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial
period of time to get ready for its intended use or sale. Capitalization of borrowing costs commences
when the activities necessary to prepare the qualifying asset for its intended use or sale have been
undertaken and expenditures and borrowing costs have been incurred. Borrowing costs are
capitalized until the asset is substantially completed and available for its intended use.

Borrowing costs include interest charges and other costs incurred in connection with the borrowing of
funds, as well as any exchange differences arising from any foreign currency denominated
borrowings used to finance the projects, to the extent that they are regarded as an adjustment to
interest costs.

All other borrowing costs are expensed as incurred.

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Investments in Associates and Interests in Joint Ventures

An associate is an entity where MERALCO Group has significant influence. Significant influence is
the power to participate in the financial and operating policy decisions of the investee, but has no
control or joint control over those policies.

A joint venture is a type of joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed
sharing of control of an arrangement, which exists only when decisions about the relevant activities
require unanimous consent of the parties sharing control.

The considerations made in determining significant influence or joint control are similar to those
necessary to determine control over subsidiaries.

Investments in associates and interests in joint ventures are accounted for using the equity method of
accounting and are initially recognized at cost.

Under the equity method, the investment in an associate or interest in a joint venture is initially
recognized at cost. The carrying amount of the investment is adjusted to recognize changes in the
share of net assets of the associate or joint venture since the acquisition date. Goodwill relating to the
associate or joint venture is included in the carrying amount of the investment and is neither
amortized nor individually tested for impairment.

If the MERALCO Group’s share of losses of an associate or a joint venture equals or exceeds its
interest in the associate or joint venture, the MERALCO Group discontinues recognizing its share of
further losses. The interest in an associate or joint venture is the carrying amount of the investment or
joint venture determined using the equity method together with any long-term interest that in
substance forms part of the MERALCO Group’s net investment in associate or joint venture. After the
MERALCO Group’s interest is reduced to zero, additional losses are provided for, and a liability is
recognized, only to the extent that the MERALCO Group has incurred legal or constructive obligation
or made payments in behalf of the associate of joint venture. If the associate or joint venture
subsequently reports profits, the MERALCO Group resumes recognizing its share of their profits only
after its share of the profit equals the share of loss not recognized.

The consolidated statement of income reflects the MERALCO Group’s share in the results of
operations of the associate or joint venture. Any change in the other comprehensive income (“OCI”)
of those investees is presented as part of the MERALCO Group’s OCI. In addition, when there has
been a change recognized directly in the equity of the associate or joint venture, the MERALCO
Group recognizes its share of any changes, when applicable, in the consolidated statement of changes
in equity. Unrealized gains and losses resulting from transactions between the MERALCO Group and
the associate or joint venture are eliminated to the extent of the interest in the associate or joint
venture.

The aggregate of the MERALCO Group’s share in the profit or loss of its associates and joint ventures
is shown on the face of the consolidated statement of income and represents profit or loss after tax.

The financial statements of the associate or joint venture are prepared for the same reporting year as
the MERALCO Group. When necessary, adjustments are made to bring the accounting policies in line
with those of the MERALCO Group.

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After application of the equity method, the MERALCO Group determines whether it is necessary to
recognize an impairment loss on its investment in associate or interest in joint venture. At each
reporting date, the MERALCO Group determines whether there is objective evidence that the
investment in the associate or joint venture is impaired. If there is such evidence, the MERALCO
Group calculates the amount of impairment as the difference between the recoverable amount of the
investment in associate or interest in joint venture and its carrying value, then recognizes the loss as
part of equity in net earnings of an associate or a joint venture in the consolidated statement of
income.

Upon loss of significant influence over the associate or joint control over the joint venture, the
MERALCO Group measures and recognizes any remaining investment at its fair value. Any
difference between the carrying amount of the investment in associate or interest in joint venture
upon loss of significant influence or joint control and the fair value of the remaining investment and
proceeds from disposal is recognized in profit or loss.

Business Combinations and Goodwill

Business combinations are accounted for using the acquisition method. The cost of an acquisition is
measured as the aggregate of the consideration transferred, measured at acquisition-date fair value
and the amount of any non-controlling interest in the acquiree. For each business combination, the
MERALCO Group elects whether to measure the non-controlling interest in the acquiree at fair value
or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs in a
business combination are recognized as expense.

When a business is acquired, an assessment is made of the identifiable assets acquired and liabilities
assumed for appropriate classification and designation in accordance with the contractual terms,
economic and other pertinent conditions as at the acquisition date. This includes the separation of
embedded derivatives in host contracts by the acquiree.

If the business combination is achieved in stages, the acquirer’s previously held equity interest in the
acquiree is remeasured at fair value as at acquisition date and any resulting gain or loss is recognized
in profit or loss.

Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the
acquisition date. Subsequent changes to the fair value of the contingent consideration, which is
deemed to be an asset or liability will be recognized in accordance with PFRS 9 in profit or loss. If
the contingent consideration is classified as equity, it shall not be remeasured until it is finally settled
within equity.

Goodwill is initially measured at cost being the excess of the aggregate of the consideration
transferred, any non-controlling interest in the acquiree and, in a business combination achieved in
stages, the acquisition-date fair value of the previously held equity interest in the acquiree, over the
fair value of net identifiable assets acquired. If the difference is negative, such difference is
recognized as gain in the consolidated statement of income.

If the initial accounting for a business combination is incomplete by the end of the reporting date in
which the business combination occurs, the provisional amounts of the items for which the
accounting is incomplete are reported in the consolidated financial statements. During the
measurement period, which shall be no longer than one (1) year from the acquisition date, the
provisional amounts recognized at acquisition date are retrospectively adjusted to reflect new facts
and circumstances obtained that existed as at the acquisition date and, if known, would have affected
the measurement of the amounts recognized as of that date. During the measurement period,

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additional assets or liabilities are also recognized if new information is obtained about facts and
circumstances that existed as at the acquisition date and, if known, would have resulted in the
recognition of those assets and liabilities as at that date.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For
the purpose of impairment testing, goodwill acquired in a business combination is, from acquisition
date, allocated to each of the cash generating units that are expected to benefit from the combination,
irrespective of whether other assets or liabilities of the acquiree are assigned to those units, beginning
on the acquisition date.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is
disposed of, the goodwill associated with the operation disposed of, is included in the carrying
amount of the operation when determining the gain or loss on disposal of the operation. Goodwill
disposed of in such circumstance is measured based on relative values of the operation disposed and
the portion of the cash-generating unit retained.

Business combinations involving entities under common control are accounted for similar to the
pooling-of-interests method. The assets and liabilities of the combining entities are reflected at their
carrying amounts reported in the consolidated financial statements of the controlling company. Any
difference between the consideration paid and the share capital of the “acquired” entity is reflected
within equity as additional paid-in capital. The consolidated statement of income reflects the results
of the combining entities for the full year, irrespective of when the combination takes place.
Comparatives are presented as if the entities had always been combined since the date the entities
were under common control.

Investment Properties

Investment properties, except land, are stated at cost, net of accumulated depreciation and
accumulated impairment loss, if any. The carrying amount includes transaction costs and costs of
replacing part of an existing investment property at the time such costs are incurred if the recognition
criteria are met and excludes the costs of day-to-day servicing of an investment property.

Investment properties include properties that are being constructed or developed for future use.

Land classified as investment property is carried at cost less any impairment in value.

The MERALCO Group’s investment properties acquired before January 1, 2004 are stated at deemed
cost.

See Note 16 – Equity for the related discussions.

Investment properties, except land, are being depreciated on a straight-line basis over the useful life
of 40 years.

Investment properties are derecognized either when they have been disposed of or when these are
permanently withdrawn from use and no future economic benefit is expected from its disposal. Any
gain or loss from the derecognition of the investment properties is recognized in the consolidated
statement of income in the year these are disposed or retired.

Transfers are made to investment property when, and only when, there is a change in use, evidenced
by the end of owner-occupation or the commencement of an operating lease to another party. If
owner-occupied property becomes an investment property, the MERALCO Group accounts for such

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property in accordance with the policy stated under utility plant, generation plant and others up to the
date of the change in use. Transfers are made from investment property when, and only when, there is
a change in use, evidenced by the commencement of owner-occupation or the commencement of
development with a view to sale. Transfers from investment property are recorded using the carrying
amount of the investment property as at the date of change in use.

Intangible Assets

Intangible assets acquired separately are initially measured at cost. Following initial recognition,
intangible assets are carried at cost less accumulated amortization and any accumulated impairment
loss. The useful lives of intangible assets are assessed at the individual asset level as having either
finite or indefinite useful lives.

Intangible assets with finite lives are amortized over the useful economic lives of five (5) to 30 years
using the straight-line method and assessed for impairment whenever there is an indication that the
intangible assets may be impaired. At a minimum, the amortization period and the amortization
method for an intangible asset with a finite useful life are reviewed at each reporting date. Changes in
the expected useful life or the expected consumption pattern of future economic benefit embodied in
the asset are accounted for by changing the amortization period or method, as appropriate, and treated
as change in accounting estimates. The amortization expense of intangible assets with finite lives is
recognized in the consolidated statement of income.

Intangible assets with indefinite useful lives are not amortized, but are assessed for impairment
annually either individually or at the cash-generating unit level. The assessment of intangible assets
with indefinite useful life is done annually at every reporting date to determine whether such
indefinite useful life continues to exist. Otherwise, the change in the useful life assessment from
indefinite to finite is made on a prospective basis.

Gains or losses arising from derecognition of an intangible asset are measured as the difference
between the net disposal proceeds and the carrying amount of the asset, and are recognized in the
consolidated statement of income.

Intangible assets generated within the business are not capitalized and expenditures are charged to
profit or loss in the year these are incurred.

Fair Value Measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The fair value measurement is
based on the presumption that the transaction to sell the asset or transfer the liability takes place either
(a) in the principal market for the asset or liability, or (b) in the absence of a principal market, in the
most advantageous market for the asset or liability. The principal or the most advantageous market
must be accessible to the MERALCO Group.

The fair value of an asset or a liability is measured using the assumptions that market participants
would use when pricing the asset or liability, assuming that market participants act in their economic
best interest. A fair value measurement of a nonfinancial asset takes into account a market
participant’s ability to generate economic benefits by using the asset in its highest and best use or by
selling it to another market participant that would use the asset in its highest and best use.

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The MERALCO Group uses valuation techniques that are appropriate in the circumstances and for
which sufficient data are available to measure fair value, maximizing the use of relevant observable
inputs and minimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the consolidated financial
statements are categorized within the fair value hierarchy, described as follows, based on the lowest
level input that is significant to the fair value measurement as a whole:

i. Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or
liabilities;
ii. Level 2 - Valuation techniques for which the lowest level input that is significant to the fair
value measurement is directly or indirectly observable; and
iii. Level 3 - Valuation techniques for which the lowest level input that is significant to the fair
value measurement is unobservable.

For assets and liabilities that are recognized in the consolidated financial statements on a recurring
basis, the MERALCO Group determines whether transfers have occurred between levels in the
hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair
value measurement as a whole) at the end of each reporting date.

For the purpose of fair value disclosures, the MERALCO Group has determined classes of assets and
liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of
the fair value hierarchy.

Impairment of Nonfinancial Assets

The MERALCO Group assesses at each reporting date whether there is an indication that a
nonfinancial asset [utility plant, generation plant and others, intangible assets, investment properties,
investments in associates and interests in joint ventures and receivable from the Bureau of Internal
Revenue (“BIR”)] other than goodwill and intangible assets with indefinite useful life, may be
impaired. If any such indication exists, the MERALCO Group makes an estimate of the asset’s
recoverable amount. An asset’s recoverable amount is the higher of an individual asset’s or a cash
generating unit’s fair value less costs to sell and its value in use. Where the carrying amount of an
asset exceeds its recoverable amount, the asset is considered impaired and is written down to its
recoverable amount. The fair value is the amount obtainable from the sale of the asset in an arm’s-
length transaction. In determining fair value less costs to sell, an appropriate valuation model is used.
These calculations are corroborated by valuation factors/parameters, quoted share prices for publicly
traded securities or other available fair value indicators. In assessing value in use, the estimated future
cash flows are discounted to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the asset. Impairment losses
are recognized in the consolidated statement of income.

An assessment is also made at each reporting date as to whether there is any indication that
previously recognized impairment losses may no longer exist or may have decreased. If any such
indication exists, the MERALCO Group estimates the individual asset’s or cash generating unit’s
recoverable amount. A previously recognized impairment loss is reversed only if there has been a
change in the estimates used to determine the asset’s recoverable amount since the last impairment
loss was recognized. If a reversal of impairment loss is to be recognized, the carrying amount of the
asset is increased to its recoverable amount. The increased amount cannot exceed the carrying amount
that would have been determined had no impairment loss has been recognized for the asset in prior
year. Such reversal is recognized in the consolidated statement of income. After such reversal, the

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depreciation and amortization expense are adjusted in future years to allocate the asset’s revised
carrying amount, less any residual value, on a systematic basis over its remaining useful life.

Intangible assets with indefinite useful lives are tested for impairment annually at every reporting date
or more frequently, if events or changes in circumstances indicate that the carrying value may be
impaired, either individually or at the cash generating unit level, as appropriate. The amount of
impairment is calculated as the difference between the recoverable amount of the intangible asset and
its carrying amount. The impairment loss is recognized in the consolidated statement of income.
Impairment losses relating to intangible assets may be reversed in future years.

Goodwill is reviewed for impairment annually at every reporting date or more frequently if events or
changes in circumstances indicate that the carrying value may be impaired. Impairment is determined
for goodwill by assessing the recoverable amount of the cash generating unit or group of cash
generating units, to which the goodwill relates. Where the recoverable amount of the cash generating
unit or group of cash generating units is less than the carrying amount of the cash generating unit or
group of cash generating units to which goodwill has been allocated, an impairment loss is
recognized. Impairment losses relating to goodwill shall not be reversed in future years.

If the allocation of goodwill acquired in a business combination to cash generating units or group of
cash generating units is incomplete, an impairment testing of goodwill is only carried out when
impairment indicators exist. Where impairment indicators exist, impairment testing of goodwill is
performed at a level at which the acquirer can reliably test for impairment.

Financial Instruments - Initial Recognition and Subsequent Measurement

Financial Assets

Initial Recognition and Measurement

At initial recognition, financial assets are classified and measured at amortized cost, FVOCI, and fair
value through profit or loss (“FVPL”).

The classification of financial assets at initial recognition depends on the financial asset’s contractual
cash flow characteristics and the MERALCO Group’s business model for managing them. With the
exception of trade receivables that do not contain a significant financing component, the MERALCO
Group initially measures a financial asset at its fair value, and in the case of a financial asset not at
FVPL, plus transaction costs.

In order for a financial asset to be classified and measured at amortized cost or FVOCI, it needs to
give rise to cash flows that are solely payments of principal and interest (“SPPI”) on the principal
amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument
level.

The MERALCO Group’s business model for managing financial assets refers to how it manages its
financial assets in order to generate cash flows. The business model determines whether cash flows
will result from collecting contractual cash flows, selling the financial assets, or both.

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Purchases or sales of financial assets that require delivery of assets within a time frame established by
regulation or convention in the market place (regular way trades) are recognised on the trade date,
i.e., the date that the MERALCO Group commits to purchase or sell the asset.

Subsequent Measurement

For purposes of subsequent measurement, financial assets are classified in four (4) categories:
 Financial assets at amortized cost (debt instruments)
 Financial assets at FVOCI with recycling of cumulative gains and losses (debt instruments)
 Financial assets designated at FVOCI with no recycling of cumulative gains and losses upon
derecognition (equity instruments)
 Financial assets at FVPL

Financial Assets at Amortized Cost (Debt Instruments)

This category is the most relevant to the MERALCO Group. The MERALCO Group measures
financial assets at amortized cost if both of the following conditions are met:

 The financial asset is held within a business model with the objective to hold financial assets in
order to collect contractual cash flows, and
 The contractual terms of the financial asset give rise on specified dates to cash flows that are
SPPI on the principal amount outstanding.

Financial assets at amortized cost are subsequently measured using the effective interest rate (“EIR”)
method and are subject to impairment. Gains and losses are recognized in profit or loss when the asset
is derecognized, modified or impaired. The MERALCO Group’s financial assets at amortized cost
include cash and cash equivalents, trade and other receivables, short-term investments, debt securities
at amortized cost and advance payments to a supplier.

Financial Assets at FVOCI (Debt Instruments)

The MERALCO Group measures debt instruments at FVOCI if both of the following conditions are
met:

 The financial asset is held within a business model with the objective of both holding to collect
contractual cash flows and selling, and
 The contractual terms of the financial asset give rise on specified dates to cash flows that are
SPPI on the principal amount outstanding.

For debt instruments at FVOCI, interest income, foreign exchange revaluation and impairment losses
or reversals are recognized in the consolidated statement of profit or loss and computed in the same
manner as for financial assets measured at amortized cost. The remaining fair value changes are
recognized in OCI. Upon derecognition, the cumulative fair value change recognized in OCI is
recycled to profit or loss. The MERALCO Group’s debt instruments at FVOCI include investments in
government securities and investments in corporate bonds.

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Financial Assets Designated at FVOCI (Equity Instruments)

Upon initial recognition, the MERALCO Group can elect to classify irrevocably its equity
investments as equity instruments designated at FVOCI when they meet the definition of equity under
PAS 32, Financial Instruments: Presentation, and are not held for trading. The classification is
determined on an instrument by instrument basis. Gains and losses on these financial assets are never
recycled to profit or loss. Dividends are recognized as other income in the consolidated statement of
income when the right to receive payment has been established, except when the MERALCO Group
benefits from such proceeds as a partial recovery of the cost of the financial asset, in which case, such
gains are recorded in OCI. Equity instruments designated at FVOCI are not subject to impairment
assessment.

The MERALCO Group elected to classify irrevocably its non-listed equity investments and
investment in club shares under this category.

Derecognition

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar
financial assets) is primarily derecognized (i.e., removed from the MERALCO Group’s consolidated
statement of financial position) when:

 The rights to receive cash flows from the asset have expired;
 The MERALCO Group has transferred its rights to receive cash flows from the asset or has
assumed an obligation to pay the received cash flows in full without material delay to a third
party under a ‘pass-through’ arrangement; and either (a) the MERALCO Group has transferred
substantially all the risks and rewards of the asset, or (b) the MERALCO Group has neither
transferred nor retained substantially all the risks and rewards of the asset, but has transferred
control of the asset.

When the MERALCO Group has transferred its rights to receive cash flows from an asset or has
entered into a pass-through arrangement, it evaluates if, and to what extent, it has retained the risks
and rewards of ownership.

When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor
transferred control of the asset, the MERALCO Group continues to recognize the transferred asset to
the extent of its continuing involvement. In that case, the MERALCO Group also recognizes an
associated liability. The transferred asset and the associated liability are measured on a basis that
reflects the rights and obligations that the MERALCO Group has retained. Continuing involvement
that takes the form of a guarantee over the transferred asset is measured at the lower of the original
carrying amount of the asset and the maximum amount of consideration that the MERALCO Group
could be required to repay.

Modification of Financial Assets

The MERALCO Group derecognizes a financial asset when the terms and conditions have been
renegotiated to the extent that, substantially, it becomes a new asset, with the difference between its
carrying amount and the fair value of the new asset recognized as a derecognition gain or loss in
profit or loss, to the extent that an impairment loss has not already been recorded.

The MERALCO Group considers both qualitative and quantitative factors in assessing whether a
modification of financial asset is substantial or not. When assessing whether a modification is
substantial, the MERALCO Group considers the following factors, among others:

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 Change in currency
 Introduction of an equity feature
 Change in counterparty
 If the modification results in the asset no longer considered “solely payment for principal and
interest”

The MERALCO Group also performs a quantitative assessment similar to that being performed for
modification of financial liabilities. In performing the quantitative assessment, the MERALCO Group
considers the new terms of a financial asset to be substantially different if the present value of the
cash flows under the new terms, including any fees paid net of any fees received and discounted using
the original effective interest rate, is at least 10% different from the present value of the remaining
cash flows of the original financial asset.

When the contractual cash flows of a financial asset are renegotiated or otherwise modified and the
renegotiation or modification does not result in the derecognition of that financial asset, the
MERALCO Group recalculates the gross carrying amount of the financial asset as the present value of
the renegotiated or modified contractual cash flows discounted at the original EIR (or credit-adjusted
EIR for purchased or originated credit-impaired financial assets) and recognizes a modification gain
or loss in the statement of comprehensive income.

When the modification of a financial asset results in the derecognition of the existing financial asset
and the subsequent recognition of a new financial asset, the modified asset is considered a 'new '
financial asset. Accordingly, the date of the modification shall be treated as the date of initial
recognition of that financial asset when applying the impairment requirements to the modified
financial asset. The newly recognized financial asset is classified as Stage 1 for ECL measurement
purposes, unless the new financial asset is deemed to be purchased or originated credit-impaired
financial assets (“POCI”).

Impairment of Financial Assets

The MERALCO Group recognizes an allowance for expected credit losses (“ECLs”) for all debt
instruments not held at FVPL. ECLs are based on the difference between the contractual cash flows
due in accordance with the contract and all the cash flows that the MERALCO Group expects to
receive, discounted at an approximation of the original effective interest rate. The expected cash
flows will include cash flows from the sale of collateral held or other credit enhancements that are
integral to the contractual terms.

ECLs are measured in a way that reflects the following:

 an unbiased and probability-weighted amount that is determined by evaluating a range of


possible outcomes;
 the time value of money; and
 reasonable and supportable information that is available without undue cost or effort at the
reporting date about past events, current conditions and forecasts of future economic conditions.

ECLs are recognized in two stages. For credit exposures for which there has not been a significant
increase in credit risk since initial recognition and that are not credit-impaired upon origination, ECLs
are provided for credit losses that result from default events that are possible within the next
12-months (a 12-month ECL). For those credit exposures for which there has been a significant
increase in credit risk since initial recognition on an individual or collective basis but are not credit-

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impaired, a loss allowance is required for credit losses expected over the remaining life of the
exposure, irrespective of the timing of the default (a lifetime ECL).

Financial assets are credit-impaired when one (1) or more events that have a detrimental impact on
the estimated future cash flows of those financial assets have occurred. For these credit exposures,
lifetime ECLs are recognized and interest revenue is calculated by applying the credit-adjusted
effective interest rate to the amortized cost of the financial assets.

For trade receivables and contract assets, MERALCO applies a simplified approach in calculating
ECLs. Therefore, MERALCO does not track changes in credit risk, instead recognizes a loss
allowance based on lifetime ECLs of each customer segment (e.g. residential, commercial, industrial,
etc.) at each reporting date. MERALCO has established a provision matrix that is based on its current
credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic
environment. In determining the ECLs of trade receivables, the credit loss experience for each
contract status of customers for the current year, adjusted for forwarding looking factors as well as
the economic environment was considered.

For debt instruments, the MERALCO Group applies the low credit risk simplification. At every
reporting date, the MERALCO Group evaluates whether the debt instrument is considered to have low
credit risk using all reasonable and supportable information that is available without undue cost or
effort. In making that evaluation, the MERALCO Group reassesses the internal credit rating of the
debt instrument. In addition, the MERALCO Group considers that there has been a significant
increase in credit risk when contractual payments are more than 30 days past due.

The MERALCO Group’s debt instruments at FVOCI comprise solely of quoted bonds that are graded
in the top investment category and, therefore, are considered to be low credit risk investments. It is
the MERALCO Group’s policy to measure ECLs on such instruments on a 12-month basis. However,
when there has been a significant increase in credit risk since origination, the allowance will be based
on the expected lifetime credit losses.

Credit losses are recognized based on 12-month ECL for debt investment securities that are assessed
to have low credit risk at the reporting date. A financial asset is considered to have low credit risk if:

 the financial instrument has a low risk of default


 the borrower has a strong capacity to meet its contractual cash flow obligations in the near term
 adverse changes in economic and business conditions in the longer term, may, but will not
necessarily, reduce the ability of the borrower to fulfill its contractual cash flow obligations.

At each reporting date, the MERALCO Group assesses whether there has been a significant increase
in credit risk for financial assets since initial recognition by comparing the risk of default occurring
over the expected life between the reporting date and the date of initial recognition. The MERALCO
Group considers reasonable and supportable information that is relevant and available without undue
cost or effort for this purpose. This includes quantitative and qualitative information and forward-
looking analysis.

Exposures that have not deteriorated significantly since origination, or where the deterioration
remains within the MERALCO Group’s investment grade criteria, are considered to have a low credit
risk. The provision for credit losses for these financial assets is based on a 12-month ECL. The low
credit risk exemption has been applied on debt investments that meet the investment grade criteria of
the MERALCO Group from the time of origination.

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An exposure will migrate through the ECL stages as asset quality deteriorates. If, in a subsequent
year, asset quality improves and also reverses any previously assessed significant increase in credit
risk since origination, then the loss allowance measurement reverts from lifetime ECL to 12-months
ECL.

MERALCO considers a financial asset in default when contractual payments are 300 days past due
(average days to terminate customer contract). In certain cases, the MERALCO Group may also
consider a financial asset to be in default when internal or external information indicates that the
MERALCO Group is unlikely to receive the outstanding contractual amounts in full before taking into
account any credit enhancements held by the MERALCO Group. A financial asset is written off when
there is no reasonable expectation of recovering the contractual cash flows.

Financial Liabilities

Initial Recognition and Measurement

Financial liabilities are classified, at initial recognition, as financial liabilities at FVPL, loans and
borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as
appropriate.

All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings
and payables, net of directly attributable transaction costs.

The MERALCO Group’s financial liabilities include interest-bearing long-term financial liabilities,
customer deposits and refunds, refundable service extension costs, notes payable and trade and other
payables.

Subsequent Measurement

Financial liabilities at FVPL

Financial liabilities at FVPL include financial liabilities held for trading and financial liabilities
designated upon initial recognition as at FVPL.

Financial liabilities are classified as held for trading if they are incurred for the purpose of
repurchasing in the near term. This category also includes derivative financial instruments entered
into by the MERALCO Group that are not designated as hedging instruments in hedge relationships as
defined by PFRS 9. Separated embedded derivatives are also classified as held for trading unless they
are designated as effective hedging instruments.

Gains or losses on liabilities held for trading are recognized in the consolidated statement of profit or
loss. Financial liabilities designated upon initial recognition at FVPL are designated at the initial date
of recognition, and only if the criteria in PFRS 9 are satisfied. The MERALCO Group has not
designated any financial liability as at FVPL.

Loans and borrowings

This is the category most relevant to the MERALCO Group. After initial recognition, interest-bearing
loans and borrowings are subsequently measured at amortized cost using the EIR method. Gains and
losses are recognized in profit or loss when the liabilities are derecognized as well as through the EIR
amortization process.

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Amortized cost is calculated by taking into account any discount or premium on acquisition and fees
or costs that are an integral part of the EIR. The EIR amortization is included as finance costs in the
consolidated statement of income. This category generally applies to interest-bearing loans and
borrowings.

Derecognition

A financial liability (or a part of a financial liability) is derecognized when the obligation under the
liability is discharged, cancelled or has expired. Where an existing financial liability is replaced by
another from the same lender on substantially different terms, or the terms of an existing liability or a
part of it are substantially modified, such an exchange or modification is treated as a derecognition of
the original financial liability and the recognition of a new financial liability, and the difference in the
respective carrying amounts is recognized in the statement of comprehensive income.

Exchange or Modification of Financial Liabilities

The MERALCO Group considers both qualitative and quantitative factors in assessing whether a
modification of financial liabilities is substantial or not. The terms are considered substantially
different if the present value of the cash flows under the new terms, including any fees paid net of any
fees received and discounted using the original effective interest rate, is at least 10% different from
the present value of the remaining cash flows of the original financial liability. However, under
certain circumstances, modification or exchange of a financial liability may still be considered
substantial, even where the present value of the cash flows under the new terms is less than 10%
different from the present value of the remaining cash flows of the original financial liability. There
may be situations where the modification of the financial liability is so fundamental that immediate
derecognition of the original financial liability is appropriate (e.g., restructuring a financial liability to
include an embedded equity component).

When an existing financial liability is replaced by another from the same lender on substantially
different terms, or the terms of an existing liability are substantially modified, such an exchange or
modification is treated as a derecognition of the original liability and the recognition of a new
liability. The difference between the carrying value of the original financial liability and the fair value
of the new liability is recognized in profit or loss.

When the exchange or modification of the existing financial liability is not considered as substantial,
the MERALCO Group recalculates the gross carrying amount of the financial liability as the present
value of the renegotiated or modified contractual cash flows discounted at the original EIR and
recognizes a modification gain or loss in profit or loss.

If modification of terms is accounted for as an extinguishment, any costs or fees incurred are
recognized as part of the gain or loss on the extinguishment. If the modification is not accounted for
as an extinguishment, any costs or fees incurred adjust the carrying amount of the financial
instrument and are amortized over the remaining term of the modified financial instrument.

The MERALCO Group has not availed of any reliefs and has not renegotiated the terms of its existing
loan agreements with its lenders.

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Offsetting of Financial Instruments

Financial assets and financial liabilities are offset and the net amount is reported in the consolidated
statement of financial position if there is a currently enforceable legal right to offset the recognized
amounts and there is an intention to settle on a net basis, to realize the assets and settle the liabilities
simultaneously.

Redeemable Preferred Stock

MERALCO’s peso-denominated redeemable preferred stock has characteristics of a liability and is


thus recognized as a liability in the consolidated statement of financial position. The corresponding
dividends on those shares are recognized as part of “Interest and other financial charges” account in
the consolidated statement of income. Dividends no longer accrue when such shares have been called
for redemption.

Inventories

Inventories are stated at the lower of cost and net realizable value. Costs of acquiring materials and
supplies including costs incurred in bringing each item to their present location and condition are
accounted using the moving average and weighted average cost method, as applicable. Net realizable
value is the estimated selling price in the ordinary course of business less the estimated cost to sell or
the current replacement cost of the asset.

Prepayments

Prepayments are expenses paid in advance and recorded as asset before they are utilized.
Prepayments that are expected to be realized within 12 months from the reporting date are classified
as current assets. Otherwise, these are classified as noncurrent assets.

Value-Added Tax (“VAT”)

Input VAT pertains to the 12% indirect tax paid in the course of trade or business on purchases of
goods or services.

Output VAT pertains to the 12% tax due on the local sale of goods or services.

If at the end of any taxable month, the output VAT exceeds the input VAT, the outstanding balance is
included under “Trade payables and other current liabilities” account. If the input VAT exceeds the
output VAT, the excess shall be carried over to the succeeding months and included under “Financial
and other current assets” account.

Provisions

Provisions are recognized when the MERALCO Group has a present obligation, legal or constructive,
as a result of a past event, and when it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation and a reliable estimate can be made of the amount of
the obligation. Where the MERALCO Group expects a provision, or a portion, to be reimbursed, for
example under an insurance contract, the reimbursement is recognized as a separate asset but only
when the reimbursement is virtually certain. The expense relating to any provision is presented in the
consolidated statement of income, net of any reimbursement. If the effect of the time value of money
is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the
risks specific to the liabilities.

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Retirement Benefits

MERALCO and certain subsidiaries have distinct, funded, noncontributory defined benefit retirement
plans covering all permanent employees. MERALCO’s retirement plan provides for post-retirement
benefits in addition to a lump sum payment to employees hired as at December 31, 2003. Retirement
benefits for employees of MERALCO hired beginning January 1, 2004 were amended to provide for a
defined lump sum payment only upon retirement of qualified employees. MERALCO also has a
contributory provident plan introduced in January 2009 whereby employees hired beginning
January 1, 2004 may elect to participate.

The net defined benefit liability or asset of the retirement plan is the aggregate of the present value of
the defined benefit obligation at the end of the reporting date reduced by the fair value of plan assets
(if any), adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The asset
ceiling is the present value of any economic benefits available in the form of refunds from the plan or
reductions in future contributions to the plan.

The cost of providing benefits under the defined benefit plans is actuarially determined using the
projected unit credit method.

Defined benefit costs comprise of (i) service costs; (ii) net interest on the net defined benefit liability
or asset; and (iii) remeasurements of the net defined benefit liability or asset.

Service costs, which include current service costs, past service costs and gains or losses on
non-routine settlements are recognized as expense in the consolidated statement of income. Past
service costs are recognized when plan amendment or curtailment occurs. These amounts are
calculated periodically by independent qualified actuaries.

Net interest on the net defined benefit liability or asset is the change during the year in the net defined
benefit liability or asset that arises from the passage of time, which is determined by applying the
discount rate based on government bonds to the net defined benefit liability or asset. Net interest on
the net defined benefit liability or asset is recognized as expense or income in the consolidated
statement of income.

Remeasurements comprising actuarial gains and losses, return on plan assets and any change in the
effect of the asset ceiling (excluding net interest on defined benefit liability) are recognized
immediately in OCI in the year in which they arise. Remeasurements are not reclassified to profit or
loss in subsequent year.

Plan assets are assets that are held by a long-term employee benefit fund or qualifying insurance
policies. Plan assets are not available to the creditors of the MERALCO Group, nor can they be paid
directly to the MERALCO Group. Fair value of plan assets is based on market price information.
When no market price is available, the fair value of plan assets is estimated by discounting expected
future cash flows using a discount rate that reflects both the risk associated with the plan assets and
the maturity or expected disposal date of those assets (or, if they have no maturity, the expected
period until the settlement of the related obligations). If the fair value of the plan assets is higher than
the present value of the defined benefit obligation, the measurement of the resulting defined benefit
asset is limited to the present value of economic benefits available in the form of refunds from the
plan or reductions in future contributions to the plan.

The MERALCO Group’s right to be reimbursed for some or all of the expenditures required to settle a
defined benefit obligation is recognized as a separate asset at fair value when, and only when,
reimbursement is virtually certain.

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The retirement costs under the defined contribution plan are recorded based on MERALCO Group’s
contribution to the defined contribution plan as services are rendered by the employee.

Termination Benefits

Termination benefits are provided in exchange for its severance as a result of either an entity’s
decision to terminate an employee’s employment before the normal retirement date or an employee’s
decision to accept an offer of benefits in exchange for the termination of employment.

A liability and expense for a termination benefit is recognized at the earlier of when the entity can no
longer withdraw the offer of those benefits and when the entity recognizes related restructuring costs.
Initial recognition and subsequent changes to termination benefits are measured in accordance with
the nature of the employee benefit, as either post-employment benefits, short-term employee benefits,
or other long-term employee benefits.

Employee Leave Entitlements

Employee entitlements to annual leave are recognized as a liability when such accrues to the
employees. The undiscounted liability for leave expected to be settled wholly before 12 months after
the end of the reporting year is recognized for services rendered by employees up to the end of the
reporting year.

Unused sick leaves are accumulated, up to a certain limit, and commuted to cash upon separation or
retirement. An actuarial valuation of the obligations on the accumulated unused sick leaves is
conducted periodically in accordance with the relevant accounting standards.

Long-term Incentive Plan

The liability relating to the long-term incentive plan comprises the present value of the obligation at
the end of the reporting date.

Equity

Common stock is measured at par value for all shares issued. Incremental costs incurred directly
attributable to the issuance of new shares are shown as a deduction from equity, net of any related tax.
The amount of proceeds and/or fair value of consideration received, net of incremental costs incurred
directly attributable to the issuance of new shares in excess of par value, is recognized as additional
paid-in capital.

Employee stock purchase plan cost represents the cumulative compensation expense recognized
based on the amount determined using an option pricing model.

Change in the ownership interest of a subsidiary, without loss of control, is accounted for as an equity
transaction and presented as “Equity Reserve” in the consolidated statement of financial position.

OCI comprises items of income and expense, which are not recognized in profit or loss as required or
permitted by PFRS.

Cumulative translation adjustment represents the resulting exchange differences in the remeasurement
of accounts due to change in functional currency.

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Treasury shares are recognized at cost and deducted from equity. No gain or loss is recognized in
profit or loss on the purchase, sale, issue or cancellation of the MERALCO Group’s own equity
instruments. Any difference between the carrying amount and the consideration, if reissued, is
recognized in additional paid-in capital.

Retained earnings include net income attributable to the equity holders of the Parent, reduced by
dividends declared on common stock. Dividends are recognized as liability and deducted from
retained earnings when they are declared. Dividend declarations approved after the financial
reporting date are disclosed as events after the financial reporting date.

Non-controlling interests represent the portion of profit or loss and net assets of subsidiaries not
attributed, directly or indirectly, to MERALCO.

Revenue Recognition

Revenue from contracts with customers is recognized when control of the goods or services are
transferred to the customer at an amount that reflects the consideration to which the MERALCO
Group expects to be entitled in exchange for those goods or services. The MERALCO Group
assesses its revenue arrangements against specific criteria to determine if it is acting as a principal or
as an agent. MERALCO Group has concluded that it is acting as principal in majority of its revenue
arrangements.

The following specific recognition criteria must also be met before revenue from contracts with
customers is recognized:

Sale of Electricity
As distribution utilities, revenues are recognized upon supply of power to the customers and are
stated at amounts invoiced to customers, inclusive of pass-through components, and net of discounts
and/or rebates. The Uniform Filing Requirements (“UFR”) on the rate unbundling released by the
ERC on October 30, 2001 specified the following bill components: (a) generation charge,
(b) transmission charge, (c) SL charge, (d) distribution charge, (e) supply charge, (f) metering charge,
(g) Currency Exchange Rate Adjustment (“CERA”) I and II, where applicable and (h) inter-class rate
and lifeline subsidies. VAT, business taxes such as LFT, RPT (beginning March 2021), the Power Act
Reduction (for residential customers) adjustment, universal charges, and Feed-in-Tariff - Allowance
(“FiT-All”) are also separately presented in the customer’s billing statement. Taxes billed and
collected on behalf of the national governments and local government units, universal charges and
FiT-All [billed and collected on behalf of Power Sector Assets and Liabilities Management
Corporation (“PSALM”) and National Transmission Corporation (“TransCo”), respectively] do not
form part of MERALCO and Clark Electric’s revenues. Revenues are adjusted for the over and/or
under-recoveries of pass-through charges.

Revenue from Contracts with Customers - Recognized Over Time

The MGen Group has contracts with customers in the form of Electric Power Purchase Agreement
(“EPPAs”), Ancillary Services Procurement Agreement (“ASPAs”), and sale of electricity to WESM.

The MGen Group recognizes revenue when it satisfies an identified performance obligation by
transferring a promised good or service to a customer. A good or service is considered to be
transferred when the customer obtains control. The MGen Group determines, at contract inception,
whether it will transfer control of a promised good or service over time. If the MGen Group does not
satisfy a performance obligation over time, the performance obligation is satisfied at a point in time
when control of the asset is transferred to the customer, generally on delivery of the goods.

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Revenue from contracts with customers is consummated whenever the electricity generated by the
MGen Group is transmitted through the transmission line designated by the buyer, for a
consideration.

Revenue from sale of electricity is recognized monthly based on the actual energy delivered and made
available to customers or minimum energy off take or contracted capacity, adjusted by actual days of
downtime, whichever is higher.

Revenue from sale of electricity through ancillary services to the National Grid Corporation of the
Philippines (“NGCP”) is recognized monthly based on the capacity scheduled and/or dispatched and
provided.

Energy fees derived from trading operations are recognized based on actual delivery of such
electricity supplied and made available to customers multiplied by the applicable tariff rate as agreed
with its customers.

Revenue from Contracts with Customers - Recognized at the Point in Time

Revenues from the following are recognized at the point in time when control of the asset is
transferred to the customer, generally on delivery of the goods:

Coal Sales

Coal sales are recognized at point in time when the coal is delivered, the legal title has passed to the
customer. Coal sales are presented as part of sale of electricity in the consolidated statement of
income.
Service Fees

Service fee pertains to fees charged to customers and clients for coal transaction related services. The
service fee is recognized at point in time. Service fees are presented as part of sale of other services in
the consolidated statement of income.

Sale of Services

The MERALCO Group recognizes revenue from construction contracts over time on the basis of
direct measurements of the value to customers of the goods or services transferred to date, relative to
the remaining goods or services promised under the contract (output method). Progress is measured
based on the monthly project accomplishment which integrates the performance to date of the
construction activities.

Construction contracts are generally accounted for as a single performance obligation and are not
segmented between types of services. For engineering and construction contracts, these two (2) are
combined into one performance obligation since these are not distinct within the context of the
contract. The combined performance obligation qualifies as a good or service (or a bundle of goods
or services) that is distinct.

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Interest Income

Interest income is recognized as interest accrues, using the EIR method. The EIR is the rate that
discounts estimated future cash receipts through the expected life of the financial instrument.

Lease Income

Income arising from lease of investment properties, communication tower assets and pole positions is
accounted for on a straight-line basis over the lease term.

Lease income is included under “Revenues – Sale of other services” account in the consolidated
statement of income.

Receivables

Receivables represent the MERALCO Group’s right to all amounts of consideration that are
unconditional (i.e., only the passage of time is required before payment of the consideration is due).

Contract Assets

A contract asset is the right to consideration in exchange for goods and services transferred to the
customer. If the MERALCO Group performs by transferring goods or services to a customer before
the customer pays consideration or before payment is due, a contract asset is recognized for the
earned consideration that is conditional.

The MERALCO Group’s contract assets include unbilled receivables and under-recoveries of pass-
through charges.

Contract Liabilities

A contract liability is the obligation to transfer goods or services to a customer for which the
MERALCO Group has received consideration (or an amount of consideration is due) from the
customer. If a customer pays consideration before the MERALCO Group transfers good or services
to the customer, a contract liability is recognized when the payment is made or the payment is due
(whichever is earlier). Contract liabilities are recognized as revenue when the MERALCO Group
performs under the contract.

The following are considered as contract liabilities:

Assets Funded by Customers

In accordance with the Distribution Services and Open Access Rule (“DSOAR”), the costs of
non-standard connection facilities to connect the customers to MERALCO’s distribution network and
to provide the customers with ongoing access to the supply of electricity are funded by the customers.
MERALCO assesses whether the constructed or acquired non-standard connection facilities meet the
definition of an asset in accordance with PAS 16. If the definition of an asset is met, MERALCO
recognizes such asset at its acquisition or construction cost with an equivalent credit to the liability
account. Such liability to the customers is included under “Other noncurrent liabilities” account in the
consolidated statement of financial position, and is recognized as income over the average duration of
relationship with the customer. Assets funded by customers do not form part of MERALCO’s
regulatory asset base until amounts are refunded.

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Net Over-recoveries of Pass-through Charges

Generation, transmission and SL over-recoveries which resulted from the difference in the power
suppliers’ billings and recovery of such pass-through costs from consumers are included in “Other
noncurrent liabilities” account in the consolidated statement of financial position.

Cost and Expense Recognition

Expenses are decreases in economic benefits during the financial reporting date in the form of
outflows or decrease of assets or incurrence of liabilities that result in decrease in equity, other than
those relating to distributions to equity participants. These are recognized when incurred.

MERALCO Group recognizes contract costs relating to satisfied performance obligations as these are
incurred. Contract costs principally include all direct materials, labor costs and indirect costs related
to contract performance. Project mobilization costs and incremental costs of obtaining a contract with
a customer are recognized as an asset if the MERALCO Group expects to recover them and the
contract term is for more than one year. The project mobilization costs and costs of obtaining a
contract are amortized over the expected construction period following the pattern of revenue
recognition. Costs incurred prior to obtaining a contract with a customer are not capitalized but are
expensed as incurred. Expected losses on contracts are recognized immediately when it is probable
that the total contract costs will exceed total contract revenues. The amount of such loss is determined
irrespective of whether or not work has commenced on the contract, based on the stage of completion
of the contract activity, or the amount of profits expected to arise on other contracts which are not
treated as a single construction contract.

Total contract costs incurred and estimated earnings recognized in excess of total billings are
recognized as an asset.

Lease Liabilities

At the commencement date of the lease, the MERALCO Group recognizes lease liabilities measured
at the present value of lease payments to be made over the lease term. The lease payments include
fixed payments (including in substance fixed payments) less any lease incentives receivable, variable
lease payments that depend on an index or a rate, and amounts expected to be paid under residual
value guarantees. The lease payments also include the exercise price of a purchase option reasonably
certain to be exercised by the MERALCO Group and payments of penalties for terminating a lease, if
the lease term reflects the MERALCO Group exercising the option to terminate. The variable lease
payments that do not depend on an index or a rate are recognized as expense in the year which the
event or condition that triggers the payment occurs.

In calculating the present value of lease payments, the MERALCO Group uses the incremental
borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily
determinable. After the commencement date, the amount of lease liabilities is increased to reflect the
accretion of interest and reduced for the lease payments made. In addition, the carrying amount of
lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-
substance fixed lease payments or a change in the assessment to purchase the underlying asset.

Short-term Leases and Leases of Low-value Assets

The MERALCO Group applies the short-term lease recognition exemption to its short-term leases of
machinery and equipment (i.e., those leases that have a lease term of 12 months or less from the
commencement date and do not contain a purchase option). It also applies the leases of low-value

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assets recognition exemption to leases of office equipment that are considered of low value. Lease
payments on short-term leases and leases of low-value assets are recognized as expense on a straight-
line basis over the lease term.

Leases

The MERALCO Group considers whether a contract is, or contains a lease at the inception of a
contract. A lease is a contract, or part of a contract, that conveys the right to use an asset (the
underlying asset) for a period of time in exchange of a consideration.

Company as Lessee

At commencement date of the lease, the MERALCO Group recognizes a right-of-use (“ROU”) asset
and a corresponding lease liability on the statements of financial position, except for short-term leases
(defined as leases with a lease term of 12 months or less) and leases of low value assets. For these
leases, the MERALCO Group recognizes the lease payments as an operating expense on a straight-
line basis over the term of the lease unless another systematic basis is more representative of the time
pattern in which economic benefits from the leased asset are consumed.

Lease liability is measured at the present value of the unpaid lease payments, discounted using the
interest rate implicit in the lease (if readily available) or the MERALCO Group’s incremental
borrowing rate. Incremental borrowing rate is the rate of interest that the MERALCO Group would
have to pay to borrow over a similar term and with a similar security the funds necessary to obtain an
asset of a similar value to the right-of-use-asset in a similar economic environment.

Lease payments included in the measurement of the lease liability consists of fixed payments, variable
payments based on an index or rate, amounts expected to be payable under a residual value guarantee,
and payments arising from options reasonably certain to be exercised.

Subsequent to initial measurement, lease liability will be reduced for payments made and increased
for interest. It is remeasured to reflect any reassessment or modification, or if there are changes in the
fixed payments. When the lease liability is remeasured, the corresponding adjustment is reflected in
the ROU asset, or profit and loss if the ROU asset is already reduced to zero.

ROU asset is measured at cost, which consist of the initial measurement of the lease liability, any
initial direct costs incurred, an estimate of any costs to dismantle and remove the asset at the end of
the lease, and any lease payments made in advance of the lease commencement date.

The MERALCO Group depreciates ROU assets on a straight-line basis using the expected useful life
or lease term whichever is shorter. The MERALCO Group also assesses the ROU asset for
impairment when such indicators exist.

Company as Lessor

Leases where the MERALCO Group does not transfer substantially all the risk and benefits of
ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an
operating lease are added to the carrying amount of the leased asset and recognized over the lease
term on the same basis as rental income. Contingent rents are recognized as revenue in the year in
which these are earned.

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Foreign Currency-Denominated Transactions and Translations

The consolidated financial statements are presented in Philippine peso, which is also MERALCO’s
functional and presentation currency. The Philippine peso is the currency of the primary economic
environment in which the MERALCO Group operates, except for LOIL and MPG Asia. This is also
the currency that mainly influences the revenue from and cost of rendering services. Each entity in
the MERALCO Group determines its own functional currency and items included in the financial
statements of each entity are measured using that functional currency.

The functional currency of LOIL and MPG Asia is the United States (“U.S.”) dollar.

Transactions in foreign currencies are initially recorded in the functional currency rate prevailing at
the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are re-
translated using functional currency closing rate of exchange prevailing at the end of the reporting
date. All differences are recognized in the consolidated statement of income except for foreign
exchange differences that relate to capitalizable borrowing costs on qualifying assets. Nonmonetary
items that are measured in terms of historical cost in foreign currency are translated using the
exchange rate as at the date of the initial transactions.

As at the reporting date, the monetary assets and liabilities of subsidiaries, LOIL and MPG Asia
whose functional currency is other than Philippine peso, are translated into Philippine peso at the rate
of exchange prevailing at the end of the reporting date, and income and expenses are translated
monthly using the weighted average exchange rate for the month. The exchange differences arising
on translation are recognized as a separate component of OCI as cumulative translation adjustments.
On the disposal of a subsidiary, the amount of cumulative translation adjustments recognized in OCI
is recognized in the consolidated statement of income.

Income Taxes

Current Income Tax

Current income tax assets and liabilities for the current and prior years are measured at the amount
expected to be recovered from or paid to the taxation authority. The tax rate and tax laws used to
compute the amount are those that are enacted or substantively enacted as at the reporting date.

Deferred Income Tax


Deferred income tax is provided on all temporary differences at the reporting date between the
income tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognized for all taxable temporary differences, except:

 where the deferred income tax liability arises from the initial recognition of goodwill or of an
asset or liability in a transaction that is not a business combination and, at the time of the
transaction, affects neither the accounting profit nor taxable profit or loss; and

 in respect of taxable temporary differences associated with investments in associates and interests
in joint ventures, where the timing of the reversal of the temporary differences can be controlled
and it is probable that the temporary differences will not reverse in the foreseeable future.

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Deferred income tax assets are recognized for all deductible temporary differences to the extent that it
is probable that taxable profit will be available against which the deductible temporary differences
can be utilized except:

 when the deferred income tax asset relating to the deductible temporary difference arises from the
initial recognition of an asset or liability in a transaction that is not a business combination and, at
the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

 in respect of deductible temporary differences associated with investments in subsidiaries,


associates and joint ventures, deferred income tax assets are recognized only to the extent that it
is probable that the temporary differences will reverse in the foreseeable future and taxable profit
will be available against which the temporary differences can be utilized.

The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to
the extent that it is no longer probable that sufficient taxable profit will be available to allow all or
part of the deferred income tax assets to be utilized. Unrecognized deferred income tax assets are
reassessed at each reporting date and are recognized to the extent these have become probable that
future taxable profit will allow the deferred income tax assets to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply
when the assets are realized or the liabilities are settled, based on tax rates and tax laws that are
enacted or substantively enacted as at the reporting date.

Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right
exists to set off current income tax assets against current income tax liabilities and the deferred taxes
relate to the same taxable entity and the same taxation authority.

Deferred income tax items are recognized in correlation to the underlying transaction either in profit
or loss or directly in equity.

Earnings per Share

Basic earnings per share is calculated by dividing the net income for the year attributable to equity
holders of the parent by the weighted average number of common shares outstanding during the year.

Diluted earnings per share is calculated by dividing the net income for the year attributable to equity
holders of the parent by the weighted average number of shares outstanding, adjusted for the effects
of any dilutive potential common shares.

Contingencies

Contingent liabilities are not recognized in the consolidated financial statements. These are disclosed
in the notes to consolidated financial statements unless the possibility of an outflow of resources
embodying economic benefits is remote. Contingent assets are not recognized unless the realization
of the assets is virtually certain. These are disclosed in the notes to consolidated financial statements
when an inflow of economic benefits is probable.

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Events After the Reporting Date

Post reporting date events that provide additional information about the MERALCO Group’s financial
position at the reporting date (adjusting events) are reflected in the consolidated financial statements.
Post reporting date events that are non-adjusting events are disclosed in the notes to consolidated
financial statements, when material.

5. Significant Judgments, Accounting Estimates and Assumptions

The preparation of the MERALCO Group’s consolidated financial statements requires management to
make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses,
assets and liabilities and the accompanying disclosures, and the disclosure of contingent assets and
liabilities, at the end of the reporting date. Uncertainty about these assumptions and estimates could
result in outcomes that require a material adjustment to the carrying amounts of the assets or
liabilities affected in future years.

Judgments

In the process of applying the MERALCO Group’s accounting policies, management has made the
following judgments, which have the most significant effect on the amounts recognized in the
consolidated financial statements.

Determination of Functional Currency

The functional currencies of the entities under the MERALCO Group are the currencies of the
primary economic environment in which each entity operates. It is the currency that mainly
influences the revenue and cost of rendering services.

Based on the economic substance of the underlying circumstances, the functional and presentation
currency of MERALCO and its subsidiaries, except LOIL and MPG Asia, is the Philippine peso. The
functional and presentation currency of LOIL and MPG Asia is the U.S. dollar.

Uncertain Tax Position

The MERALCO Group assesses whether it has any uncertain tax position in accordance with
IFRIC 23. The MERALCO Group applies significant judgement in identifying uncertainties over its
income tax treatments. The MERALCO Group determined, based on its review and assessment of its
income tax computations and filings, in consultation with external tax expert, that it is not probable
that its uncertain tax treatments will be accepted by the taxation authorities. The MERALCO Group
quantified the effect of each uncertain tax treatment using the most likely amount which the
MERALCO Group expects to better predict the resolution of the uncertainty.

Operating Lease Commitments

As Lessor

The MERALCO Group has several lease arrangements as a lessor. Based on the terms and conditions
of the arrangements, it has evaluated that the significant risks and rewards of ownership of such
properties are retained by the MERALCO Group. The lease agreements do not transfer ownership of
the assets to the lessees at the end of the lease term and do not give the lessees a bargain purchase
option over the assets. Consequently, the lease agreements are accounted for as operating leases.

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As Lessee

The MERALCO Group has entered into various operating lease agreements used for its operations.

For the MERALCO Group’s lease under PFRS 16, the MERALCO Group recognizes ROU assets and
lease liabilities measured at the present value of lease payments to be made over the lease term using
the MERALCO Group’s incremental borrowing rate.
The MERALCO Group availed exemption of PFRS 16 for its short-term lease with the term of
12 months or less and low value assets. Accordingly, lease payments on these leases are recognized
as expense on a straight-line basis over the lease term.

Arrangement that Contains a Lease

Based on MERALCO’s assessment, the PPAs and PSAs do not qualify to be accounted for as lease
and are accounted for as ordinary service contracts, since MERALCO does not have the right to direct
the use, operate and was not involved in the design of the identified assets.

Principal versus Agent

The MERALCO Group’s revenue recognition requires the MERALCO Group to make certain
judgments on its arrangements with power generation companies such as PPAs and PSAs. The
MERALCO Group has concluded that it is acting as a principal in its revenue arrangements.

Revenue from sale of electricity requires MERALCO and Clark Electric to bill customers based on
various billing cycle cut-off dates, while recording of related purchased power cost is based on
calendar month as provided in the terms of the PPAs and PSAs. The difference between the amounts
initially billed to customers and the settlement of the actual billings with power generation companies
is adjusted to revenue at month end based on ERC Resolution No. 16, A Resolution Adopting the
Rules Governing the Automatic Cost Adjustment and True-up Mechanisms and Corresponding
Confirmation Process for Distribution Utilities.

Moreover, MERALCO and Clark Electric assessed that revenues from electricity, re-connection and
other non-standard connection services arise from a single performance obligation which will be
satisfied over the period when the services are expected to be provided.

Entity in which the MERALCO Group Holds more than the Majority of the Voting Rights
Accounted for as a Joint Venture

MERALCO, through MGen, has a 51% interest in SBPL. While MERALCO owns majority of the
voting rights in SBPL, it does not have sole control of SBPL. MERALCO’s investment in SBPL is
accounted for as a joint venture since key operating and financial decisions of SBPL require the
unanimous vote and consent of the parties sharing control.

Entity in which the MERALCO Group Holds more than the Majority of the Voting Rights
Accounted for as an Associate

MERALCO, through MGen, has a total of 58% direct and indirect interest in PacificLight.
MERALCO’s investment in PacificLight is accounted for as an associate since the relevant and
significant activities and policies of PacificLight require the majority votes of the BOD and MGen
does not hold the majority of the BOD.

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Entity in which the MERALCO Group Holds less than 20% of the Voting Rights
Accounted for as an Associate

MERALCO, through Finserve, has 10% interest in AF Payments, Inc. (“AF Payments”). AF Payments
is considered an associate and, thus, MERALCO/Finserve’s interest in AF Payments is accounted for
using the equity method as MERALCO/Finserve is deemed to have significant influence as evidenced
by its representation in the BOD which guarantees MERALCO’s participation in the decision making
and policy making process of AF Payments.

Acquisitions

The MERALCO Group evaluates each investment under PFRS 3 to determine whether to treat an
acquisition as an asset acquisition or a business combination. For those transactions treated as asset
acquisitions, the purchase price is allocated to the assets acquired, with no recognition of goodwill.
For those acquisitions that meet the definition of a business combination, MERALCO Group apply
the acquisition method of accounting where assets acquired and liabilities assumed are recorded at
fair value at the date of each acquisition, and the results of operations are included with our results
from the dates of the respective acquisitions. When determining the fair value of tangible assets
acquired, age, condition and the economic useful life of the asset are taken into consideration to
determine the estimated cost to replace the asset. When determining the fair value of intangible assets
acquired, the applicable discount rate and the timing and amount of future cash flows, including rate
and terms of renewal and attrition are considered.

Contingencies

The MERALCO Group has possible claims from or obligation to other parties from past events and
whose existence may only be confirmed by the occurrence or non-occurrence of one (1) or more
uncertain future events not wholly within its control. Management has determined that the present
obligations with respect to contingent liabilities and claims with respect to contingent assets do not
meet the recognition criteria, and therefore has not recorded any such amounts.

See Note 29 – Contingencies and Legal Proceedings.

Estimates and Assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty as at the
reporting date that have a significant risk of causing a material adjustment to the carrying amounts of
assets and liabilities within the next financial reporting date are discussed as follows:

Estimating Useful Lives of Utility Plant, Generation Plant and Others, Intangible Assets
with Finite Lives and Investment Properties

The MERALCO Group estimates the useful lives of utility plant, generation plant and others,
intangible assets with finite lives and, investment properties based on the periods over which such
assets are expected to be available for use. The estimate of the useful lives of the utility plant,
generation plant and others, intangible assets with finite lives and investment properties is based on
management’s collective assessment of industry practice, internal technical evaluation and experience
with similar assets. The estimated useful lives are reviewed at least at each financial reporting date
and are updated if expectations differ from previous estimates due to physical wear and tear, technical
or commercial obsolescence and legal or other limitations on the use of such assets. It is possible,
however, that future results of operations could be materially affected by changes in estimates
brought about by changes in the factors mentioned in the foregoing. The amounts and timing of

*SGVFS169563*
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recorded expenses for any year would be affected by changes in these factors and circumstances. A
reduction in the estimated useful lives of utility plant, generation plant and others, intangible assets
with finite lives and investment properties would increase recorded operating expenses and decrease
noncurrent assets.

The total depreciation and amortization expense of utility plant, generation plant and others amounted
to =
P14,117 million, P
=10,846 million and =P8,065 million for the years ended December 31, 2022, 2021
and 2020, respectively. Total carrying values of utility plant, generation plant and others, net of
accumulated depreciation and amortization, amounted to = P243,323 million and = P225,326 million as at
December 31, 2022 and 2021, respectively.

Total depreciation of investment properties amounted to =


P4 million for each of the years ended
December 31, 2022, 2021 and 2020. Total carrying values of investment properties, net of
accumulated depreciation, amounted to P=1,495 million and =
P1,496 million as at December 31, 2022
and 2021, respectively.

Total amortization of intangible assets with finite lives amounted to =P1,910 million, =
P1,649 million
and P
=486 million for the years ended December 31, 2022, 2021 and 2020, respectively. Total
carrying values of intangible assets with finite lives, net of accumulated amortization, amounted to
=21,691 million and =
P P15,054 million as at December 31, 2022 and 2021, respectively.

See Note 7 – Utility Plant, Generation Plant and Others, Note 9 – Investment Properties and
Note 10 – Intangible Assets.

Impairment of Nonfinancial Assets

PFRS requires that an impairment review be performed when certain impairment indicators are
present. These conditions include obsolescence, physical damage, significant changes in the manner
by which an asset is used, worse than expected economic performance, drop in revenues or other
external indicators, among others. In the case of goodwill, at a minimum, such asset is subject to an
annual impairment test and more frequently whenever there is an indication that such asset may be
impaired. This requires an estimation of the value in use of the cash generating unit to which the
goodwill is allocated. Estimating the value in use requires preparation of an estimate of the expected
future cash flows from the cash generating unit and choosing an appropriate discount rate in order to
calculate the present value of those cash flows.

Determining the recoverable amount of utility plant, generation plant and others, intangible assets,
investment properties, investments in associates and interests in joint ventures, goodwill and financial
and other noncurrent assets, requires (i) the determination of future cash flows expected to be
generated from the continued use as well as ultimate disposition of such assets and (ii) making
estimates and assumptions that can materially affect the consolidated financial statements. Future
events may cause management to conclude that utility plant, generation plant and others, intangible
assets, investment properties, investments in associates and interests in joint ventures, goodwill and
financial and other noncurrent assets are impaired. Any resulting impairment loss or reversal of
previously recognized impairment loss could have material adverse impact on the MERALCO
Group’s consolidated financial position and financial performance.

The preparation of estimated future cash flows involves significant estimations and assumptions.
While management believes that the assumptions are appropriate and reasonable, significant changes
in the assumptions may materially affect the assessment of recoverable values and may lead to future
impairment charges under PFRSs.

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The carrying values of nonfinancial assets subject to impairment review are as follows:

Account 2022 2021


(Amounts in millions)
Utility plant, generation plant and others P
=243,323 =225,326
P
Investments in associates and interests in joint
ventures 31,888 23,317
Intangible assets 21,691 15,054
Investment properties 1,495 1,496
Receivable from the BIR 181 181
Goodwill 35 35

See Note 7 – Utility Plant, Generation Plant and Others, Note 8 – Investments in Associates and
Interests in Joint Ventures, Note 9 – Investment Properties and Note 10 – Intangible Assets.

Realizability of Deferred Income Tax Assets

The MERALCO Group reviews the carrying amounts of deferred income tax assets at the end of each
reporting year and reduces these to the extent that it is no longer probable that sufficient taxable
income will be available to allow all or part of the deferred income tax assets to be utilized.

Assessment on the recognition of deferred income tax assets on deductible temporary differences is
based on the level and timing of forecasted taxable income for the subsequent reporting date. This
forecast is based on past results and future expectations on revenues and expenses as well as future
tax planning strategies. Management believes that sufficient taxable profit will be generated to allow
all or part of the recorded or recognized deferred tax assets to be utilized. The amounts of the deferred
income tax assets considered realizable could be adjusted in the future if estimates of taxable income
are revised.

Based on the foregoing assessment, following are the relevant consolidated information with respect
to deferred income tax assets:

2022 2021
(Amounts in millions)
Recognized deferred income tax assets P
=32,032 =34,660
P
Unrecognized deferred income tax assets 2,694 1,444

See Note 28 – Income Taxes and Local Franchise Taxes.

Provision for ECL of Receivables and Contract Assets

The MERALCO Group applies the PFRS 9 simplified approach to measure expected credit losses
which uses a lifetime expected loss allowance for all trade and other receivables and contract assets.

The economic impact of COVID-19 pandemic to MERALCO consumers together with advisories and
issuances from the DOE and ERC directing MERALCO and other DUs to extend payment terms and
suspend service disconnection activities necessitated reassessment of MERALCO’s ECL model in
2020. MERALCO considered resegmentation of all its customer bills starting from the ECQ period
with the objective of identifying customer groups which were significantly affected by COVID-19
pandemic based on accumulated number of unpaid bills and measured the expected credit losses
considering the deferred payment arrangements and expected default upon resumption of service
disconnection activities. In 2021, MERALCO continued to extend the suspension of disconnection

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activities in areas under ECQ, MECQ and granular lockdowns, and extended installment payment
arrangements to certain customers. In 2022, MERALCO provided ECL on certain identified trade
receivables which have been the subject of disputes from customers. In determining the ECLs of
trade receivables, MERALCO considered the credit loss experience for each contract status of
customers for the current year, adjusted for forwarding looking factors, and taking into account the
economic environment. The contract assets relate to unbilled receivables and have substantially the
same risk characteristics as the trade and other receivables. The MERALCO Group has concluded
that the expected loss rates for trade receivables are a reasonable approximation of the loss rates for
contract assets.

The MERALCO Group incorporates forward-looking information in its assessments whether the
credit risk has increased significantly since its initial recognition and its measurement of ECL. The
MERALCO Group has considered a range of relevant forward-looking macroeconomic assumptions
such as inflation rate, gross domestic product and unemployment rate for the determination of
unbiased general industry adjustments and any related specific industry adjustments that support the
calculation of ECLs.

ECLs for trade and other receivables amounted to =P2,311 million, =


P551 million and =
P1,933 million
for the years ended December 31, 2022, 2021 and 2020, respectively. Trade and other receivables,
net of allowance for expected credit losses, amounted to =
P54,683 million and =
P45,013 million as at
December 31, 2022 and 2021, respectively.

See Note 13 – Trade and Other Receivables.

Estimating Net Realizable Value of Inventories

Inventories consist of materials and supplies used in the electricity distribution, power generation and
services segments, and are valued at the lower of cost or net realizable value. The cost of inventories
is written down whenever the net realizable value of inventories becomes lower than the cost due to
damage, physical deterioration, obsolescence, and change in price levels or other causes (i.e., pre-
termination of contracts). The lower of cost or net realizable value of inventories is reviewed on a
periodic basis. Inventory items identified to be obsolete and no longer usable are written off and
charged as expense in the consolidated statement of income.

The carrying values of inventories amounted to =


P10,629 million and =
P9,817 million as at
December 31, 2022 and 2021, respectively.

See Note 14 – Inventories.

Estimation of Retirement Benefit Costs

The cost of defined benefit retirement plans and other post-employment benefits as well as the
present value of the retirement obligation are determined using actuarial valuations. The actuarial
valuation involves making various assumptions. These include the determination of the discount
rates, future salary increases, mortality rates and future retirement benefits increases. Due to the
complexity of the valuation, the underlying assumptions and its long-term nature, defined benefit
obligations are highly sensitive to changes in these assumptions. All assumptions are reviewed at
each reporting date. Retirement and other post-employment benefits expense amounted to
=1,686 million, P
P =2,241 million and =P1,610 million for the years ended December 31, 2022, 2021 and
2020, respectively. Retirement and other post-employment benefit liabilities as at December 31, 2022
and 2021 amounted to = P2,887 million and = P7,716 million, respectively.

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In determining the appropriate discount rate, management considers the interest rates of government
bonds in the respective currencies, with extrapolated maturities corresponding to the expected
duration of the defined benefit obligation. The underlying bonds are further reviewed for quality, and
those having excessive credit spreads are removed from the population of bonds on which the
discount rate is based, on the basis that they do not represent high quality bonds.

The mortality rate is based on publicly available mortality tables for the Philippines and is modified
accordingly with estimates of mortality improvements. Future salary increases and retirement benefits
increases are based on expected future inflation rates for the Philippines.

See Note 25 – Expenses and Income and Note 26 – Long-term Employee Benefits.

Provisions

The MERALCO Group has various claims, assessments and cases as discussed in Note 29 –
Contingencies and Legal Proceedings and Note 2 – Rate Regulations. The MERALCO Group’s
estimate for probable costs for the resolution of these claims, assessments and cases has been
developed in consultation with external counsel, if any, and internal counsels handling the defense in
these claims, assessments and cases and is based upon thorough analysis of potential outcome.

The MERALCO Group, in consultation with its external and internal legal counsels, does not believe
that these claims and legal proceedings will have a material adverse effect on the consolidated
financial statements. It is possible, however, that future financial performance could be materially
affected by changes in the estimates or the effectiveness of management’s strategies and actions
relating to these proceedings.

The MERALCO Group recognized net provisions on various claims and assessments amounting to
=5,831 million, P
P =10,175 million and =
P15,526 million for the years ended December 31, 2022, 2021
and 2020, respectively.

Provisions are measured at the present value of management’s best estimate of the expenditures
required to settle the present obligation at the end of the reporting year. The discount rate used to
determine the present value is a pre-tax rate that reflects current market assessments of the time value
of money and the risk specific to the liability. As at December 31, 2022 and 2021, provisions and
other noncurrent liabilities are presented net of the effect of the time value of money amounting to
=5,147 million and =
P P860 million, respectively.

See Note 19 – Provisions and Note 22 – Trade Payables and Other Current Liabilities.

Revenue Recognition

The MERALCO Group’s revenue recognition policies require the use of estimates and assumptions
that may affect the reported amounts of its revenues and receivables.

Revenues from sale of electricity by MERALCO and Clark Electric are billed based on customer-
specific billing cycle cut-off date for each customer, while recording of related purchased power cost
is based on calendar month as provided in the terms of the PPAs and PSAs. The recognition of
unbilled revenues for billing cycles with earlier than month-end cut-off dates requires the use of
estimates. The difference between the amounts initially recognized based on provisional invoices and
the settlement of the actual billings by power generation companies is taken up in the subsequent
period. Also, revenues from sale of electricity are adjusted for the estimated over and/or under-

*SGVFS169563*
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recoveries of pass-through charges, which are subject of various applications for recovery and
approval by the ERC.

Management believes that such use of estimates will not result in material adjustments in future years.

Revenues and costs from construction contracts of MIESCOR are recognized based on the output
method. This is measured principally on the basis of the estimated completion of a physical
proportion of the contract work.

Revenue from Contracts with Customers

The MGen Group applied the following judgements that significantly affect the determination of the
amount and timing of revenue from contracts with customers:

1) Identifying Performance Obligations. The MGen Group identifies performance obligations by


considering whether the promised goods or services in the contract are distinct goods or services.
A good or service is distinct when the customer can benefit from the good or service on its own
or together with other resources that are readily available to the customer and the MGen Group’s
promise to transfer the good or service to the customer is separately identifiable from the other
promises in the contract.

The MGen Group assesses performance obligations as a series of distinct goods and services that
are substantially the same and have the same pattern of transfer if:
a. each distinct good or services in the series are transferred over time; and
b. the same method of progress will be used (i.e., units of delivery) to measure the entity’s
progress towards complete satisfaction of the performance obligation

For revenue contracts under EPPAs, ASPA, and spot market sales to WESM, these are combined
and considered as one (1) performance obligation since these are not distinct within the context of
PFRS 15 as the buyer cannot benefit from the contracted capacity without the corresponding
energy and the buyer cannot obtain energy without contracting a capacity.

2) Determining Method to Estimate Variable Consideration and Assessing the Constraint. The
MGen Group includes some or all the amounts of variable consideration estimated but only to the
extent that it is highly probable that a significant reversal in the amount of cumulative revenue
recognized will not occur when the uncertainty associated with the variable consideration is
subsequently resolved. The MGen Group considers both the likelihood and magnitude of the
revenue reversal in evaluating the extent of variable consideration the MGen Group will be
subjected to constraint.

Factors such as the following are considered:


a. high susceptibility to factors outside the Group’s influence;
b. timing of the resolution of the uncertainty; and
c. having a large number and broad range of possible outcomes.

Some contracts with customers provide for volume and prompt payment discounts that give rise
to variable consideration. In estimating the variable consideration, the MGen Group is required
to use either the expected value method or the most likely amount method based on which
method better predicts the amount of consideration to which it will be entitled. The expected
value method of estimation takes into account a range of possible outcomes while the most likely
amount is used when the outcome is binary.

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The MGen Group determined that the expected value method is the appropriate method to use in
estimating the variable consideration given the number of contracts with customers that have
similar characteristics and the range of possible outcomes.

3) Allocation of Variable Consideration. Variable consideration may be attributable to the entire


contract or to a specific part of the contract. For revenue contracts under EPPAs, ASPA and spot
market sales to WESM, revenue streams which are considered as series of distinct services that
are substantially the same and have the same pattern of transfer, the MGen Group allocates the
variable amount that is no longer subject to constraint to the satisfied portion (i.e., month or
actual electricity delivery) which forms part of the single performance obligation and the monthly
billing of the MGen Group.

4) Revenue Recognition. The MGen Group recognizes revenue when it satisfies an identified
performance obligation by transferring a promised good or service to a customer. A good or
service is considered to be transferred when the customer obtains control. The MGen Group
determines, at contract inception, whether it will transfer control of a promised good or service
over time. If the MGen Group does not satisfy a performance obligation over time, the
performance obligation is satisfied at a point in time.

The MGen Group concluded that revenue from sale of electricity from contracts with customers
are to be recognized over time, since customers simultaneously receive and consume the benefits
as the MGen Group supplies power.

5) Identifying Methods for Measuring Progress of Revenue Recognized Over Time. The MGen
Group determines the appropriate method of measuring progress which is either through input or
output methods. Input method recognizes revenue on the basis of the efforts or inputs to the
satisfaction of a performance obligation while output method recognizes revenue on the basis of
direct measurements of the value to the customer of the goods or services transferred to date.

The MGen Group determined that the output method is the more appropriate way of measuring
progress as actual electricity is supplied to customers.

6. Segment Information

Each operating segment of the MERALCO Group engages in business activities from which revenues
are earned and expenses are incurred (including intercompany transactions with other business
segments within the MERALCO Group). The operating results of each of the operating segments are
regularly reviewed by MERALCO’s Management Committee to evaluate how resources are to be
allocated to the operating segments and to assess their performances for which discrete financial
information is available.

For management purposes, the MERALCO Group’s operating businesses are organized and managed
separately according to the nature of services provided, with each segment representing a strategic
business unit that offers different products and/or services, as follows:

 Power

The Power segment consists of (a) electricity distribution, (b) power generation and (c) RES.

Electricity distribution – This is principally electricity distribution and supply of power on a pass-
through basis covering all captive customers in the MERALCO and the Clark Electric franchise

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areas in Luzon. Electricity distribution within the MERALCO franchise area accounts for
approximately 52% of the power requirements of the country. Clark Electric’s franchise area
covers Clark Special Economic Zone and the sub-zones.

Shin Clark manages the development, operation, and maintenance of the electric power
distribution system in the 9,450-hectare New Clark City located within the Clark Special
Economic Zone in the towns of Capas and Bamban, Tarlac, through a Joint Venture Agreement
with the BCDA. On May 10, 2022, Shin Clark Power Corporation (“Joint Venture Company”)
has been incorporated and registered with the Securities and Exchange Commission (“SEC”) and
is awaiting ERC’s approval of its CPCN to be able to operate as a distribution utility.

Power generation – The MERALCO Group has a combined group generating capacity of
2,251 MW (net) of coal, liquid natural gas, and oil and diesel plants in the Philippines and
Singapore.

MGen owns 51% interest in SBPL which operates a 455 MW (net) supercritical coal-fired plant in
Mauban, Quezon. For the year ended December 31, 2022, it delivered a total of 2,765 GWh to
MERALCO under an ERC-approved PSA.

GBPC owns 970 MW (net) of operating coal and diesel-fired power plants in the Visayas and
Mindoro Island. GBPC also has a 50% interest in Alsons Thermal Energy Corporation (“ATEC”),
which holds a 75% interest interest in Sarangani Energy Corporation (“Sarangani Energy”).
Sarangani Energy operates a 2 x 105 MW (net) CFB plant in Maasim, Sarangani.

MGen Renewable Energy, Inc. (“MGreen”) is a wholly owned subsidiary of MGen engaged in
the development, construction and operation of solar-powered generation facilities. It has a 60%
equity in First Bulacan. First Bulacan owns and operates a 80 MWdc/50 MWac utility scale solar
facility located in San Miguel, Bulacan, the largest single operating solar plant in the country,
which began commercial operations on May 12, 2021 and has since delivered solar energy to
MERALCO under an ERC-approved PSA. The PSA is for a period of 20 years.

MGreen is in the final stages of the construction of its 75 MWac solar plant in Baras, Rizal
through PHRI, a joint venture with Mitsui’s local unit Mit-Renewables Philippine Corporation. In
August 2022, the project company secured a = P2,650 million, 15-year term project financing
facility to fund the ongoing construction of the solar plant. Also under construction is a 68 MWac
solar plant in Ilocos Norte in partnership with Pasuquin Energy Holdings, Inc. of Vena Energy
Solar PH B.V. (“Vena Energy”) These two (2) projects are expected to commence operations in
the first quarter of 2023.

MGen also has a combined 58% (direct and indirect interests) in PacificLight Power Pte Ltd.
(“PacificLight Power”). PacificLight Power owns and operates a 2 x 400 MW combined cycle
turbine power plant mainly fueled by liquefied natural gas (“LNG”) in Jurong Island, Singapore.

See Note 8 – Investments in Associates and Interests in Joint Ventures.

RES – covers the sourcing and supply of electricity to qualified contestable customers.
MERALCO and Clark Electric also operate as local retail electricity suppliers within their
respective franchise area under a separate business unit, MPower and Cogent Energy,
respectively. Under Retail Competition and Open Access (“RCOA”), qualified contestable
customers who opt for contestability and elect to be among contestable customers may source
their electricity supply from any retail electricity suppliers, including MPower and Cogent
Energy.

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The ERC granted the following subsidiaries distinct RES licenses to operate as retail electricity
suppliers within Luzon and Visayas: Vantage and Phoenix Power, wholly owned subsidiaries of
MERALCO; MeridianX, a wholly owned subsidiary of Comstech, and GESC, a wholly owned
subsidiary of GBPC. Vantage and MeridianX’s RES licenses which were issued by the ERC are
valid for five (5) years up to January 10, 2022 and February 9, 2022, respectively. The validity of
their RES licenses was extended until July 9, 2023 pending final evaluation by the ERC of the
renewal applications. Clarion, a wholly owned subsidiary of Clark Electric, submitted the
requirements for its RES licensing to ERC on November 17, 2017. As at February 27, 2023, the
approval of its RES licensing is pending with the ERC. GESC is a wholly owned subsidiary of
GBPC. On September 10, 2021, GESC’s RES license was renewed for another five (5) years
beginning September 13, 2021.

 Other Services

The other services segment is involved principally in electricity-related services, such as, electro-
mechanical engineering, construction, consulting and related manpower services, e-transaction
and bills collection, telecommunications services, rail-related operations and maintenance
services, insurance and re-insurance, e-business development, power distribution management,
energy systems management and harnessing renewable energy, construction and leasing of
communication towers and electric vehicle and charging infrastructure solutions. These services
are provided by MIESCOR, MBI, MLI and MIDC (collectively known as “MIESCOR Group”),
CIS, Bayad and CFSI (collectively referred to as “CIS Group”), e-MVI, Paragon and Radius
(collectively referred to as “e-MVI Group”), Comstech, MRail, LOIL, Finserve, MServ, Spectrum
and eSakay.

The Management Committee evaluates the performance of the business segments based on (i) net
income attributable to equity holders of the parent for the year, (ii) consolidated core earnings before
interest, taxes, and depreciation and amortization (“consolidated core EBITDA”); and (iii)
consolidated core net income (“CCNI”). Net income is measured consistent with reported net income
in the consolidated statement of income.

Consolidated core EBITDA is measured as CCNI excluding depreciation and amortization, interest
and other financial charges, interest and other financial income and provision for income tax.

CCNI for the year is measured as consolidated net income attributable to equity holders of the parent
adjusted for foreign exchange gain or loss, mark-to-market gain or loss, impairment or reversal of
impairment of noncurrent assets and certain other non-recurring gain or loss, if any, net of tax effect
of the foregoing adjustments.

Billings between operating segments are at an arm’s-length basis in a manner similar to transactions
with third parties. Segment revenues, segment expenses and segment results include transfers among
business segments. Those transfers are eliminated upon consolidation.

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The MERALCO Group operates and generates substantially all of its revenues in the Philippines (i.e., one (1) geographical location). Thus, geographical segment
information is not presented. None of its revenues from transactions with a single external customer accounts for 10% or more of its revenues from external customers.

Power Other Services Inter-segment Transactions Total


Note 2022 2021 2020 2022 2021 2020 2022 2021 2020 2022 2021 2020
(Amounts in millions)
Revenues P
=413,950 =309,238
P =267,946
P P
=17,012 =15,250
P =10,382
P (P
= 4,433) (P
=5,941) (P
=3,024) P
=426,529 =318,547
P =275,304
P

Segment results P
=44,946 =50,912
P =42,074
P P
=4,411 =3,161
P =2,460
P P
=– =–
P =–
P P
=49,357 =54,073
P =44,534
P
Provision for probable losses and
expenses from claims (5,799) (10,120) (15,511) (32) (55) (15) – – – (5,831) (10,175) (15,526)
Impairment loss (2,603) – – – – – – – – (2,603) – –
Depreciation and amortization 7, 9 and 10 (15,084) (11,913) (8,003) (947) (586) (552) – – – (16,031) (12,499) (8,555)
Interest and other financial income 24 1,942 2,145 2,282 121 52 41 – – – 2,063 2,197 2,323
Equity in net earnings (losses)
of associates and joint ventures 8 12,053 3,162 1,276 (18) (35) (43) – – – 12,035 3,127 1,233
Interest and other financial charges 24 (3,554) (3,633) (1,490) (200) (95) (104) – – – (3,754) (3,728) (1,594)
Provision for income tax - net 27 (5,841) (8,158) (5,569) (807) (754) (697) – – – (6,648) (8,912) (6,266)
Net income (loss) attributable to non-
controlling interests – – – – – – (157) (585) 167 (157) (585) 167
Net income attributable to equity
holders of the Parent P
=26,060 =22,395
P =15,059
P P
=2,528 =1,688
P =1,090
P (P
= 157) (P
=585) =167
P P
=28,431 =23,498
P =16,316
P

The inter-segment revenues mainly represent revenues of other services segment earned from the power segment.

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The following table shows the reconciliation of the EBITDA to net income:

2022 2021 2020


(Amounts in millions)
EBITDA P
=51,947 =46,538
P =31,080
P
Add (deduct):
Depreciation and amortization (16,031) (12,499) (8,555)
Interest and other financial income net
of charges and foreign exchange gains
and losses (680) (1,044) (110)
Income before income tax 35,236 32,995 22,415
Provision for income tax - net (6,648) (8,912) (6,266)
Net income P
=28,588 =24,083
P =16,149
P

The following table shows the reconciliation of the CCNI to net income:

2022 2021 2020


(Amounts in millions)
CCNI P
=27,105 =24,608
P =21,711
P
Add (deduct) non-core items, net of tax:
Non-core income (expenses) 591 (1,487) (4,556)
Foreign exchange gains (losses) 735 377 (839)
Net income for the year attributable to
equity holders of the Parent 28,431 23,498 16,316
Net income for the year attributable to
non-controlling interests 157 585 (167)
Net income P
=28,588 =24,083
P =16,149
P

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7. Utility Plant, Generation Plant and Others


The movements in utility plant, generation plant and others are as follows:
2022

Data
transmission
Sub- Communication cables and Office Furniture,
transmission towers, buildings communi- Fixtures and
and Boilers and and cation Other Transportation Construction
Note Distribution Powerhouse Land improvements Equipment Equipment Equipment Others in Progress Total
(Amounts in millions)
Cost:
Balance at beginning of year = 214,967
P = 43,337
P = 17,699
P = 12,946
P = 4,611
P = 4,326
P = 4,144
P = 7,113
P = 25,166
P = 334,309
P
Additions 520 108 1,108 2,894 188 578 830 2,527 27,133 35,886
Transfers from construction in progress 14,659 – – 198 370 222 7 157 (15,613) –
Disposals/retirements (7,306) (1,298) – (147) (57) (3) (36) (192) (54) (9,093)
Reclassifications 10 38 (812) – (184) (105) 255 (26) (141) (74) (1049)
Balance at end of year 222,878 41,335 18,807 15,707 5,007 5,378 4,919 9,464 36,558 360,053
Less accumulated depreciation and amortization:
Balance at beginning of year 91,182 2,355 – 3,585 2,050 3,100 2,799 3,912 – 108,983
Depreciation and amortization 9,004 2,754 – 607 551 466 267 468 – 14,117
Disposals/retirements (7,277) (502) – (61) (14) (2) (37) (9) – (7,902)
Reclassifications – (1,073) – (48) 44 (18) (34) (282) – (1,411)
Balance at end of year 92,909 3,534 – 4,083 2,631 3,546 2,995 4,089 – 113,787
Less allowance for impairment loss – 292 – – – – – – 2,651 2,943
Net book value = 129,969
P = 37,509
P = 18,807
P = 11,624
P = 2,376
P = 1,832
P = 1,924
P = 5,375
P = 33,907
P = 243,323
P

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2021 (As restated – see Note 3)


Data
transmission
Sub- Communi- cables and Office Furniture,
transmission cation towers, communi- Fixtures and Transpor-
and Boilers and buildings and cation Other tation Construction
Note Distribution Powerhouse Land improvements Equipment Equipment Equipment Others in Progress Total
(Amounts in millions)
Cost:
Balance at beginning of year =196,793
P =–
P =15,752
P =7,401
P =3,339
P =4,079
P =3,973
P =5,755
P =25,822
P =262,914
P
Effect of consolidation of GBPC 3 – 39,901 1,436 4,708 26 10 43 51 590 46,765
Additions 946 3,409 511 493 1,069 206 276 618 19,031 26,559
Transfers from construction in progress 19,302 – – 344 175 31 2 384 (20,238) –
Disposals/retirements (1,969) – – (1) – (1) (151) (66) – (2,188)
Reclassifications 10 (105) 27 – 1 2 1 1 371 (39) 259
Balance at end of year 214,967 43,337 17,699 12,946 4,611 4,326 4,144 7,113 25,166 334,309
Less accumulated depreciation and amortization:
Balance at beginning of year 85,913 – – 3,237 1,896 2,738 2,673 3,448 – 99,905
Depreciation and amortization 7,238 2,069 – 325 174 363 247 430 – 10,846
Disposals/retirements (1,969) – – (1) – (1) (121) (17) – (2,109)
Reclassifications – 286 – 24 (20) – – 51 – 341
Balance at end of year 91,182 2,355 – 3,585 2,050 3,100 2,799 3,912 – 108,983
Net book value =123,785
P =40,982
P =17,699
P =9,361
P =2,561
P =1,226
P =1,345
P =3,201
P =25,166
P =225,326
P

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As at December 31, 2022 and 2021, the net book values of customer-funded assets included in
“Utility plant, generation plant and others” account amounted to =P5,861 million and =
P5,764 million,
respectively. The corresponding liabilities to customers in the same amounts as at
December 31, 2022 and 2021 are included in “Other noncurrent liabilities” account in the
consolidated statements of financial position.

The power plant complex of PHRI and the generation plant and equipment of First Bulacan, with
aggregate carrying value of =
P6,288 million as at December 31, 2022 are pledged as securities for their
long-term debt.

In 2022, MIDC recognized ROU assets and corresponding lease liabilities amounting to = P1,824
milion, covering the lease agreements transferred from Globe and for the agreements entered by
MIDC for built-to-suit sites.

See Note 17 – Interest-bearing Long-term Financial Liabilities.

As at December 31, 2022, the capitalized site preparation expenses for the development of ultra-
supercritical pulverized coal-fired power generation plant of A1E amounted to =P12,492 million. In
2022, A1E recognized a provision for impairment loss amounting to = P2,651 million, related to the
design and materials for a coal technology, given the planned change in plant configuration from coal
to liquified natural gas power plant.

Construction in progress pertains to both electric capital projects (“ECPs”) and non-ECPs. ECPs are
capital projects involving construction of new electric distribution-related facilities and the upgrade
and major rehabilitation of existing electrical facilities. Non-ECPs mainly represent construction of
MGen’s power plant projects, MIDC’s communication towers and Radius’ network expansion
projects. Total interest capitalized amounted to =P398 million, =P299 million and = P275 million based
on average capitalization rate of 5% for the years ended December 31, 2022, 2021 and 2020,
respectively.

8. Investments in Associates and Interests in Joint Ventures


This account consists of the following:
2022 2021
Place of
Incorporation Principal Activity Percentage of Ownership
Associates
FPM Power Holdings Limited (“FPM British Virgin Islands/ Investment and holding
Power”)/ PacificLight Power Singapore company/ Power
generation 58 58
Alsons Thermal Energy Corporation Philippines Power generation
(“ATEC”) 50 50
Redondo Peninsula Energy Inc. (“RP Philippines Power generation
Energy”) 47 47
Bauang Private Power Corporation Philippines Power generation
(“BPPC”) 38 38
Aclara Meters Philippines, Inc. (“Aclara Philippines Sale of metering products
Meters”) and services 35 35
Power Distribution Services Ghana Ghana Distribution of power
Limited (“PDS Ghana”) 30 30

(Forward)

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2022 2021
Place of
Incorporation Principal Activity Percentage of Ownership
Indra Philippines, Inc. (“Indra Philippines Management and IT
Philippines”) consultancy 25 25
Greenergy Philippines Renewable energy 57 28
AF Payments Philippines Electronic payment clearing
and settlement system
operator 10 10
Joint Ventures
SBPL Philippines Power generation 51 51
Pure Meridian Hydropower Corporation Philippines Renewable energy
(“Pure Meridian”) 50 50
(Forward)

MRail-DESCO Joint Venture (“MDJV”) Philippines Maintenance of mass transit


system 51 51
Nuevo Solar Energy Corporation Philippines Power generation
(“NSEC”) 50 50
First Balfour-MRail Joint Venture Philippines Maintenance of mass transit
(“FBMJV”) system 49 49
MPioneer Insurance Inc. (“MPioneer”) Philippines Insurance 35 35
Rockwell Business Center Joint Venture Philippines Real estate
(“RBC JV”) 30 30

The movements in investments in associates and interests in joint ventures are as follows:

2021
(As restated –
Note 2022 see Note 3
(Amounts in millions)
Acquisition cost:
Balance at beginning of year P
=27,247 =21,447
P
Additions 504 779
Effect of consolidation of GBPC 3 – 10,314
(1)
Reclassification 11 and 23 5,713 (5,293)
Balance at end of year 33,464 27,247
Accumulated equity in net earnings (losses):
Balance at beginning of year (4,199) (5,752)
Equity in net earnings 12,035 3,127
Reclassification (1) 93 206
Dividends received (4,039) (1,780)
Balance at end of year 3,890 (4,199)
Share in remeasurement adjustments on
retirement liabilities
Balance at beginning of year (25) (13)
Share in actuarial gains (losses) 9 (12)
Balance at end of year (16) (25)
Share in other comprehensive income and
cumulative translation adjustments:
Balance at beginning of year 306 6
Cumulative translation adjustments (336) 300
Balance at end of year (30) 306
Allowance for impairment loss
Balance at beginning of year (12) –
Reclassification 23 (5,748) –
Provisions (467) (12)

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2021
(As restated –
Note 2022 see Note 3
(Amounts in millions)
Reversal 807 –
Balance at end of year (5,420) (12)
P
=31,888 =23,317
P
(1)
Refer to Note 23 to the consolidated financial statements for the nature of reclassification in 2022.
Reclassification in 2021 pertains to the carrying amount of MERALCO’s 14% investment in GBPC, which was accounted using
equity method and presented as part of investments in associates and interests in joint ventures in 2020.

The carrying values of investments in associates and interests in joint ventures follow:

2021
(As restated –
Note 2022 see Note 3
(Amounts in millions)
Associates:
ATEC 3 P
=10,057 =10,053
P
FPM Power/PacificLight Power 9,627 2,434
Indra Philippines 382 416
Aclara Meters 87 59
RP Energy 119 706
Greenergy – 35
Joint ventures:
SBPL 9,523 8,138
RBC JV 1,063 907
NSEC 595 64
MPioneer 369 354
Pure Meridian – 123
MDJV 66 28
P
=31,888 =23,317
P

ATEC

ATEC has the following equity interests: (i) 75% of Sarangani Energy which operates a 2 x 118.5
MW (gross capacity) baseload coal-fired plant in Maasim, Sarangani Province; (ii) 100% of San
Ramon Power, Inc. which is developing a 120 MW baseload coal-fired plant in Zamboanga City; and
(iii) 100% ACES Technical Services Corporation, which provides operations and maintenance
services to ATEC’s power plants.

FPM Power/PacificLight Power

FPM Power is 40%-owned by MERALCO through MPG Asia (a wholly-owned subsidiary of MGen)
and 60%-owned by First Pacific Company Limited (“First Pacific”). FPM Power has a 70% equity
interest in PacificLight Power, which owns and operates a 2 x 400 MW LNG-fired power plant in
Jurong Island, Singapore. PacificLight Power’s wholly owned subsidiary, PacificLight Energy Pte.
Ltd., is engaged in energy trading.

On July 1, 2021, MGen acquired Petronas International Power Corporation’s 30% stake in
PacificLight Power bringing its combined direct and indirect interest to 58%.

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The fair values of the identifiable assets and liabilities of PacificLight Power as at July 1, 2021,
which were based on a provisional assessment, are as follow:

Amounts in
millions
Generation plant and others =22,651
P
Cash and cash equivalents 1,165
Trade and other receivables 4,174
Other assets 4,632
Interest-bearing long-term financial liabilities (22,187)
Trade and other payables (5,581)
Other liabilities (2,424)
Net assets 2,430
Less: FPM Power’s 70% interest 1,701
Net assets acquired =729
P

Refer to Note 3 to the consolidated financial statements for the comparative information reflecting the
adjustments to the provisional amounts.

In 2022, MGen re-assessed the estimated recoverable amount of its investment in FPM Power in view
of the improvement in market condition in Singapore resulting in PacificLight Power’s positive
operating results. The recoverable amount of MGen’s investment in FPM Power as at December 31,
2022 amounting to = P6,071 million was based on its value in use, calculated using the cash flow
projections of PacificLight Power. Consequently, MGen reversed previously recognized provision for
impairment loss of =P807 million in 2022.

See Note 15 – Financial and Other Current Assets and Note 22 – Related Party Transactions.

RP Energy

RP Energy is a joint venture among MGen, Therma Power, Inc. (“TPI”) and Taiwan Cogeneration
International Corporation – Philippine Branch (“TCIC”) for the construction and operation of a power
plant in the Subic Bay Freeport Zone.

In 2022, MGen re-assessed the estimated recoverable amount of its investment in RP Energy with the
continuing suspension of power plant development. A provision for impairment loss of =
P368 million
was recognized in 2022.

Aclara Meters

Aclara Meters is 35% owned by MERALCO and 65% owned by Aclara Technology LLC. Aclara
Meters serves the Philippine market for American National Standard Institute (“ANSI”)-type Watt-
hour meters.

Greenergy

On February 3, 2021, GBPC, through its subsidiary CACI Power Corporation (“CACI Power”),
acquired 28% equity interest in Greenergy, which is developing a 40 MWac solar power plant in
Cordon, Isabela. In December 2021, GBPC transferred its 60% ownership in CACI Power to
MGreen.

In 2022, CACI Power increased its ownership in Greenergy to 95%.

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SBPL

SBPL, which is a joint venture between MGen (51%) and New Growth B.V. (49%), a 100%
subsidiary of Electricity Generating Public Company Limited of Thailand (“EGCO”), owns and
operates a new 455 MW (net) supercritical coal-fired power plant in Mauban, Quezon.

SBPL delivers all its plant output to MERALCO under a 20-year PSA approved by the ERC.

RBC JV

RBC JV is a joint venture between Rockwell Land Corporation (“Rockwell Land”) and MERALCO
for a pre-agreed cooperation period, pursuant to which Rockwell Land built and managed three (3)
Business Process Outsourcing-enabled buildings on a non-regulatory asset base property of
MERALCO. Investment in RBC JV represents MERALCO’s 30% interest in the joint venture, while
Rockwell Land has 70% interest in RBC JV.

Indra Philippines

Indra Philippines is an IT service provider in the country and in the Asia Pacific region, with a wide
range of services across various industries. Indra Philippines provides services which meet certain of
MERALCO’s IT requirements in the area of system development, outsourcing of Information Systems
(“IS”) and IT operations and management consulting.

MPioneer

MPioneer is 35% owned by MERALCO and 65% owned by Pioneer Insurance and Surety Company.
It is engaged in non-life insurance business.

Pure Meridian

On January 7, 2016, MERALCO and Repower Energy Development Corporation (“REDC”) entered
into a joint venture through, Pure Meridian, for the development of mini-hydroelectric power
projects. As of December 31, 2022, the development of the mini-hydroelectric power projects is suspended.

As at December 31, 2022, MERALCO recognized impairment on the carrying amount of its
investment in Pure Meridian with the suspension of the development of its projects.

NSEC

NSEC, a joint venture between MGreen and Vena Energy, is engaged in the development of an
approximately 68 MWac solar energy project in Currimao, Ilocos Norte.

MDJV

On June 2, 2014, MRail and Desco, Inc. entered into a Joint Venture Agreement for the general
overhaul and rehabilitation of three (3) units of diesel electric locomotives by the Philippine National
Railways. The project including its warranty period was completed on April 19, 2019. The MDJV is
in the process of liquidation.

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AF Payments

MERALCO, through Finserve, has a 10% equity interest in AF Payments. AF Payments operates and
maintains an electronic payment clearing and settlement system through a contactless automated fare
collection system for public utility, including generic contactless micropayment solution. It supplies
and issues fare media and store value cards or reloadable cards for use in transport and non-transport
facilities and operates and maintains the related hardware and software.

Due to the lower than expected penetration rate into the micropayments business, MERALCO
recognized impairment on the carrying amount of its investment in AF Payments. The recoverable
amount of the investment in AF Payments was measured using the estimate of the value in use of the
investment. The valuation analysis involved discounting estimates of free cash flows using the
discount rate of 11.9%. The estimated cash flows were based on the most recent financial budgets and
forecasts representing best estimate of ranges of economic conditions that will exist over the forecast
period. The forecast period covers the remaining service concession agreement term until December
2025. As at December 31, 2022 and 2021, the investment in AF Payments is fully impaired.

The condensed statements of financial position of material associates follow:

2022
FPM Power /
PacificLight
ATEC Power RP Energy
(Amounts in millions)
Current assets P
=4,494 P
=12,853 P
=241
Noncurrent assets 35,258 41,112 773
Current liabilities (4,533) (13,035) (6)
Noncurrent liabilities (11,558) (14,533) (22)
Non-controlling interests (3,281) – –
Net assets P
=20,380 P
=26,397 P
=986

2021
FPM Power /
PacificLight
ATEC Power RP Energy
(Amounts in millions)
Current assets P5,665
= =31,570
P =251
P
Noncurrent assets 33,600 15,140 1,176
Current liabilities (5,698) (9,499) (6)
Noncurrent liabilities (13,461) (23,724) (25)
Net assets =20,106
P =13,487
P =1,396
P

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The condensed statements of comprehensive income of material associates are as follows:


2022 2021 2020
FPM FPM
Power / Power /
PacificLight RP PacificLight RP FPM RP
ATEC Power Energy ATEC Power Energy GBPC(1) Power Energy
(Amounts in millions)
Revenues P10,077
= P
=99,168 P
=2 P
=8,270 P
=61 P
=– =P21,926 P19,981
= P
=4
Costs and expenses (8,270) (86,598) (469) (6,826) (59) (21) (19,447) (20,181) (18)
Net income (loss) 1,807 12,570 (467) 1,444 2 (21) 2,479 (200) (14)
Non-controlling
interests (429) – – (354) – – (831) – –
Net income (loss)
attributable to equity
holders of the parent 1,378 12,570 (467) 1,090 2 (21) 1,648 (200) (14)
Other comprehensive
income – – – – – – – – –
Total comprehensive
income (loss) = 1,378
P P
=12,570 (P
= 467) P
=1,090 P
=2 (P
=21) =1,648
P (P
=200) (P
=14)
Dividends received = 412
P P
=2,988 P
=– P
=1,455 P
=– P=– =308
P =–
P P
=–
(1)
On March 31, 2021, MERALCO, through MGen, acquired 86% combined equity in GBPC from MPIC and JG Summit, increasing
MGen’s equity to 100%. The transaction resulted in accounting for the investment in GBPC as a subsidiary. In 2020, investment in GBPC
was accounted as investment in an associate.

The reconciliation of the net assets of the foregoing material associates to the carrying amounts of
investments and advances in these associates recognized in the consolidated statements of financial
position is as follows:

2022
FPM
Power /
PacificLight
ATEC Power RP Energy
(Amounts in millions, except % of ownership)
Net assets of associates P
=20,380 =26,397
P =986
P
Proportionate ownership in associates (%) 50 58 47
10,190 15,310 463
Fair value adjustment and impairment (133) (5,563) (368)
Goodwill – – 24
P
=10,057 =9,747
P =119
P

2021
FPM
Power /
PacificLight
ATEC Power RP Energy
(Amounts in millions, except % of ownership)
Net assets of associates =20,106
P =13,487
P =1,396
P
Proportionate ownership in associates (%) 50 58 47
10,053 7,822 656
Fair value adjustment and impairment – (5,388) –
Goodwill – – 50
=10,053
P =2,434
P =706
P

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The following is the aggregate information of associates that are considered as not individually
material:

2022 2021 2020


(Amounts in millions)
Share in net income P
=81 =54
P =20
P
Share in other comprehensive
income (loss) 9 (12) (1)
Share in total comprehensive
income P
=90 P42
= P19
=
Dividends received P
=100 =13
P =19
P

Joint Ventures

The condensed statements of financial position of material joint ventures follow:


2022
RBC JV SBPL
(Amounts in millions)
Cash and cash equivalents P
=849 P
=3,141
Current assets, excluding cash and cash equivalents 364 8,758
Noncurrent assets 2,766 45,366
Trade payables (3) (2,278)
Current liabilities, excluding trade payables (431) (4,091)
Noncurrent liabilities (2) (32,223)
Net assets P
=3,543 P
=18,673

2021
RBC JV SBPL
(Amounts in millions)
Cash and cash equivalents =849
P =3,141
P
Current assets, excluding cash and cash equivalents 143 6,230
Noncurrent assets 2,507 46,407
Trade payables (117) (1,169)
Current liabilities, excluding trade payables (358) (3,328)
Noncurrent liabilities (1) (35,324)
Net assets =3,023
P =15,957
P

The condensed statements of comprehensive income of material joint ventures are as follows:

2022 2021 2020


RBC RBC RBC
JV SBPL JV SBPL JV SBPL
(Amounts in millions)
Revenues P
=835 P
=27,113 P
=821 P
=15,700 P782
= P12,954
=
Costs and expenses (180) (24,090) (172) (13,178) (167) (10,971)
Other income – net 122 433 3 54 24 7
Provision for (benefit from) income tax - net (93) 15 (92) 23 (84) (23)
Net income P
=684 P
=3,471 P
=560 P
=2,599 =555
P =1,967
P
Dividends received P
=155 P
=385 P
=172 P
=1,123 =143
P =–
P

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The foregoing condensed statements of comprehensive income include the following:

2022 2021 2020


RBC RBC RBC
JV SBPL JV SBPL JV SBPL
(Amounts in millions)
Depreciation P
=208 P
=1,478 P
=212 P
=1,478 =209
P =1,467
P
Interest income (7) (4) (2) (4) (24) (7)

The reconciliation of the net assets of the foregoing material joint ventures to the carrying amounts of
investments in these joint ventures recognized in the consolidated statements of financial position is
as follows:
2022
RBC JV SBPL
(Amounts in millions, except % of ownership)
Net assets of joint ventures =3,543
P =18,673
P
Proportionate ownership in joint ventures (%) 30 51
=1,063
P =9,523
P

2021
RBC JV SBPL
(Amounts in millions, except % of ownership)
Net assets of joint ventures =3,023
P =15,957
P
Proportionate ownership in joint ventures (%) 30 51
=907
P =8,138
P

The following is the condensed financial information of joint ventures which are considered
immaterial:

2022 2021 2020


(Amounts in millions)
Share in net income (loss) =37
P =33
P (P
=113)
Share in other comprehensive loss – – –
Share in total comprehensive income (loss) =37
P =33
P (P
=113)
Dividends received =–
P =–
P =5
P

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9. Investment Properties

The movements in investment properties are as follows:

2022
Buildings and
Land Improvements Total
(Amounts in millions)
Cost:
Balance at beginning of year =1,428
P =206
P =1,634
P
Additions – 3 3
Balance at end of year 1,428 209 1,637
Less accumulated depreciation:
Balance at beginning of year – 138 138
Depreciation – 4 4
Balance at end of year – 142 142
=1,428
P =67
P =1,495
P

2021
Buildings and
Land Improvements Total
(Amounts in millions)
Cost:
Balance at beginning of year =1,427
P =206
P =1,633
P
Additions 1 – 1
Balance at end of year 1,428 206 1,634
Less accumulated depreciation:
Balance at beginning of year – 134 134
Depreciation – 4 4
Balance at end of year – 138 138
=1,428
P =68
P =1,496
P

Investment properties consist of real properties held for capital appreciation, former substation sites
and other non-regulatory asset base real properties. Some of these investment properties are being
leased out.

The aggregate fair values of the investment properties are as follows:

2022 2021
(Amounts in millions)
Land P
=5,589 =4,653
P
Buildings and improvements 136 126

Land pertains primarily to properties where the Rockwell JV buildings and “Strip” mall are located.
and other non-regulated asset base properties.

The fair values of investment properties were determined by independent, professionally qualified
appraisers. The fair value represents the price that would be received to sell an investment property in
an orderly transaction between market participants at the measurement date.

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The fair value disclosures of the investment properties are categorized as Level 3 as there is no active
market for identical or similar properties. The inputs include price per square meter ranging from
=100 to =
P P170,000. There have been no changes in the valuation techniques used.

In conducting the appraisal, the independent professional appraisers used one (1) of the following
approaches:

a. Market Data or Comparative Approach

Under this approach, the value of the property is based on sales and listings of comparable
property registered within the vicinity. This approach requires the establishment of a comparable
property by reducing comparative sales and listings to a common denominator with the subject
property. This is done by adjusting the differences between the subject property and those actual
sales and listings regarded as comparables. The properties used are either situated within the
immediate vicinity or at different floor levels of the same building, whichever is most appropriate
to the property being valued. Comparison was premised on the following: location, size and
physical attributes, selling terms, facilities offered and time element.

b. Depreciated Replacement Cost Approach

This method of valuation considers the cost to reproduce or replace in new condition the assets
appraised in accordance with current market prices for similar assets, with allowance for accrued
depreciation based on physical wear and tear and obsolescence.

10. Intangible Assets

The movements of intangible assets are as follows:


2022
Land and Acquired Build-to-
Leasehold Customer network suit
Software Franchise Rights Contracts location contracts Total
(Amounts in millions)
Cost:
Balance at beginning
of year P
=6,873 P
=63 P
=570 P
=13,869 P
=– P
=– P
=21,375
Additions 801 – 28 – 5,661 2,058 8,548
Retirement (23) – (16) – – – (39)
Reclassification (140) – (24) 6 – – (158)
Balance at end of
year 7,511 63 558 13,875 5,661 2,058 29,726
Less accumulated
amortization:
Balance at beginning
of year 5,051 – 377 893 – – 6,321
Amortization 418 – 40 1,402 36 14 1,910
Retirement (23) – (16) – – – (39)
Reclassification (138) – – (19) – – (157)
Balance at end of
year 5,308 – 401 2,276 36 14 8,035
P
=2,203 P
=63 P
=157 P
=11,599 P
=5,625 P
=2,044 P
=21,691

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2021 (As restated – see Note 3)


Land and
Leasehold Customer
Note Software Franchise Rights Contracts Total
(Amounts in millions)
Cost:
Balance at beginning of year =5,969
P =49
P =932
P P–
= =6,950
P
Additions 865 – 75 – 940
Effect of consolidation of
GBPC 3 6 – – 13,494 13,500
Disposals/retirements (5) – (31) – (36)
Reclassification 7 38 14 (406) 375 21
Balance at end of year 6,873 63 570 13,869 21,375
Less accumulated amortization:
Balance at beginning of year 4,343 – 374 – 4,717
Amortization 719 – 37 893 1,649
Disposals/retirements (5) – (31) – (36)
Reclassification (6) – (3) – (9)
Balance at end of year 5,051 – 377 893 6,321
=1,822
P =63
P =193
P =12,976
P =15,054
P

On August 11, 2022, MIDC entered into a Sale and Leaseback Agreement with Globe Telecom, Inc.
(“Globe”) where MIDC shall acquire 2,180 telecom towers and related passive infrastructure for a
total consideration of ₱26.2 billion. Under the Master Lease Agreement, Globe will be the anchor
tenant of the towers for an initial period of 15 years. In addition, Globe has commissioned MIDC to
construct 900 additional build-to-suit towers over the next four years on which Globe will be the
anchor tenant.

As of December 31, 2022, MIDC acquired 860 towers from Globe for a total price of ₱10.3 billion
and recognized the following identifiable assets:

Amounts in
millions
Telecommunication towers and passive equipment =2,601
P
Acquired network location intangibles 5,661
Build-to-suit contract intangibles 2,058
Total assets acquired =10,320
P

Acquired network location intangibles represent the value to MIDC of the incremental revenue
growth that could potentially be obtained from leasing the excess capacity on acquired towers to other
mobile network operators. The build-to-suit contract intangibles pertain to the contractual
commitment of Globe to engage MIDC in building additional towers to be leased by Globe.

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11. Financial and Other Noncurrent Assets

This account consists of:

Note 2022 2021


(Amounts in millions)
Financial assets:
Debt securities at amortized cost 15 and 27 P
=19,503 =24,340
P
Restricted cash 27 4,478 4,698
Financial assets at FVOCI 27 4,140 8,467
Advance payments to a supplier 27 and 30 361 523
Nonfinancial assets:
Under-recoveries of pass-through charges - net 2 and 24 11,407 10,597
Finance lease 973 565
Rental deposits 779 643
Deferred input VAT 457 1,585
Receivable from the BIR 181 181
Goodwill 35 35
Others 1,606 1,491
P
=43,920 =53,125
P

Debt Securities at Amortized Cost

The details of debt securities at amortized cost are as follows:

2022 2021
Current Current
Portion Noncurrent Portion Noncurrent
(see Note 15) Portion Total (see Note 15) Portion Total
(Amounts in millions)
Government securities =16,793
P =11,444
P =28,237
P =11,873
P =21,136
P =33,009
P
Private debt securities 1,000 8,059 9,059 5,248 3,204 8,452
=17,793
P =19,503
P =37,296
P =17,121
P =24,340
P =41,461
P

This account represents investments in government securities issued by the Republic of Philippines
and private debt securities issued by Philippine listed corporations.

Financial Assets at FVOCI

The details of financial assets at FVOCI are as follows:


2022 2021
(Amounts in millions)
Investments in debt securities:
Corporate bonds and other investments P
=2,200 =6,569
P
Government securities – 3
Investments in shares of stock and club shares 1,940 1,895
P
=4,140 =8,467
P

Interest income from debt and equity securities amounted to P


=1,150 million, =
P1,316 million and
=1,580 million for the years ended December 31, 2022, 2021 and 2020, respectively.
P

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The rollforward of unrealized fair value gains on quoted FVOCI financial assets, net of tax, included
in the consolidated statements of financial position follows:
2022 2021
(Amounts in millions)
Balance at beginning of year P
=502 =324
P
Unrealized fair value gains (losses) on fair value
changes on:
Debt securities (280) 139
Equity securities 89 39
Balance at end of year P
=311 =502
P

Net Under-Recoveries of Pass-through Charges

This account represents generation, transmission and other pass-through costs incurred by MERALCO
and Clark Electric as DUs determined based on ERC-approved recovery mechanism, which shall be
billed to customers, upon confirmation by the ERC. The balance also includes other net under-
recoveries of generation, transmission and other pass-through charges of current and prior years,
which are the subject of various applications for recovery and approval by the ERC.

Allowance for ECL on net under -recoveries of pass-through charges amounted to =


P2,925 million and
=3,078 million as at December 31, 2022 and 2021, respectively.
P

See Note 13 - Trade and Other Receivables.

Deferred Input VAT

The amount includes portion of input VAT incurred and paid in connection with purchase of capital
assets in excess of =
P1 million per month. As provided for under RA No. 9337 (“EVAT Law”), said
portion of input VAT shall be deferred and credited evenly over the estimated useful lives of the
related capital assets or 60 months, whichever is shorter, against the output VAT due. Under the Tax
Reform for Acceleration and Inclusion (“TRAIN”) Law that was signed by President Duterte on
December 19, 2017, input VAT on capital goods purchased after December 31, 2021 shall be fully
recognized outright and may be claimed as input tax credits against output tax. The deferred input
VAT as of December 31, 2021 will continue to be amortized.

Finance Lease

Spectrum entered into bilateral PSAs to lease out solar power generation systems to its customers
under a finance lease arrangement for a period of 25 years.

Spectrum recognized finance lease receivables equivalent to its net investments under the lease. Net
investment in the lease is the fair value of the asset and the present value of the minimum lease
payments, whichever is lower. The average implicit interest rate of the lease arrangements ranges
from 7.07% to 12.52% per annum at the inception of the lease.

Minimum lease payment pertains to the price of estimated energy output that the asset can produce
and deliver to the lessee. The difference of actual and minimum lease payments from finance lease
arrangements is recognized under “Other income (expense)” account in the consolidated statement of
income.

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The lease payments made by the lessees consist of interest and principal determined using the
effective interest rate method. The lease receivable is reduced by the principal received.

12. Cash and Cash Equivalents

This account consists of:

2022 2021
(Amounts in millions)
Cash on hand and in banks P
=17,198 =20,888
P
Cash equivalents 38,634 34,119
P
=55,832 =55,007
P

Cash in banks earn interest at prevailing bank deposit rates. Cash equivalents are temporary cash
investments, which are made for varying periods up of to three (3) months depending on MERALCO
Group’s immediate cash requirements and earn interest at the prevailing short-term investment rates.

Interest income on cash in banks and cash equivalents amounted to P


=765 million, =
P515 million and
=595 million for the years ended December 31, 2022, 2021 and 2020, respectively.
P

13. Trade and Other Receivables

This account consists of:


Note 2022 2021
(Amounts in millions)
Trade:
Electricity sold 23 and 27 P
=41,695 =35,264
P
Energy generated 27 7,594 5,087
Service contracts 3,183 3,814
Unbilled receivables 24 3,118 2,647
Nontrade 23 and 27 6,208 4,125
61,798 50,937
Less allowance for expected credit losses 7,115 5,924
P
=54,683 =45,013
P

Movements in allowance for expected credit losses for trade and other receivables are as follows:

2022
Balance at Balance at
Beginning of End of
Year Provisions Write-offs Year
(Amounts in millions)
Trade:
Electricity sold P
=3,751 P
=2,137 (P
=1,119) P
=4,769
Energy generated 1,120 (11) (1) 1,108
Other trade receivables 785 1 – 786
Nontrade receivables 268 184 – 452
P
=5,924 P
=2,311 (P
=1,120) P
=7,115

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2021
Balance at Effect of Balance at
Beginning of Consolidation End of
Year Provisions Write-offs of GBPC Year
(Amounts in millions)
Trade:
Electricity sold =3,492
P =259
P P–
= P–
= =3,751
P
Energy generated – 52 (34) 1,102 1,120
Other trade receivables 783 2 – – 785
Nontrade receivables 30 238 – – 268
=4,305
P =551
P (P
=34) =1,102
P =5,924
P

2022 2021

Trade – Trade – Other Trade – Trade –


Electricity Energy Trade Nontrade Electricity Energy Other Trade Nontrade
Sold Generated Receivables Receivables Total Sold Generated Receivables Receivables Total
(Amounts in millions)
Individually
impaired P
= 2,420 P
=– P
= 786 P
= 452 P
= 3,658 =1,086
P =–
P =785
P =268
P =2,139
P
Collectively
impaired 2,349 1,108 – – 3,457 2,665 1,120 – – 3,785
P
= 4,769 P
= 1,108 P
= 786 P
= 452 P
= 7,115 =3,751
P =1,120
P =785
P =268
P =5,924
P

Trade Receivables – Electricity Sold

Trade receivables of MERALCO and Clark Electric include charges for pass-through costs. Pass-
through costs of MERALCO as DU consist of generation, transmission and SL charges, which
represent 66%, 9% and 5%, respectively, of the total billed amount in 2022 and 58%, 9% and 4%,
respectively, of the total billed amount in 2021. Billed receivables are due 10 days after bill date.
MERALCO’s and Clark Electric’s trade receivables are noninterest-bearing and are substantially
secured by bill deposits. Electricity consumed after the meter reading cut-off dates, which will be
billed to customers in the immediately following billing period, is included as part of trade
receivables.

See Note 27 – Financial Assets and Financial Liabilities.

Trade Receivables – Energy Generated

Trade receivables – Energy generated represent non-interest-bearing outstanding billings for energy
fees and pass-through fuel costs arising from the delivery of electricity to customers and energy sales
to the WESM by power generation subsidiaries. Normal credit term is 15 to 30 days from the date of
receipt of billing.
Trade Receivables – Service Contracts
Service contracts receivable arise from contracts entered into by the MIESCOR Group, e-MVI
Group, CIS Group, MRail, MServ, Finserve, Comstech, eSakay and Spectrum for construction,
engineering, consulting and related manpower, light rail maintenance, telecommunications and data
transport, e-transactions and bills collection, tellering and e-business development, energy systems
management and harnessing renewable energy to third parties.

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Receivables from service contracts and others are noninterest-bearing and are generally on
30- to 90-day terms.
See Note 11 – Financial and Other Noncurrent Assets.

14. Inventories

2022 2021
(Amounts in millions)
Materials and supplies:
At cost P
=10,867 =10,057
P
At net realizable value (“NRV”) 10,629 9,817
Materials and supplies at NRV P
=10,629 =9,817
P

The net realizable value of inventories is net of allowance for inventory obsolescence of
=238 million and P
P =240 million as at December 31, 2022 and 2021, respectively. No item of
inventory has been written off for the years ended December 31, 2022, 2021 and 2020.

See Note 25 – Expenses and Income.

15. Financial and Other Current Assets

2021
(As restated –
Note 2022 see Note 3
(Amounts in millions)
Financial assets:
Debt securities at amortized cost 11 and 27 P
=17,793 =17,121
P
Short-term investments 204 444
Current portion of advance payments to a
supplier 27 199 182
Nonfinancial assets:
Prepayments 3,962 4,101
Input VAT 6,057 2,570
Prepaid tax 3,714 1,511
Others 1,214 2,388
P
=33,143 =28,317
P

Short-term investments are temporary cash placements for varying periods beyond three (3) months
but not exceeding 12 months and earn interest at the prevailing short-term placement investment
rates.

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16. Equity

Common Stock
2022 2021
(In millions, except par value)
Authorized number of shares- P
=10 par value per share 1,250 1,250

Issued and outstanding - number of shares 1,127 1,127

There was no movement in the number of shares of MERALCO’s common stock.

The common shares of MERALCO were listed on the PSE on January 8, 1992. There are 41,338 and
41,689 shareholders of MERALCO’s common shares as at December 31, 2022 and 2021,
respectively.
Unappropriated Retained Earnings

The unappropriated retained earnings include accumulated earnings of subsidiaries, associates and
joint ventures, the balance of MERALCO’s revaluation increment in utility plant, generation plant and
others and investment properties carried at deemed cost, deferred tax assets and unrealized foreign
exchange gains totaling to =P66,595 million and =P57,591 million as at December 31, 2022 and 2021,
respectively. These amounts are restricted for dividend declaration purposes as of the close of the
respective reporting year.

The following are the cash dividends declared on common shares for the years ended
December 31, 2022, 2021 and 2020:

Dividend
Declaration Date Record Date Payment Date Per Share Amount
(In millions)
July 25, 2022 August 23, 2022 September 14, 2022 P5.81
= P6,544
=
February 28, 2022 March 30, 2022 April 26, 2022 10.23 11,526
July 26, 2021 August 23, 2021 September 15, 2021 5.06 5,700
March 1, 2021 March 30, 2021 April 26, 2021 7.82 8,818
July 27, 2020 August 20, 2020 September 15, 2020 4.70 5,294
February 24, 2020 March 20, 2020 April 15, 2020 10.40 11,716
The BOD-approved dividend policy of MERALCO consists of (i) regular cash dividends equivalent to
50% of CCNI for the year, and (ii) special dividend determined on a “look-back” basis. Declaration
and payment of special dividend are dependent on the availability of unrestricted retained earnings
and free cash. The declaration, record and payment dates shall be consistent with the guidelines and
regulations of the Philippine SEC.
Treasury Shares
Treasury shares represent 172,412 subscribed shares and the related rights of employees who have
opted to withdraw from the ESPP in accordance with the provisions of the ESPP and which
MERALCO purchased.

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17. Interest-bearing Long-term Financial Liabilities


This account consists of the following:
2022 2021
(Amounts in millions)
Long-term portion of interest-bearing
financial liabilities - long-term debt P
=68,757 =52,720
P
Current portion of interest-bearing financial
liabilities:
Long-term debt 4,118 7,644
Redeemable preferred stock 1,467 1,470
5,585 9,114
P
=74,342 =61,834
P

All of the redeemable preferred shares have been called as at June 30, 2011, consistent with the terms
of the Preferred Shares Subscription Agreement. Accrued interests amounted to P =249 million as at
December 31, 2022 and 2021. Interest is no longer accrued from the time such preferred shares were
called for redemption.

The details of interest-bearing long-term financial liabilities are as follows:

2022 2021
(Amounts in millions)
MERALCO
=10.0 Billion Term Loan
P P
=10,000 =–
P
12-year Puttable Bonds 7,000 7,000
=7.2 Billion Note
P 4,320 4,680
MGen Group
=18.0 Billion Term Loan
P 17,460 17,910
=11.6 Billion Term Loan
P 11,099 –
=16.0 Billion Term Loan
P 4,930 5,510
=4.5 Billion Term Loan
P 3,860 4,150
=3.5 Billion Term Loan
P 3,338 –
=3.0 Billion Term Loan
P 2,907 2,841
=2.0 Billion Term Loan
P 2,000 –
=1.5 Billion Term Loan
P 460 614
=7.0 Billion Term Loan
P – 3,869
=11.0 Billion Term Loan
P – 7,829
=14.0 Billion Term Loan
P – 4,200
Radius
=700 Million Term Loan
P 700 –
$2.9 Million Medium-Term Loan 108 –
MServ
=600 Million Term Loan
P 450 480
=350 Million Note
P 70 140

((Forward)

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Note 2022 2021


(Amounts in millions)
MIESCOR
=4,444 Million Term Loan
P P
=4,444 P–
=
=375 Million Term Loan
P 295 383
eSakay
=27 Million Term Loan
P 19 23
Total long-term debt 73,460 59,629
Less unamortized debt issue costs 934 357
72,526 59,272
Redeemable Preferred Stock 1,467 1,470
Fair value adjustment in relation to the purchase of
GBPC 3 349 1,092
74,342 61,834
Less current portion 5,585 9,114
Long-term portion of interest-bearing financial
liabilities P
=68,757 =52,720
P

The scheduled maturities of the outstanding long-term debt at nominal values as at


December 31, 2022 are as follows:

Amount
(In millions)
Less than one (1) year =4,195
P
One (1) year up to two (2) years 7,820
More than two (2) years up to three (3) years 11,118
More than three (3) years up to four (4) years 4,482
More than four (4) years up to five (5) years 4,648
More than five (5) years 41,197
=73,460
P

MERALCO

=
P 10.0 Billion Term Loan

In December 2022, MERALCO obtained a P =10,000 million, 10-year floating rate loan due in
December 2032. The related interest is payable quarterly. The principal is payable in nominal annual
amortizations with a balloon payment upon final maturity.

12-year Puttable Bonds

The =P7,000 million 12-year Puttable Bond is the balance of the total =P18,000 million Puttable Bonds
issued in December 2013, puttable in 10 years. This also includes a call option, whereby MERALCO
may redeem (in whole but not in part only) the outstanding bonds on the 7th year from issue date at
the early redemption price of 101.0%. The call option was not exercised. The put and call options are
clearly and closely related to the host instruments, and thus, were not recognized separately.

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=
P 7.2 Billion Note

MERALCO’s P =7,200 million, 10-year Fixed Rate Note Facility is due in February 2024. The principal
is payable in nominal annual amortizations with a balloon payment upon final maturity.

MGen Group

=
P 18 Billion Term Loan

GBPC has a = P18,000 million, 15-year term loan due in May 2036. Interest rate is subject to repricing
on the 5th year. The principal is payable semi- annually until maturity.

=
P 11.6 Billion Term Loan

On April 28, 2022, PEDC obtained a = P11,580 million, 12-year term loan due in April 2034. The
principal and related interest are payable semi-annually. The proceeds of this loan were used to
refinance its P
=11.0 billion and =P14.0 billion term loans, that were to mature in 2027 and 2022,
respectively.

=
P 16.0 Billion Term Loan

CEDC’s P =5.8 Billion Term Loan represents a restructured loan from the original project financing
obligation. This restructured loan is payable over 10 years until June 2031.

=
P 4.5 Billion Term Loan

This bilateral term loan with a consortium of banks was used to finance the acquisition of a 50% less
one share in ATEC. The loan is a fixed rate 12-year facility with quarterly principal repayment
commencing three (3) years from the drawdown date.

=
P 3.5 Billion Term Loan

On July 18, 2022, TPC obtained a = P3,500 million, 5-year term loan due in July 2027. The principal
and related interest are payable quarterly. The proceed of this loan was used to pre-terminate the
=7.0 billion term loan due in 2025.
P

=
P 3.0 Billion Term Loan

P3,039 million, 15-year term loan with interest repricing on the 10th year
First Bulacan obtained a =
and the principal amount payable until November 2034.

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=
P 2.0 Billion Term Loan

On September 1, 2022, PHRI obtained a = P2,000 million, 15-year term loan due in September 2037.
The principal and related interest are payable semi-annually.

=
P 1.5 Billion Term Loan

This =
P1,500 million loan of CEDC was used for general financing and other corporate requirements.
The principal and related interest are payable semi-annually until December 2025.

Radius

=
P 700 Million Term Loan

On August 9, 2022, Radius obtained a P


=700 million, 7-year term loan. The principal and interest are
payable quarterly until August 2029.

$2.9 Million Medium-Term Loan

In 2022, Radius obtained a $2.9 million, medium-term loan. The principal and interest are payable
quarterly until July 2024.

MServ

=
P 600 Million Term Loan

MServ obtained a =
P600 million, 10-year fixed rate term loan. The principal is payable annually until
January 2027 while the related interest is payable semi-annually.

=
P 350 Million Note

MServ has a =P350 million fixed rate note payable to a local bank. The principal is payable semi-
annually until July 2023.

MIESCOR

MIDC drew = P4,444 million out of the total =


P27,000 million floating rate term loan facility. The
principal and related interest are payable quarterly until October 2037.

=
P 375 Million Term Loan

On June 17, 2021, MIESCOR obtained a =


P375 million, fixed rate term loan, payable semi-annually
until June 2028.

eSakay

=
P 27 Million Term Loan Facility

On November 8, 2019, eSakay obtained a =P27 million, seven (7)-year fixed rate term loan, with
principal amount payable until November 2026.

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The annual interest rates of the interest-bearing financial liabilities range from 4.50% to 6.90% and
4.50% to 10.81% as at December 31, 2022 and 2021, respectively.

Debt Covenants

MERALCO’s loan agreements require compliance with debt service coverage of 1.1 times calculated
on specific measurement dates. The agreements also contain restrictions with respect to the creation
of liens or encumbrances on assets, issuance of guarantees, mergers or consolidations, disposition of a
significant portion of its assets and related party transactions.

Under their respective loan agreements, MERALCO’s subsidiaries are required to meet certain pre-
agreed financial ratios at all times until full payment of the obligation. GBPC is prohibited from
entering into merger or consolidation, unless GBPC is the surviving entity.

As at December 31, 2022 and 2021, the MERALCO Group is in compliance with all of the covenants
of the loan agreements.

Interest expense on interest-bearing long-term financial liabilities amounted to to =


P2,760 million,
=2,265 million and =
P P473 million for the years ended December 31, 2022, 2021 and 2020,
respectively.

Unamortized Debt Issue Costs

The following presents the changes to the unamortized debt issue costs:

Note 2022 2021


(Amounts in millions)
Balance at beginning of year P
=357 P78
=
Additions 705 205
Effect of consolidation of GBPC 3 – 125
Amortization charged to interest
and other financial charges 24 (128) (51)
Balance at end of year P
=934 =357
P

Redeemable Preferred Stock

The movements in the number of shares of the redeemable preferred stock, which have all been
called, are as follows:

2022 2021
Balance at beginning of year 147,015,281 147,158,808
Redemptions (352,940) (143,527)
Balance at end of year 146,662,341 147,015,281

The original “Terms and Conditions” of MERALCO’s Special Stock Subscription Agreement, which
required an applicant to subscribe to preferred stock with 10% dividend to cover the cost of extension
of, or new, distribution facilities, have been amended by the Magna Carta and the DSOAR, effective
June 17, 2004 and January 18, 2006, respectively. The amendment sets forth the guidelines for the
issuance of preferred stock, only if such instrument is available.

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18. Customers’ Deposits

This account consists of:

2022 2021
Current Current
Portion Noncurrent Portion Noncurrent
(see Note 22) Portion Total (see Note 22) Portion Total
(Amounts in millions)
Bill deposits P
=2,925 P
=31,590 P
=34,515 =2,460
P =30,901 =
P P33,361
Meter deposits 316 – 316 315 – 315
P
=3,241 P
=31,590 P
=34,831 =2,775
P =30,901 P
P =33,676

Bill Deposits

Bill deposits serve to guarantee payment of bills by a customer.

As provided in the Magna Carta and DSOAR, all captive customers of the DU are required to pay a
deposit, equivalent to the estimated monthly bill calculated based on applied load. Such deposit shall
be updated annually based on the historical 12-month average bill. A captive customer who has paid
his electric bills on or before due date for three (3) consecutive years may apply for the full refund of
the bill deposit, together with the accrued interests, prior to the termination of his service; otherwise
bill deposits and accrued interests shall be refunded within one (1) month from the termination of
service, provided all bills have been paid.

Under the amended DSOAR, which became effective on April 1, 2010, interest on bill deposits for
both residential and non-residential customers shall be computed using the equivalent peso savings
account interest rate of the Land Bank of the Philippines (“Land Bank”) or other government banks,
on the first working day of the year, subject to the confirmation by the ERC.

As provided for under ERC Resolution No. 1, Series of 2011, A Resolution Adopting the Revised
Rules for the Issuance of Licenses to Retail Electricity Suppliers, a local RES may require security
deposits from its contestable customers, which shall earn interest equivalent to the actual interest
earnings of the total amount of deposits received from the customers.

On May 10, 2019, MERALCO received a copy of the Petition dated April 27, 2019 filed by various
partylist representatives which questioned the imposition of bill deposits by the DU for its captive
customers.

The Petition prayed that the provisions on bill deposits in the Magna Carta be declared as illegal and
void and that MERALCO and other DUs be permanently prohibited from imposing and collecting bill
deposit from the captive market. The Petition further prayed that the bill deposit be refunded and/or
that combining the bill deposits with the general funds of MERALCO be disallowed. Lastly, the
Petition prayed for the conduct of an audit of the bill deposits collected by MERALCO.

MERALCO filed its Comment to the Petition on October 18, 2019. On October 28, 2019, the OSG
filed a Manifestation and Motion to drop COA as a respondent in the case. In a Resolution dated
February 4, 2020, the SC required COA to file their comments on the Petition. On July 27, 2020,
MERALCO received a copy of the Comment filed by the COA, through the OSG.

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On September 8, 2020, the SC issued a Notice of Resolution noting the Comment filed by
the OSG and requiring petitioners to file a consolidated reply within ten (10) days from notice. On
November 24, 2020, MERALCO received the petitioners’ Consolidated Reply to the Separate
Comment/Opposition of the ERC, MERALCO, and COA dated November 10, 2020.

The following are the movements of the bill deposits account:

Note 2022 2021


(Amounts in millions)
Balance at beginning of year P
=33,361 =32,105
P
Additions 3,212 3,002
Refunds (2,058) (1,746)
Balance at end of year 34,515 33,361
Less portion maturing within one year 22 2,925 2,460
Noncurrent portion of bill deposits
and related interests P
=31,590 =30,901
P

Interest expense on bill deposits amounted to =


P21 million, =
P21 million and P
=35 million for the years
ended December 31, 2022, 2021 and 2020, respectively.

Meter Deposits
Meter deposits were intended to guarantee the cost of meters installed.
The Magna Carta for residential customers (effective July 19, 2004) and DSOAR (effective
February 2, 2006) for non-residential customers exempt all customer groups from payment of meter
deposits beginning July 2004 for residential customers and February 2006 for non-residential
customers.

MERALCO implemented refund of said deposits to its customers based on the ERC Resolution No. 8,
Series of 2008, otherwise known as “Rules to Govern the Refund of Meter Deposits to Residential
and Non-Residential Customers” (“Rules”) which required the refund of meter deposits from the
effectivity of said Rules on July 5, 2008.

The total amount of refund shall be equivalent to the meter deposit paid by the customer plus the total
accrued interest earned from the time the customer paid the meter deposit until the day prior to the
start of refund.
In July 2016, MERALCO deposited the amount equivalent to the unclaimed meter deposits in a single
savings account. As at February 27, 2023, the matter is still pending with the ERC.

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19. Provisions
Provisions consist of amounts recognized related to certain proceedings and claims against
MERALCO Group, among others. The movements follow:

Note 2022 2021


(Amounts in millions)
Balance at beginning of year P
=37,036 =38,992
P
Provisions for the year – net 11,439 4,432
Settlements (24,776) (6,388)
Reclassification from other noncurrent liabilities 22 37,122 –
Balance at end of year 60,821 37,036
Less current portion 22 48,164 23,482
Noncurrent portion of provisions P
=12,657 =13,554
P

The balance of provisions substantially represents the amounts of claims related to a commercial
contract which remains unresolved and local taxes being contested as discussed in
Note 29 – Contingencies and Legal Proceedings, consistent with the limited disclosure as allowed in
PFRS.

20. Customers’ Refund


This account represents the balance of the refund related to the SC decision promulgated on
April 30, 2003, which is continuously being refunded based on documents presented by qualified
claimants. The unclaimed amount is deposited in a separate interest-bearing bank account.

MERALCO implemented the SC ruling which ordered the refund of = P0.167 per kWh for billings
made from February 1994 to April 2003 in four (4) phases. MERALCO continues to process refunds
as the eligible customers present their required supporting documents until the ERC directs otherwise
and approves MERALCO’s proposed scheme on how the unclaimed refund shall be utilized for
purposes of reducing the distribution rates of consumers.

In 2021, the ERC through its appointed consultant conducted an audit and verification of
MERALCO’s refunds, which included MERALCO’s SC refund. The audit has been completed and as
at February 27, 2023, MERALCO is awaiting further action of the ERC on the matter.
See Note 2 – Rate Regulations.

21. Notes Payable

Notes payable represent unsecured interest-bearing working capital loans obtained from local banks.
Annual interest rates were up to 4.00% and 5.40% as at December 31, 2022 and 2021, respectively.

Interest expense on notes payable amounted to =


P1,187 million, P
=1,238 million and =
P994 million for
the years ended December 31, 2022, 2021 and 2020, respectively.

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22. Trade Payables and Other Current Liabilities

This account consists of the following:


2021
(As restated –
Note 2022 see Note 3)
(Amounts in millions)
Trade accounts payable 23 and 24 P
=72,121 =54,489
P
Provisions 2, 19 and 29 48,164 23,482
Taxes 17,299 15,071
Accrued expenses:
Employee benefits 2,151 2,095
Interest 17 299 264
Others 3,279 4,840
Current portions of:
Bill deposits and related interests 18 2,925 2,460
Deferred income 1,126 961
Meter deposits and related interests 18 316 315
Refundable service extension costs 1,772 1,660
Dividends payable on:
Common stock 16 2,878 2,021
Redeemable preferred stock 17 249 249
Payable to customers 7,968 6,731
Universal charges payable 32 2,227 2,373
FiT-All payable 32 358 957
Regulatory fees payable 290 263
Other current liabilities 480 836
P
=163,902 =119,067
P

Trade Accounts Payable

Trade accounts payable mainly represent obligations to power generating companies, NGCP and
IEMOP for cost of power purchased and transmission services. In addition, this account includes
liabilities due to local and foreign suppliers for purchases of goods and services, consisting of
transformers, poles, coal, materials and supplies, and contracted services, among others.

Trade payables are non-interest-bearing and are generally settled within 15 to 30 days from the
receipt of invoice. Other payables are non-interest-bearing and due within one (1) year from
incurrence.

See Note 23 – Related Party Transactions, Note 24 – Revenue and Purchased Power and
Note 30 – Significant Contracts and Commitments.

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Refundable Service Extension Costs

Article 14 of the Magna Carta, specifically, “Right to Extension of Lines and Facilities”, requires a
customer requesting for an extension of lines and facilities beyond 30-meter service distance from the
nearest voltage facilities of the DU to advance the cost of the project. The amended DSOAR, which
became effective April 1, 2010, requires such advances from customers to be refunded at the rate of
75% of the distribution revenue generated from the extension lines and facilities until such amounts
are fully refunded. The related asset shall form part of the rate base only as the refund is paid out.
Customer advances are non-interest-bearing.

As at December 31, 2022 and 2021, the noncurrent portion of refundable service extension costs of
=4,653 million and =
P P5,334 million, respectively, is presented as “Refundable service extension costs -
net of current portion” account in the consolidated statements of financial position.

Universal Charges Payable

Universal charges are amounts passed on and collected from customers on a monthly basis by DUs.
These are charges imposed to recover stranded debts, stranded contract costs of NPC, stranded
contract costs of eligible contracts of DUs, missionary electrification and environment charges. DUs
remit collections monthly to PSALM who administers the fund generated from universal charges and
disburses the said funds in accordance with the intended purposes.

Payable to Customers

Payable to customers represents amounts credited to customers’s bills or paid by customers in


advance and which are being applied to their current consumption.

Taxes

Taxes represent pass-through VAT, output VAT, withholding taxes and energy taxes payable. Pass-
through VAT pertains to VAT on generation and transmission costs billed to the DU, which are in turn
billed to the customers. Remittance of such pass-through VAT to the generation companies is based
on collection of billed receivables from the customers.

23. Related Party Transactions

The MERALCO Group has approval process and limits on the amount and extent of related party
transactions.

The following summarizes the total amount of transactions, which have been provided and/or
contracted by the MERALCO Group to/with related parties for the relevant year. The outstanding
balances are unsecured, non-interest-bearing and settled in cash.

Pole Attachment Contract with PLDT, Inc. (“PLDT”)

MERALCO has a pole attachment contract with PLDT similar to pole attachment contracts of
MERALCO with third parties/ telecommunication companies. Under the pole attachment contract,
PLDT shall use the contracted cable positions exclusively for its telecommunication cable network
facilities.

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Sale of Electricity under Various Service Contracts

MERALCO sells electricity to its subsidiaries, associates, joint ventures and related party shareholder
groups with operations within the franchise area, namely, PLDT, Metro Pacific and JG Summit and
their respective subsidiaries and affiliates. The rates charged to related parties are the same ERC-
mandated rates applicable to all customers within the franchise area. Also, rate charges of RES for
generation charge uses the same rate model for other customers.
Purchase of Telecommunication Services from PLDT and Subsidiaries

The MERALCO Group’s telecommunications carriers include PLDT for its wireline and Smart
Communications, Inc. and Digitel Mobile Philippines, Inc., for its fixed and wireless services. Such
services are covered by standard service contracts between the telecommunications carriers and each
legal entity within the MERALCO Group.

Lease Agreement with Robinsons Land Corporation (“RLC”)

In 2022, MERALCO entered into various lease agreements with RLC for its temporary office
premises for period ranging from 12 months to 15 months.
Purchase of Goods and Services

In the ordinary course of business, the MERALCO Group purchases goods and services from its
affiliates and sells power and renders services to such affiliates.

PSA with SBPL

As discussed in Note 30, MERALCO has a long-term PSA with SBPL.

Following is a summary of related party transactions in 2022, 2021 and 2020 and the outstanding
balances as at December 31, 2022 and 2021:
Outstanding
Receivable
Amount of Transactions (Liability)
Category 2022 2021 2020 2022 2021 Terms Conditions
(Amounts in millions)
Sale of electricity:
JG Summit Group =3,919 P
P =2,704 P
=2,542 P
=2,257 =387
P 10-day; Unsecured,
noninterest- no impairment
bearing
PLDT Group 1,224 1,233 1,192 86 85 10-day; Unsecured,
noninterest- no impairment
bearing
Metro Pacific Group 391 410 415 40 158 10-day; Unsecured,
noninterest- no impairment
bearing
Purchases of IT services - 940 922 1,228 (377) (362) 30-day; Unsecured
Indra Philippines noninterest-
bearing
(Forward)

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Outstanding
Receivable
Amount of Transactions (Liability)
Category 2022 2021 2020 2022 2021 Terms Conditions
(Amounts in millions)
Purchases of meters and =147
P =248 P
P =157 =– (P
P =23) 30-day; Unsecured
devices – Aclara Meters noninterest-
bearing
Purchases of medical 192 238 143 (7) – 30-day; Unsecured
services - Colinas Verdes noninterest-
Hospital Managers bearing
Revenue from pole 689 599 541 5 73 Advance Unsecured,
attachment - PLDT payment no impairment
Lease of office premises - RLC 46 – – – – 30-day; Unsecured
noninterest-
bearing
Purchases of wireline and
wireless services -
PLDT Group 103 90 105 (13) (11) 30-day; Unsecured
noninterest-
bearing
Purchases of insurance premium 451 412 449 (2) (3) 30-day; Unsecured
- MPioneer noninterest-
bearing
Donations to One Meralco 99 71 76 – – None None
Foundation

Purchases of power:
SBPL 26,795 15,973 12,902 (1,773) (746) 30-day; Unsecured
noninterest-
bearing
PEDC 1 – 372 1,812 – – 30-day; Unsecured
noninterest-
bearing
1 On March 31, 2021, MERALCO, through MGen, acquired 86% combined equity in GBPC from MPIC and JG Summit, increasing
MGen’s equity to 100%.

Advances to FPM Power

As at December 31, 2021, FPM Power’s non-interest-bearing loan from MPG Asia amounting to
US$110 million (P
=5,748 million) as at December 31, 2021 was fully impaired. On November 25,
2022, MPG Asia converted the loan to additional equity investment in FPM Power.

See Note 15 – Financial and other Current Assets and Note 8 – Investments in Associates and
Interests in Joint Ventures.

Transaction with MERALCO Retirement Benefits Fund (“Retirement Fund”)

MERALCO’s Retirement Fund holds 6,000 common shares of RP Energy at par value of = P100 per
share, with total carrying amount of =P600,000 or an equivalent 3% equity interest in RP Energy. The
fair value of RP Energy’s common shares cannot be reliably measured as these are not traded in the
financial market. As at December 31, 2022 and 2021, the fair value of the total assets being managed
by the Fund amounted to = P31.6 billion and =
P34.6 billion, respectively.

See Note 25 – Long-Term Employee Benefits.

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Compensation of Key Management Personnel

The compensation of key management personnel of the MERALCO Group by benefit type is as
follows:

2022 2021 2020


(Amounts in millions)
Short-term employee benefits P
=643 =549
P =559
P
Long-term employee incentives
and retirement benefits 280 280 137
Total compensation to key
management personnel P
=923 =829
P =696
P

All directors are entitled to a reasonable per diem for their attendance in meetings of the BOD and
Board Committees plus an additional compensation, provided that the total value of such additional
compensation, in whatever form so given, shall not exceed one (1) percent of the income before
income tax of MERALCO during the preceding year.

Each of the directors is entitled to a per diem of =


P140,000 for every BOD meeting attended. Each
member of the Audit, Risk Management, Remuneration and Leadership Development, Finance,
Related Party Transactions and Nomination and Governance Committees is entitled to a fee of
=24,000 for every committee meeting attended. Also, the members of the BOD are entitled to a stock
P
grant based on a pre-approved number of shares for each director which was implemented beginning
May 2013 as approved by the stockholders. The directors have the option to receive the number of
shares granted or the equivalent cash value.

As at December 31, 2022, there are no agreements between the MERALCO Group and any of its key
management personnel providing for benefits upon termination of employment or retirement,
except with respect to benefits provided under (i) a defined benefit retirement plan, (ii) a program
which aims to address capability refresh and organizational optimization requirements, and
(iii) a contributory provident plan. Post-retirement benefits under the defined benefit retirement plan
cover employees hired up to December 31, 2003 only. The provident plan, which is implemented on a
voluntary basis, covers employees hired beginning January 1, 2004.

24. Revenues and Purchased Power

Revenues

The MERALCO Group disaggregates its revenue information in the same manner as it reports its
segment information.

See Note 6 – Segment Information.

Contract Assets and Contract Liabilities

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The MERALCO Group’s contract balances are as follows:

2022 2021
(Amounts in millions)
Contract assets:
Unbilled receivables P
=3,118 P2,647
=
Under-recoveries of pass-through charges - net 11,407 10,597
Contract liabilities:
Non-refundable liability related to asset funded
by customers 869 866
Over-recoveries from transmission, lifeline
subsidy and SL charges 559 597

Income recognized from the non-refundable liability related to assets funded by customers amounted
to =
P203 million, =
P114 million and =
P94 million for the years ended December 31, 2022, 2021 and
2020, respectively.

Purchased Power

The details of purchased power are as follows:


2022 2021 2020
(Amounts in millions)
Generation costs P
=279,328 =190,416
P =167,241
P
Transmission costs 43,317 34,499 37,179
P
=322,645 =224,915
P =204,420
P

Purchased power costs for the captive customers are pass-through costs and are revenue-neutral to
MERALCO and Clark Electric, as DUs.

Generation costs include any line rentals, market fees and must-run unit charges billed by IEMOP.

The details of purchased power follow:

2022 2021 2020


(Amounts in millions)
“FGPC” and FGP Corp.
(“FGP”) P
=76,145 =51,164
P =43,659
P
NGCP 43,356 34,539 37,230
IEMOP 40,655 21,721 14,523
QPPL 28,793 16,289 13,990
SBPL 26,795 15,973 12,902
South Premiere Power
Corporation (“SPPC”) 25,679 25,643 24,166
San Miguel Energy Corporation
(“SMEC”) 21,625 15,535 16,639
Masinloc Power Partners Co. Ltd.
(“MPPCL”) 18,712 8,522 8,056
First NatGas Power Corp.
(“FNPC”) 14,971 9,309 8,456
(Forward)

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2022 2021 2020


(Amounts in millions)
AC Energy Philippines, Inc. (“AC
Energy”) P
=10,562 P
=10,790 P
=9,023
Therma Luzon, Inc. (“TLI”) 4,161 2,219 7,033
Southwest Luzon Power
Generation Corporation 2,672 1,982 34
First Gen Hydro Power
Corporation (“FGHPC”) 1,378 2,507 723
Energy Development Corporation
(“EDC”) 1,015 – –
PEDC 969 2,264 1,812
Sem-Calaca Power Corporation
(“Sem-Calaca”) 644 4,933 3,650
Solar Philippines Tarlac
Corporation (“Solar
Philippines Tarlac”) 370 425 338
Therma Mobile, Inc. (“TMO”) – – 516
Millenium Energy, Inc. (“MEI”) – – 307
Others 4,143 1,100 1,363
P
=322,645 =224,915
P =204,420
P

Generation and transmission costs are net of company use amounting to =


P480 million, =
P351 million
and P
=321 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Generation and transmission costs over- or under-recoveries result from the lag in the billing and
recovery of generation and transmission costs from consumers. As at December 31, 2022 and 2021,
the total transmission costs and SL charge over-recoveries included in “Other noncurrent liabilities”
account in the consolidated statements of financial position amounted to =
P484 million and
=532 million, respectively.
P

25. Expenses and Income

Salaries, Wages and Employee Benefits


Note 2022 2021 2020
(Amounts in millions)
Salaries, wages and related employee benefits P
=14,150 P
=13,651 =10,691
P
Retirement benefits 26 1,531 2,140 1,496
Other post-employment benefits 26 155 101 114
P
=15,836 P
=15,892 =12,301
P

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Depreciation and Amortization

Note 2022 2021 2020


(Amounts in millions)
Utility plant, generation plant and others 7 P
=14,117 =10,846
P =8,065
P
Intangible assets 10 1,910 1,649 486
Investment properties 9 4 4 4
P
=16,031 =12,499
P =8,555
P

Other Expenses

Note 2022 2021 2020


(Amounts in millions)
Materials used 14 P
=4,104 =2,792
P =1,712
P
Rent and utilities 1,314 971 732
Transportation and travel 597 390 255
Insurance 483 459 391
Advertising 278 200 222
Communication 22 190 157 148
Others 1,486 1,343 807
P
=8,452 =6,312
P =4,267
P

26. Long-term Employee Benefits

Liabilities for long-term employee benefits consist of the following:

2022 2021
(Amounts in millions)
Retirement benefits liability P
=1,571 =5,625
P
Other post-employment benefits 1,316 2,091
Long-term incentives 3,756 2,541
6,643 10,257
Less current portion 3,750 –
P
=2,893 =10,257
P

Defined Benefit Retirement Plans

The features of the MERALCO Group’s defined benefit plans are discussed in Note 4 – Significant
Accounting Policies, Changes and Improvements.

Actuarial valuations are prepared annually by the respective independent actuaries engaged by
MERALCO and its subsidiaries.

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Expense recognized for defined benefit plans (included in “Salaries, wages and employee
benefits” account in the consolidated statements of income)

2022 2021 2020


(Amounts in millions)
Current service costs P
=1,197 =1,579
P =1,194
P
Net interest costs 273 509 255
Net retirement benefits expense P
=1,470 =2,088
P =1,449
P

Retirement Benefits Liability

2022 2021
(Amounts in millions)
Defined benefit obligation P
=33,143 P40,192
=
Fair value of plan assets (31,572) (34,567)
Net retirement benefits liability P
=1,571 =5,625
P

Changes in the net retirement benefits liability are as follows:

2022 2021
(Amounts in millions)
Retirement benefits liability at
beginning of year P
=5,625 =12,013
P
Net retirement benefits expense 1,470 2,088
Amounts recognized in OCI (5,274) (8,766)
Effect of consolidation of GBPC – 1,055
Contributions by employer (250) (765)
Net retirement benefits liability at end of year P
=1,571 =5,625
P

Changes in the present value of the defined benefits obligation are as follows:

2022 2021
(Amounts in millions)
Defined benefit obligation at beginning of year P
=40,192 =45,918
P
Interest costs 1,853 1,735
Current service costs 1,197 1,579
Benefits paid (2,515) (2,603)
Effect of consolidation of GBPC – 1,595
Actuarial gains due to:
Changes in financial assumptions (9,336) (8,451)
Experience adjustments 1,752 419
Defined benefit obligation at end of year P
=33,143 =40,192
P

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Changes in the fair value of plan assets are as follows:

2022 2021
(Amounts in millions)
Fair value of plan assets at beginning of year P
=34,567 =33,905
P
Interest income 1,580 1,226
Contributions by employer 250 765
Return on plan assets, excluding amount included in
net interest on the net defined benefit obligation
and interest income (2,310) 734
Effect of consolidation of GBPC – 540
Benefits paid (2,515) (2,603)
Fair value of plan assets at end of year P
=31,572 =34,567
P

The Board of Trustees (“BoT”) of the Retirement Fund is chaired by the Chairman of MERALCO,
who is neither an executive nor a beneficiary. The other members of the BoT are (i) an executive
member of the BOD; (ii) two (2) senior executives; (iii) an independent member of the BOD; and
(iv) a member of the BOD who represents the largest shareholder group, none of whom are
beneficiaries of the plan.
The Retirement Fund follows a conservative approach of investing in fixed income, money market
and equity assets to diversify the portfolio in order to minimize risk while maintaining an adequate
rate of return. The assets of the Retirement Fund are managed by four (4) local and one (1) foreign
trustee banks whose common objective is to maximize the long-term expected return of plan
assets. The BoT periodically reviews and approves the strategic mandate of the portfolio to ensure
the ability of the Retirement Fund to service its short-term and long-term obligations.

The major categories of plan assets are as follows:


2022 2021
(Amount in millions)
Investments quoted in active markets:
Quoted equity investments:
Holding firms P
=2,388 =2,912
P
Banks 846 954
Property 607 894
Telecommunication 420 601
Electricity, energy, power and water 372 446
Food, beverages and tobacco 366 572
Transportation services 264 284
Retail 88 199
Construction, infrastructure and allied services – 9
Others 1,859 2,233
Quoted debt investments:
“AAA” rated securities 9,359 9,886
Government securities 9,364 9,780
Cash and cash equivalents 2,268 2,183
Receivables 1,517 1,760
Real property 1,853 1,853
Others 1 1
Fair value of plan assets P
=31,572 =34,567
P

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Marketable equity securities, government securities, bonds and commercial notes are investments
held by the trustee banks.

Other Long-term Post-employment Benefits (included as part of “Salaries, wages and


employee benefits” account in the consolidated statements of income)

2022 2021 2020


(Amounts in millions)
Interest costs P
=104 =74
P =88
P
Current service costs 51 27 26
P
=155 =101
P =114
P

Other Long-term Post-employment Benefits Liability

Changes in the present value of other long-term post-employment benefits liability are as follows:

2022 2021
(Amounts in millions)
Balance at beginning of year P
=2,091 =2,007
P
Interest costs 104 74
Current service costs 51 27
Benefits paid (60) (112)
Actuarial losses (gains) due to change in
assumptions (870) 95
Balance at end of year P
=1,316 =2,091
P

Actuarial Assumptions

The principal assumptions used in determining retirement benefits and other long-term post-
employment benefits obligations are shown below:
2022 2021
Annual discount rate 7.12% 4.96%
Future range of annual salary increases 4.00%-10.00% 4.00%-10.00%

Sensitivity Analysis

The sensitivity analysis below has been determined based on a method that extrapolates the impact on
the defined benefit obligation as a result of reasonable changes in key assumptions occurring at the
end of the reporting year. The calculation of the defined benefit obligation is sensitive to the
assumptions set above. The following table summarizes how the impact on the defined benefit
obligation at the end of the reporting year would have increased (decreased) as a result of a change in
the respective assumptions, keeping all other assumptions constant. There have been no changes in
the method and assumptions used in the sensitivity analysis from prior year.

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The sensitivity analysis may not be representative of an actual change in the defined benefit
obligation as it is unlikely that changes in assumptions would occur in isolation from one another.

Effect on Present Value


of Defined Benefit
Obligation
% Change 2022 2021
(Amounts in millions)
Annual discount rate +1.0% (P
=3,252) (P
=4,450)
-1.0% 3,858 5,672

Future range of annual salary increases +1.0% 1,105 1,634


-1.0% (986) (1,442)

Funding

MERALCO contributes to the Retirement Fund from time to time such amounts of money required
under accepted actuarial principles to maintain the Retirement Fund in a sound condition, subject to
the provisions of the Plan.

The amount of the annual contributions to the Retirement Fund is determined through an annual
valuation report performed by an independent actuary.

The following is the maturity profile of the undiscounted benefit obligation (amounts in millions):

Less than one (1) year P3,629


=
One (1) year up to five (5) years 16,050
More than five (5) years up to 10 years 16,757
More than 10 years up to 15 years 12,643
More than 15 years up to 20 years 14,226
More than 20 years 32,148

Risk

The Retirement Fund is exposed to the following risks:

Credit Risk
The Retirement Fund’s exposure to credit risk arises from its financial assets which comprise of cash
and cash equivalents, investments and receivables. The credit risk results from the possible default of
the issuer of the financial instrument, with a maximum exposure equivalent to the carrying amounts
of the instruments.

The credit risk is minimized by ensuring that the exposure to the various chosen financial investment
structures is limited primarily to government securities and bonds or notes duly recommended by the
Trust Committees of the appointed fund managers of the Retirement Fund.

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Share Price Risk


The Retirement Fund’s exposure to share price risk arises from the shares of stock it holds and are
traded at the PSE. The share price risk emanates from the volatility of the stock market.

The policy is to limit investment in shares of stock to blue chip issues or issues with good fair values
or those trading at a discount to its net asset value so that in the event of a market downturn, the
Retirement Fund may still consider to hold on to such investments until the market recovers.
By having a balanced composition of holdings in the equities portfolio, exposure to industry or
sector-related risks is reduced. The mix of various equities in the portfolio reduces volatility and
contributes to a more stable return over time. Equity investments are made within the parameters of
the investment guidelines approved by the BoT. The BoT also meets periodically to review the
investment portfolio based on financial market conditions. Share prices are also monitored regularly.

Liquidity Risk
Liquidity risk is the risk that the Retirement Fund is unable to meet its payment obligations associated
with its financial liabilities as they fall due and to replace funds when they are withdrawn. Liquidity
risk is being managed to ensure that adequate fixed income and cash deposits are available to service
the financial obligations of the Retirement Fund. The schedule of the maturities of fixed income
investment assets are staggered by tenure or term. Policies are established to ensure that all financial
obligations are met, wherein the timing of the maturities of fixed income investments are planned and
matched to the due date of various obligations. Thus, for this investment class, maturities are
classified into short-, medium- and long-term. A certain percentage of the portfolio is kept as cash to
manage liquidity and settle all currently maturing financial obligations.

Defined Contribution Provident Plan

MERALCO has a defined contributory Provident Plan effective January 1, 2009, intended to be a
supplemental retirement benefit for employees hired beginning 2004, the participation of which is
voluntary. Each qualified employee-member who chooses to participate in the plan shall have the
option to contribute up to a maximum of 25% of his base salary. MERALCO shall match the
member’s contribution up to 100% of employee’s contribution or 10% of the member’s monthly base
salary, subject to a certain threshold. Upon resignation, the member shall be entitled to the total
amount credited to his personal retirement account immediately preceding his actual retirement date,
subject to provisions of the Provident Plan. MERALCO’s contribution to the Provident Plan amounted
to =
P61 million, =P52 million and = P47 million for the years ended December 31, 2022, 2021 and 2020,
respectively.

Consolidated Retirement Benefits Cost (included in “Salaries, wages and employee


benefits” account in the consolidated statements of income)

2022 2021 2020


(Amounts in millions)
Expense recognized for defined
benefit plans P
=1,470 =2,088
P =1,449
P
Expense recognized for defined
contribution plan 61 52 47
Retirement benefits expense P
=1,531 =2,140
P =1,496
P

Long-term Incentive Plan (“LTIP”)

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MERALCO’s LTIP covers qualified employees and is based on MERALCO Group’s achievement of
specified level of CCNI approved by the BOD and determined on an aggregate basis for a
three (3)-year period as well as employees’ attainment of a minimum level of performance rating.
Employees invited to LTIP must serve a minimum uninterrupted period to be entitled to an award.
Further, the employee should be on active employment at the time of pay-out.

27. Financial Assets and Financial Liabilities

Financial assets consist of cash and cash equivalents, short-term investments and trade and other
receivables, which are generated directly from operations, advance payments to a supplier, financial
assets at FVOCI and debt securities at amortized cost. The principal financial liabilities consist of
bank loans, redeemable preferred shares, trade and nontrade payables, which are incurred to finance
operations in the normal course of business. Accounting policies related to financial assets and
financial liabilities are set out in Note 4 – Significant Accounting Policies, Changes and
Improvements.

The following table sets forth the financial assets and financial liabilities:

Financial Liabilities Total


Assets at FVOCI Carried at Financial
Amortized Financial Amortized Assets and
Cost Assets Cost Liabilities
(Amounts in millions)
Assets as at December 31, 2022
Noncurrent
Financial and other noncurrent assets P
=24,342 P
=4,140 P
=– P
=28,482
Current
Cash and cash equivalents 55,832 – – 55,832
Trade and other receivables 51,589 – – 51,589
Financial and other current assets 18,196 – – 18,196
Total Financial Assets P
=149,959 P
=4,140 P
=– P
=154,099
Liabilities as at December 31, 2022
Noncurrent
Interest-bearing long-term financial liabilities - net of current
portion P
=– P
=– P
=68,757 P
=68,757
Customers’ deposits - net of current portion – – 31,590 31,590
Refundable service extension costs - net of current portion – – 4,653 4,653
Current
Notes payable – – 29,491 29,491
Trade payables and other current liabilities – – 91,739 91,739
Customers’ refund – – 2,905 2,905
Current portion of interest-bearing long-term financial
liabilities – – 5,585 5,585
Total Financial Liabilities P
=– P
=– P
=234,720 P
=234,720

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Financial Liabilities Total


Assets at FVOCI Carried at Financial
Amortized Financial Amortized Assets and
Cost Assets Cost Liabilities
(Amounts in millions)
Assets as at December 31, 2021
Noncurrent
Financial and other noncurrent assets =29,561
P =8,467
P =–
P =38,028
P
Current
Cash and cash equivalents 55,007 – – 55,007
Trade and other receivables 42,386 – – 42,386
Financial and other current assets 17,747 – – 17,747
Total Financial Assets P144,701
= =8,467
P =–
P =153,168
P
Liabilities as at December 31, 2021
Noncurrent
Interest-bearing long-term financial liabilities - net of current
portion =–
P P–
= P52,720
= P52,720
=
Customers’ deposits - net of current portion – – 30,901 30,901
Refundable service extension costs - net of current portion – – 5,334 5,334
Current
Notes payable – – 28,834 28,834
Trade payables and other current liabilities – – 71,602 71,602
Customers’ refund – – 2,929 2,929
Current portion of interest-bearing long-term financial
liabilities – – 9,114 9,114
Total Financial Liabilities =–
P P–
= =201,434
P =201,434
P
Fair Values

The fair values of the financial assets and financial liabilities are amounts that would be received to
sell the financial assets or paid to transfer the financial liabilities in orderly transactions between
market participants at the measurement date. Set out below is a comparison of carrying amounts and
fair values of the MERALCO Group’s financial instruments:

2022 2021
Carrying Fair Carrying Fair
Value Value Value Value
(Amounts in millions)
Financial assets
Debt securities at amortized cost =37,296
P =36,122
P =41,461
P =42,856
P
Financial assets at FVOCI 4,140 4,140 8,467 8,467
Financial assets at amortized cost -
Restricted cash 4,478 4,478 4,698 4,698
Advance payments to a supplier 560 596 705 768
=46,474
P =45,336
P =55,331
P =56,789
P

Financial liabilities
Financial liabilities carried at
amortized cost -
Interest-bearing-long-term
financial liabilities =72,875
P =73,600
P =60,364
P =61,135
P

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The following methods and assumptions were used to estimate the fair value of each class of financial
instrument for which it is practicable to estimate such value.

Cash and Cash Equivalents, Trade and Other Receivables, Short-term Investments, Trade
Payables and Other Current Liabilities and Notes Payable

Due to the short-term nature of transactions, the fair values of these instruments approximate their
carrying amounts as at reporting date.

Advance Payments to a Supplier

The fair values of advance payments to a supplier were computed by discounting the instruments’
expected future cash flows using the rates of 6.39% and 4.31% as at December 31, 2022 and 2021,
respectively.

Financial Assets at FVOCI

The fair values were determined by reference to market bid quotes as at reporting date.

Debt Securities at Amortized Cost

The fair values were determined by discounting the expected future cash flows using the interest rate
as at reporting date.

Meter Deposits and Customers’ Refund

Meter deposits and customers’ refund are due and demandable. Thus, the fair values of these
instruments approximate their carrying amounts.

Bill Deposits

The carrying amounts of bill deposits approximate their fair values as bill deposits are
interest-bearing.

Interest-bearing Long-term Financial Liabilities

The fair values of interest-bearing long-term debt (except for redeemable preferred stock) were
computed by discounting the instruments’ expected future cash flows using the rates ranging from
4.08% to 7.01% and 0.82% to 4.33% as at December 31, 2022 and 2021, respectively.

Redeemable Preferred Stock

The carrying amount of the preferred stock represents the fair value. Such preferred shares have been
called and are payable anytime upon presentation by the shareholder of their certification. This is
included under “Interest-bearing long-term financial liabilities” account.

Refundable Service Extension Costs

The fair values of refundable service extension costs cannot be reliably measured since the timing of
related cash flows cannot be reasonably estimated and are accordingly measured at cost.

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Fair Value Hierarchy

Below is the list of financial assets and financial liabilities that are classified using the fair value
hierarchy:
2022 2021
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
(Amounts in millions)
Financial assets
Advance payments to a supplier =–
P = 596
P P–
= = 596
P =–
P =768
P =–
P =768
P
Restricted cash – 4,478 – 4,478 – 4,698 – 4,698
Financial assets at FVOCI 2,673 – 1,467 4,140 6,935 – 1,532 8,467
Debt securities at amortized
cost 36,122 – – 36,122 42,856 – – 42,856
= 38,795
P = 5,074
P = 1,467
P P45,336
= =49,791
P =5,466
P =1,532
P =56,789
P

Financial liabilities
Interest-bearing long-term
financial liabilities =–
P = 73,600
P =–
P = 73,600
P =–
P =61,135
P =–
P =61,135
P

For the years ended December 31, 2022 and 2021, there were no transfers between Level 1 and
Level 2 fair value measurements, and no transfers into or out of Level 3 fair value measurements.

Financial Risk Management Objectives and Policies

The main risks arising from the financial instruments are interest rate risk, foreign currency risk,
commodity price risk, credit risk, and liquidity risk. The importance of managing these risks has
significantly increased in light of the considerable change and volatility in the Philippine and
international financial markets. The BOD reviews and approves policies for managing each of these
risks. Management monitors the market price risk arising from all financial instruments. The policies
for managing these risks are as follows:

Interest Rate Risk

The MERALCO Group’s exposure to the changes in market interest rates relate to changes of fair
value of its long-term financial assets and to the fluctuation of future cash flows in relation to its long-
term interest-bearing financial liabilities.

MERALCO’s policy is to manage its interest rate risk exposure using a mix of fixed and variable rate
debts. The strategy, which yields a reasonably lower effective cost based on market conditions, is
adopted. Refinancing of fixed rate loans may also be undertaken to manage interest cost. All
borrowings bear fixed interest rate as at December 31, 2022 and 2021.

The exposure of GBPC and its subsidiaries to the risk of changes in market interest rate relates
primarily to its long-term debt obligations with variable interest rates. GBPC and its subsidiaries’
loans bear fixed interest rates subject to repricing after a minimum of five years for CEDC and PEDC
and seven years for TPC.

Foreign Currency Risk

The revaluation of any of foreign currency-denominated financial assets and financial liabilities as a
result of the appreciation or depreciation of the Philippine peso is recognized as foreign exchange
gains or losses as at the end of each reporting year. The extent of foreign exchange gains or losses is
largely dependent on the amount of foreign currency-denominated financial instruments. While an
insignificant percentage of the MERALCO Group’s revenues and liabilities is denominated in U.S.
dollars, a substantial amount of the MERALCO Group’s expenditures for electricity capital projects

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and a portion of the operating expenses are denominated in foreign currencies, mostly in U.S. dollars.
As such, a strengthening or weakening of the Philippine peso against the U.S. dollar will decrease or
increase in Philippine peso terms, the principal amount of the MERALCO Group’s foreign currency-
denominated liabilities and the related interest expense, foreign currency-denominated capital
expenditures and operating expenses.

The following table shows the consolidated foreign currency-denominated financial assets and
financial liabilities as at December 31, 2022 and 2021, translated to Philippine peso at
=55.76 and =
P P51.00 to US$1, respectively.

2022 2021
U.S. Peso U.S. Peso
Dollar Equivalent Dollar Equivalent
(Amounts in millions)
Financial assets:
Cash and cash equivalents $63 P3,491
= $83 P4,217
=
Debt securities at amortized cost 41 2,286 24 1,224
Financial assets at FVOCI 30 1,693 21 1,070
Advance payments to a supplier 11 596 14 727
Short-term investments 6 335 9 444
151 8,401 151 7,682
Financial liabilities -
Trade payables and other liabilities (7) (374) (5) (240)
$144 =8,027
P $146 =7,442
P

All of the MERALCO Group’s long-term financial liabilities are denominated in Philippine peso.
However, an insignificant portion of its trade payables are denominated in U.S. dollar. Thus, the
impact of =P1 movement of the Philippine peso against the U.S. dollar will not have a significant
impact on the MERALCO Group’s obligations.

The following table demonstrates the sensitivity to a reasonably possible change in the U.S. dollar
exchange rate vis-a-vis the Philippine peso, with all other variables held constant, of the MERALCO
Group’s income before income tax due to changes in the fair value of financial assets and financial
liabilities. There is no other impact on the MERALCO Group’s equity other than those already
affecting the consolidated statements of income.

2022 2021
Effect on Effect on
Appreciation Income Appreciation Income
(Depreciation) before (Depreciation) before
of U.S. Dollar Income Tax of U.S. Dollar Income Tax
(In %) (In millions) (In %) (In millions)
U.S. dollar-denominated financial +5 P
=401 +5 P372
=
assets and financial liabilities –5 (401) –5 (372)

Foreign exchange gain or loss for the year is computed based on management’s best estimate of a +/–
5 percent change in the closing Philippine peso to U.S. dollar conversion rate using the balances as at
financial reporting date of U.S. dollar-denominated cash and cash equivalents, receivables and other
assets and liabilities. There has been no change in the methods and assumptions used by management
in the above analysis.

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Commodity Price Risk

Commodity price risk is the risk that the fair value or cash flows of a financial instrument will
fluctuate because of changes in world prices or index of the commodity. The exposure of MERALCO
and Clark Electric to price risk is minimal. The cost of fuel is part of MERALCO’s and Clark
Electric’s generation costs that are recoverable through the generation charge in the billings to
customers.

Credit Risk
Credit risk is the risk that a counterparty will not meet its obligation under a financial instrument or
customer contract, leading to a financial loss. The MERALCO Group is exposed to credit risk from
its operating activities (primarily trade receivables) and from its financing activities, including
deposits with banks and financial institutions and other financial instruments.
Trade and Other Receivables and Contract Assets
MERALCO as a franchise holder serving public interest cannot refuse customer connection. To
mitigate risk, the DSOAR allows MERALCO to collect bill deposit equivalent to one (1) month’s
consumption to secure credit. Also, as a policy, disconnection notices are sent three (3) days after the
bill due date and disconnections are carried out beginning on the third day after receipt of
disconnection notice.
Customer credit risk is managed by each business segment subject to MERALCO Group’s procedures
and controls relating to customer credit risk management. The MERALCO Group manages and
controls credit risk by setting limits on the amount of risk that it is willing to accept for individual
counterparties and by monitoring exposures in relation to such limits.

An impairment analysis is performed at each reporting date using a provision matrix to measure
expected credit losses. The provision rates are based on days past due for groupings of various
customer segments with similar loss pattern (i.e. residential, industrial, commercial). The calculation
reflects the probability-weighted outcome, the time value of money and reasonable and supportable
information that is available at the reporting date about past events, current conditions and forecasts
of future economic conditions.
The provision matrix is initially based on the MERALCO Group business segment’s historical
observed default rates. Each business segment of the MERALCO Group will calibrate the matrix to
adjust the historical credit loss experience with forward-looking information.
At every reporting date, historical observed default rates are updated and changes in the forward-
looking estimates are analyzed. The assumptions used in determining the historical default rates,
forecast of economic conditions, economic impact of COVID-19 pandemic to MERALCO Group
customers and ECLs involved significant estimation. The amount of ECLs is sensitive to changes in
circumstances and forecast of economic conditions. The historical credit loss experience, expected
deferred payment arrangements, expected default upon resumption of service disconnection activities
and forecast of economic conditions may also not be representative of customers’ actual default in the
future.

The subsidiaries of MERALCO trade only with recognized, creditworthy third parties. It is the
MERALCO Group’s policy that all customers who wish to trade on credit terms are subject to credit
verification procedures. In addition, receivables are monitored on an ongoing basis to reduce
exposure to bad debt.

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GBPC and its subsidiaries applied the simplified approach under PFRS 9, using a ‘provision matrix’,
in measuring expected credit losses which uses a lifetime expected loss allowance for receivables.
The expected loss rates are based on the payment profiles of revenues/sales over a period of at least
24 months before the relevant reporting date and the corresponding historical credit losses
experienced within this period. The historical loss rates are adjusted to reflect current and forward-
looking information on macroeconomic factors affecting the ability of the customers/counterparties to
settle the receivables. GBPC and its subsidiaries have identified the gross domestic product (“GDP”),
consumer price index (“CPI”) and unemployment rate in the locations in which they sell their
services to be the most relevant factors, and accordingly adjust the historical loss rates based on
expected changes in these factors.

No impairment losses resulted from performing collective impairment test, due to the past experience
of GBPC and its subsidiaries of realizing receivables within the credit period which help reduce the
credit risk exposure in case of default by the customers.

Set out below is the information about the credit risk exposure of the MERALCO Group’s trade and
other receivables and contract assets using a provision matrix:

2022
Trade – electectricity distributed
Contract Status
Active –
Pending Other
Active - to Energy trade Nontrade
Active Disconnected Terminate Terminated Generated receivables receivables Total
(Amounts in millions, except ECL rate)
ECL Rate 1.79% 2.46% 2.14% 81.28% 14.59% 12.47% 7.28%
Estimated
total
gross
carrying
amount at
default = 32,714
P = 1,993
P = 1,951
P = 5,037
P = 7,594
P = 6,301
P = 6,208
P = 61,798
P
Expected
credit
loss 585 49 42 4,093 1,108 786 452 7,115

2021
Trade – electectricity distributed
Contract Status
Active –
Active - Pending to Energy Other trade Nontrade
Active Disconnected Terminate Terminated Generated receivables receivables Total
(Amounts in millions, except ECL rate)
ECL Rate 2.41% 5.39% 4.97% 8.22% 22.02% 12.15% 6.50%
Estimated total
gross carrying
amount at
default =24,432
P =3,404
P =4,109
P =3,319
P =5,087
P =6,461
P =4,125
P =50,937
P
Expected credit
loss 589 183 204 2,775 1,120 785 268 5,924

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Financial Instruments and Cash and Cash Equivalents


With respect to placements of cash with financial institutions, these institutions are subject to the
MERALCO Group’s accreditation evaluation based on liquidity and solvency ratios and on the bank’s
credit rating. The MERALCO Group transacts derivatives only with similarly accredited financial
institutions. In addition, the MERALCO Group’s deposit accounts in banks are insured by the
Philippine Deposit Insurance Corporation up to P
=500,000 per bank account.
The MERALCO Group invests only in quoted debt securities with very low credit risk. The
MERALCO Group’s debt instruments at FVOCI comprised solely of quoted bonds that are graded in
the top investment category (Very Good and Good) by credit rating agencies and therefore, are
considered to be low credit risk investments.

Finally, credit quality review procedures are in place to provide regular identification of changes in
the creditworthiness of counterparties. Counterparty limits are established and reviewed periodically
based on latest available financial information of counterparties, credit ratings and liquidity. The
MERALCO Group’s credit quality review process allows it to assess any potential loss as a result of
the risks to which it may be exposed and to take corrective actions.
There are no significant concentrations of credit risk within the MERALCO Group.

The table below shows the maximum exposure to credit risk for the components of the consolidated
statements of financial position. The maximum exposure is equivalent to the nominal amount of the
accounts.
Gross Maximum Exposure
2022 2021
(Amounts in millions)
Cash and cash equivalents:
Cash in banks P
=16,966 =20,518
P
Cash equivalents 38,634 34,119
Trade and other receivables:
Electricity sold 36,926 31,513
Energy generated 6,486 3,967
Service contracts 2,421 3,049
Nontrade receivables 5,756 3,857
Other current financial assets:
Debt securities at amortized cost 17,793 17,121
Short-term investments 204 444
Current portion of advance payments to a supplier 199 182
Other noncurrent financial assets:
Debt securities at amortized cost 19,503 24,340
Restricted cash 4,478 4,698
Financial assets at FVOCI 4,140 8,467
Advance payments to a supplier 361 523
P
=153,867 =152,798
P

The credit quality of financial assets is managed by MERALCO using “High Grade”, “Standard
Grade” and “Sub-standard Grade” for accounts, which are neither impaired nor past due using
internal credit rating policies

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The following tables show the credit quality by asset class:

2022
Neither Past Due nor Impaired
Sub- Past Due Impaired
High Standard standard but not Financial
Grade Grade Grade Impaired Assets Total
(Amounts in millions)
Cash in banks and cash equivalents P
=55,600 P
=– P
=– P
=– P
=– P
=55,600
Trade and other receivables:
Electricity sold 8,031 2,868 12,728 13,299 4,769 41,695
Energy generated 6,485 – – 1 1,108 7,594
Service contracts 1,175 – – 1,246 762 3,183
Nontrade receivables 5,252 – – 504 452 6,208
Financial and other current assets:
Debt securities at amortized cost 17,793 – – – – 17,793
Current portion of advance
payments to a supplier 199 – – – – 199
Short-term investments 204 – – – – 204
Financial and other noncurrent
assets:
Debt securities at amortized cost 19,503 – – – – 19,503
Financial assets at FVOCI 4,140 – – – – 4,140
Restricted cash 4,478 – – – – 4,478
Advance payment to a supplier 361 – – – – 361
P
=123,221 P
=2,868 P
=12,728 P
=15,050 P
=7,091 P
=160,958

2021
Neither Past Due nor Impaired
Sub- Past Due but Impaired
High Standard standard not Financial
Grade Grade Grade Impaired Assets Total
(Amounts in millions)
Cash in banks and cash equivalents =54,637
P =–
P =–
P =–
P =–
P =54,637
P
Trade and other receivables:
Electricity sold 6,539 2,732 12,116 10,126 3,751 35,264
Energy generated 3,963 – – 4 1,120 5,087
Service contracts 986 – – 2,063 765 3,814
Nontrade receivables 3,246 – – 611 268 4,125
Financial and other current assets:
Debt securities at amortized cost 17,121 – – – – 17,121
Current portion of advance
payments to a supplier 182 – – – – 182
Short-term investments 444 – – – – 444
Financial and other noncurrent
assets:
Debt securities at amortized cost 24,340 – – – – 24,340
Financial assets at FVOCI 8,467 – – – – 8,467
Restricted cash 4,698 – – – – 4,698
Advance payment to a supplier 523 – – – – 523
=125,146
P =2,732
P =12,116
P =12,804
P =5,904
P =158,702
P

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Credit ratings are determined as follows:

 High Grade

High grade financial assets include cash in banks, cash equivalents, short-term investments, debt
securities at amortized cost investments, FVOCI financial assets and advance payments to a
supplier transacted with counterparties of good credit rating or bank standing. Consequently,
credit risk is minimal. These counterparties include large prime financial institutions, large
industrial companies and commercial establishments, and government agencies. For trade
receivables, these consist of current month’s billings (less than 30 days) that are expected to be
collected within 10 days from the time bills are delivered.

 Standard Grade

Standard grade financial assets include trade receivables that consist of current month’s billings
(less than 30 days) that are expected to be collected before due date (10 to 14 days after bill date).

 Sub-standard Grade

Sub-standard grade financial assets include trade receivables that consist of current month’s
billings, which are not expected to be collected within 60 days.
Liquidity Risk
Liquidity risk is the risk that the MERALCO Group will be unable to meet its payment obligations
when these fall due. The MERALCO Group manages this risk through monitoring of cash flows in
consideration of future payment of obligations and the collection of its trade receivables. The
MERALCO Group also ensures that there are sufficient, available and approved working capital lines
that it can draw from at any time.
The MERALCO Group maintains an adequate amount of cash, cash equivalents and FVOCI financial
assets, which may be readily converted to cash in any unforeseen interruption of its cash collections.
The MERALCO Group also maintains accounts with several relationship banks to avoid significant
concentration of funds with one (1) institution.

The following table sets out the maturity profile of the financial liabilities and contract liabilities
based on contractual undiscounted payments plus future interest:

2022
Over
Less than 3–12 Over More than
3 Months Months 1–5 Years 5 Years Total
(Amounts in millions)
Notes payable P2,047 P
= =28,004 =–
P =– =
P P30,051
Trade payables and other current liabilities 86,726 – – – 86,726
Customers’ refund 2,905 – – – 2,905
Interest-bearing long-term financial liabilities:
Fixed rate borrowings 958 4,937 31,187 33,259 70,341
Floating rate borrowings 163 590 2,972 12,501 16,226
Redeemable preferred stock 1,467 – – – 1,467
Customers’ deposits 505 2,736 6,907 24,683 34,831
Refundable service extension costs 345 1,427 4,405 248 6,425
Non-refundable liability related to
asset funded by customers 127 127 127 488 869
Total undiscounted financial liabilities =95,243
P =37,821
P =45,598
P =71,179 P
P =249,841

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2021
Over
Less than 3–12 Over More than
3 Months Months 1–5 Years 5 Years Total
(Amounts in millions)
Notes payable P1,402
= =28,529
P =–
P =– =
P P29,931
Trade payables and other current liabilities 67,166 – – – 67,166
Customers’ refund 2,929 – – – 2,929
Interest-bearing long-term financial liabilities:
Fixed rate borrowings 5,359 3,321 20,514 33,957 63,151
Redeemable preferred stock 1,470 – – – 1,470
Customers’ deposits 720 2,055 6,754 24,147 33,676
Refundable service extension costs 345 1,315 4,405 929 6,994
Non-refundable liability related to
asset funded by customers 127 127 127 485 866
Total undiscounted financial liabilities =79,518
P =35,347
P =31,800
P =59,518 P
P =206,183

The maturity profile of bill deposits is not determinable since the timing of each refund is linked to
the cessation of service, which is not reasonably predictable. However, MERALCO estimates that the
amount of bill deposits (including related interests) of =
P2,925 million will be refunded within a year.
This is shown as part of “Trade payables and other current liabilities” account in the consolidated
statement of financial position as at December 31, 2022.

Capital Management
The primary objective of the MERALCO Group’s capital management is to enhance shareholder
value. The capital structure is reviewed with the end view of achieving a competitive cost of capital
and at the same time ensuring that returns on, and of, capital are consistent with the levels approved
by its regulators for its core distribution business.
The capital structure optimization plan is complemented by efforts to improve capital efficiency to
increase yields on invested capital. This entails efforts to improve the efficiency of capital assets,
working capital and non-core assets.

The MERALCO Group monitors capital using, among other measures, debt to equity ratio, which is
gross debt divided by equity attributable to the holders of the parent. The MERALCO Group
considers long-term debt, redeemable preferred stock and notes payable as debt.

2022 2021
(Amounts in millions, except debt to equity ratio)
Long-term debt P
=72,875 =60,364
P
Notes payable 29,491 28,834
Redeemable preferred stock 1,467 1,470
Debt (a) P
=103,833 =90,668
P
Equity attributable to the holders of the parent (b) P
=109,664 =95,204
P
Debt to equity ratio(a)/(b) 0.95 0.95

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28. Income Taxes and Local Franchise Taxes


Income Taxes
The components of net deferred income tax assets and liabilities are as follows:

2021
(As restated –
Note 2022 see Note 3)
(Amounts in millions)
Deferred income tax assets:
Provisions for probable losses and
expenses from claims 19 and 22 =25,464
P =29,147
P
Unfunded retirement benefits cost and
unamortized past service cost 26 2,563 2,259
Accrued employee benefits 26 1,395 1,067
Allowance for expected credit losses 13 1,188 1,184
Decommissioning liability 223 219
Actuarial losses – 89
Allowance for excess of cost over net
realizable value of inventories 14 48 48
Others 1,151 564
32,032 34,577
Deferred income tax liabilities:
Revaluation increment in utility plant,
generation plant and others 16 5,483 5,519
Fair value of net assets from acquisition of
GBPC 3 5,343 5,558
Actuarial gains 2,329 922
Capitalized interest 792 700
Capitalized duties and taxes deducted
in advance 398 412
Others 457 282
14,802 13,393
=17,230
P =21,184
P

The deferred income tax assets and liabilities are presented in the consolidated statements of financial
position as follows:

2021
(As restated –
2022 see Note 3)
(Amounts in millions)
Deferred income tax assets – net P
=22,657 =27,143
P
Deferred income tax liabilities – net (5,427) (5,959)
P
=17,230 =21,184
P

Provision for (benefit from) income tax consists of:

2022 2021 2020


(Amounts in millions)
Current P
=4,122 =8,728
P =10,295
P
Deferred 2,526 184 (4,029)
P
=6,648 =8,912
P =6,266
P

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The deferred tax assets charged directly to OCI amounted to =


P1,544 million, =
P2,172 million and
=1,557 million for the years ended December 31, 2022, 2021 and 2020, respectively.
P

A reconciliation between the provision for income tax computed at statutory income tax rates of 25%,
25% and 30% for the years ended December 31, 2022, 2021 and 2020, and provision for income tax
as shown in the consolidated statements of income is as follows:

2022 2021 2020


(Amounts in millions)
Income tax computed at statutory
tax rate P
=8,809 =8,249
P =6,724
P
Impact of CREATE bill on provision for:
Current income tax – (824) –
Deferred income tax – 4,525 –
Income tax effects of:
Interest income subjected to lower final
tax rate (486) (478) (691)
Nondeductible interest expense 121 119 285
Nondeductible expense 25 – 1,038
Nontaxable income (75) (93) (94)
(Forward)

Equity in net losses of associates and


joint ventures (P
=3,009) (P
=782) (P
=370)
Difference in calculation of tax
deductible costs and expenses – (1,526) (3,621)
Unrecognized deferred tax assets 860 (677) 2,772
Others 403 399 223
P
=6,648 =8,912
P =6,892
P

MERALCO elected to adopt the itemized deductions in 2022 and Optional Standard Deductions
(“OSD”) in lieu of itemized deductions in 2021 and 2020 beginning with its first quarter income tax
return.

Certain deferred tax assets and liabilities expected to be recovered or settled in subsequent taxable
years, for which the related income and expense were not considered in determining gross income for
income tax purposes, were not recognized. This is because the manner by which MERALCO expects
to recover or settle the underlying assets and liabilities would not result in any future tax consequence
under the current method of computing taxable income.

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MERALCO’s net deferred tax assets which were not recognized as at December 31, 2022 and 2021
are as follows:

2022 2021
(Amounts in millions)
Deferred tax assets:
Net operating loss carryover (“NOLCO”) P
=2,030 =964
P
Provisions for various claims 664 480
2,694 1,444

Deferred tax liabilities:


Revaluation increment in utility plant, generation
plant and others – 13
Capitalized interest – 8
Capitalized duties and taxes deducted in advance – 6
Others – 5
– 32
P
=2,694 =1,412
P

The temporary differences for which deferred tax assets have not been recognized pertain to the tax
effect of NOLCO of MGen amounting to = P8,121 million and P
=3,856 million as at December 31, 2022
and 2021, respectively. These are not recognized because MGen does not expect to utilize such
deferred tax assets against sufficient taxable profit.

NOLCO totaling to =
P8,121 million may be claimed as deduction against taxable income as follows:

Date Incurred Expiry Date Amount


(In millions)
December 31, 2020 December 31, 2025 =1,288
P
December 31, 2021 December 31, 2026 1,945
December 31, 2022 December 31, 2025 4,888
=8,121
P

NOLCO amounting to =
P623 million, =
P862 million and =
P613 million expired in 2022, 2021 and 2020,
respectively.

On September 30, 2020, the BIR issued Revenue Regulations No. 25-2020 implementing Section
4(bbbb) of “Bayanihan to Recover As One Act” which states that the NOLCO incurred for taxable
years 2020 and 2021 can be carried over and claimed as a deduction from gross income for the next
five (5) consecutive taxable years immediately following the year of such loss.

On November 26, 2020, the Senate approved on 3rd and final reading Senate Bill No. 1357,
otherwise known as the “Corporate Recovery and Tax Incentives for Enterprises Act” (“CREATE”),
which seeks to reduce the corporate income tax rates and to rationalize the current fiscal incentives by
making it time-bound, targeted, and performed-based.

MERALCO’s consolidated financial statements as at and for the years ended December 31, 2020 and
2019 were released on March 1, 2021, prior to the signing of the CREATE bill into law by President
Duterte on March 26, 2021. As such, MERALCO’s provision for income tax in 2020 was computed
on the basis of the income tax rate of 30% and tax laws that were enacted at the reporting date. The

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impact of the CREATE bill, mainly the difference between the 30% and 25% income tax rates are
adjusted in the 2021 provision for current and deferred income tax.

LFT

Consistent with the decisions of the ERC, LFT is a recoverable charge of the DU from the particular
province or city imposing and collecting the LFT. It is presented as a separate line item in the
customer’s bill and computed as a percentage of the sum of generation, transmission, distribution
services and related SL charges.

The Implementing Rules and Regulations (“IRR”) issued by the ERC provide that LFT shall be paid
only on its distribution wheeling and captive market supply revenues. Pending the promulgation of
guidelines from the relevant government agencies, MERALCO is paying LFT based on the sum of the
foregoing charges in the customers’ bill.

In ERC Resolution No. 2, Series of 2021, or the Rules on Recovery of Pass-Through Taxes (Real
Property, Local Franchise, and Business Taxes) of DUs, the ERC amended and modified the rules
with respect to the recovery of any local franchise tax, including the filing of applications for
recovery.

29. Contingencies and Legal Proceedings

Overpayment of Income Tax related to SC Refund

With the decision of the SC for MERALCO to refund = P0.167 per kWh to customers during the billing
period February 1994 to May 2003, MERALCO overpaid income tax in the amount of = P7,107 million
for taxable years 1994 to 1998 and 2000 to 2001. Accordingly, on November 27, 2003, MERALCO
filed a claim for the recovery of such excess income taxes paid. After examination of the books of
MERALCO for the covered periods, the BIR determined that MERALCO had in fact overpaid income
taxes in the amount of =P6,690 million. However, the BIR also maintained that MERALCO is entitled
to a refund amount of only =P894 million, which pertains to taxable year 2001, claiming that the
period for filing a claim had prescribed in respect to the difference between MERALCO’s
overpayment and the refund amount MERALCO is entitled to.

The BIR then approved the refund of P =894 million for issuance of tax credit certificates (“TCCs”),
proportionate to the actual refund of claims to utility customers. The BIR initially issued TCCs
amounting to =P317 million corresponding to actual refund to customers as at August 31, 2005. In
May 2014, the BIR issued additional TCCs amounting to P =396 million corresponding to actual refund
to customers as at December 31, 2012.

As at December 31, 2022 and 2021, the amount of unissued TCCs of = P181 million is presented as part
of “Financial and other noncurrent assets” account in the consolidated statements of financial
position.

See Note 11 – Financial and other Noncurrent Assets.

MERALCO filed a Petition with the Court of Tax Appeals (“CTA”) assailing the denial by the
BIR of its income tax refund claim of =
P5,796 million for the years 1994 - 1998 and 2000, arising from
the SC decision (net of =
P894 million as approved by the BIR for taxable year 2001 “Overpayment of
Income Tax related to SC Refund”). In a Decision dated December 6, 2010, the CTA’s Second
Division granted MERALCO’s claim and ordered the BIR to refund or to issue TCC in favor of

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MERALCO in the amount of P =5,796 million in proportion to the tax withheld on the total amount that
has been actually given or credited to its customers.

On appeal by the BIR to the CTA En Banc, MERALCO’s petition was dismissed on the ground of
prescription in the Decision of the CTA En Banc dated May 8, 2012. On a MR by MERALCO of the
said dismissal, the CTA En Banc partly granted MERALCO’s motion and issued an Amended
Decision dated November 13, 2012, ruling that MERALCO’s claim was not yet barred by prescription
and remanding the case back to the CTA Second Division for further reception of evidence.

The BIR filed a MR of the above Amended Decision, while MERALCO filed its Motion for Partial
Reconsideration or Clarification of Amended Decision. Both parties filed their respective Comments
to the said motions, and these were submitted for resolution at the CTA En Banc.

In a Resolution promulgated on May 22, 2013, the CTA denied the said motions of the BIR and
MERALCO, and the CTA Second Division was ordered to receive evidence and rebuttal evidence
relating to MERALCO's level of refund to customers, pertaining to the excess charges it made in
taxable years 1994-1998 and 2000, but corresponding to the amount of = P5,796 million, as already
determined by the said court.

On July 12, 2013, the BIR appealed the CTA En Banc's Amended Decision dated November 13, 2012
and Resolution dated May 22, 2013 via Petition for Review with the SC. As at February 27, 2023,
the case is pending resolution by the SC.

LFT Assessments of Municipalities

Certain municipalities have served assessment notices on MERALCO for LFT. As provided in the
Local Government Code (“LGC”), only cities and provincial governments may impose taxes on
establishments doing business in their localities. On the basis of the foregoing, MERALCO and its
legal counsel believe that MERALCO is not subject or liable for such assessments.

RPT Assessments

On October 22, 2015, the SC ruled on an appeal of MERALCO declaring, among others, that the
transformers, electric posts, transmission lines, insulators and electric meters are not exempted from
RPT under the LGC. Thereafter, MERALCO began the process of settlement with the affected LGUs
and filed for the recovery of the resulting RPT payments with the ERC.

With the development, PEPOA and PHILRECA filed separate petitions for rule-making proposing the
pass-through of RPT.

In 2021, acting on petitions filed by PEPOA and PHILRECA, which proposed the pass-through of
RPT, ERC issued Resolution No. 2, Series of 2021, “Rules on Recovery of Pass-Through Taxes (Real
Property, Local Franchise, and Business Taxes”. Under such resolution, the ERC approved the
recovery of RPT, LFT and Business Taxes as pass-through charges and therefore excluded among the
financial building blocks in the annual revenue requirement of PBR.

Accordingly, MERALCO filed for recovery of such RPT paid and intends to recover the same in the
regulatory reset process.

Subsequently, PEPOA filed another petition for rule-making to amend certain provisions of
Resolution No. 2, Series of 2021 to cover full recovery as pass-through costs of: (i) local taxes (RPT,
LFT and business tax) levied by LGUs during the years prior to the Resolution to address tax

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arrearages; (ii) RPT assessed by LGUs on assets located outside the DU’s franchise area but are used
to provide public service within the franchise area. MERALCO had submitted its comments and
several public consultations were conducted. As at February 27, 2023, the Petition is pending with
the ERC.

See Note 19 – Provisions.

Mediation with NPC

The NPC embarked on a Power Development Program (“PDP”), which consisted of contracting
generating capacities and the construction of its own, as well as private sector, generating plants,
following a crippling power supply crisis. To address the concerns of the creditors of NPC, namely,
Asian Development Bank and the World Bank, the Department of Energy (“DOE”) required that
MERALCO enter into a long-term supply contract with the NPC.

Accordingly, on November 21, 1994, MERALCO entered into a 10-year Contract for Sale of
Electricity (“CSE”) with NPC which commenced on January 1, 1995. The CSE, the rates and amounts
charged to MERALCO therein, were approved by the BOD of NPC and the then Energy Regulatory
Board, respectively.

Separately, the DOE further asked MERALCO to provide a market for half of the output of the
Camago-Malampaya gas field to enable its development and production of natural gas, which was to
generate significant revenues for the Philippine Government and equally significant foreign exchange
savings for the country to the extent of the fuel imports, which the domestic volume of natural gas
will displace.

MERALCO’s actual purchases from NPC exceeded the contract level in the first seven (7) years of the
CSE. However, the 1997 Asian crisis resulted in a significant curtailment of energy demand.

While the events were beyond the control of MERALCO, NPC did not honor MERALCO’s good faith
notification of its off-take volumes. A dispute ensued and both parties agreed to enter into mediation.

The mediation resulted in the signing of a Settlement Agreement (“SA”) between the parties on
July 15, 2003. The SA was approved by the respective BODs of NPC and MERALCO. The net
settlement amount of =P14,320 million was agreed upon by NPC and MERALCO and manifested
before the ERC through a Joint Compliance dated January 19, 2006. The implementation of the SA is
subject to the approval of the ERC.

Subsequently, the OSG filed a “Motion for Leave to Intervene with Motion to Admit Attached
Opposition to the Joint Application and Settlement Agreement between NPC and MERALCO”. As a
result, MERALCO sought judicial clarification with the Regional Trial Court (“RTC-Pasig”).
Pre-trials were set, which MERALCO complied with and attended. However, the OSG refused to
participate in the pre-trial and opted to seek a Temporary Restraining Order (“TRO”) from the CA.

In a Resolution dated December 1, 2010, the CA issued a TRO against the RTC-Pasig, MERALCO
and NPC restraining the respondents from further proceeding with the case. Subsequently, in a
Resolution dated February 3, 2011, the CA issued a writ of preliminary injunction enjoining the RTC-
Pasig from conducting further proceedings pending resolution of the Petition. In a Decision dated
October 14, 2011, the CA resolved to deny the Petition filed by the OSG and lifted the injunction
previously issued. The said Decision likewise held that the RTC-Pasig committed no error in finding
the OSG in default due to its failure to participate in the proceedings. The RTC-Pasig was thus
ordered to proceed to hear the case ex-parte, as against the OSG, and with dispatch. The OSG filed a

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MR which was denied by the CA in its Resolution dated April 25, 2012. The OSG filed a Petition for
Review on Certiorari with the SC. MERALCO’s Comment was filed on October 29, 2012.
Subsequently, a Decision dated December 11, 2013 was rendered by the First Division of the SC
denying the Petition for Review on Certiorari by the OSG and affirming the Decision promulgated by
the CA on October 14, 2011.

With the dismissal of the petition filed by the Office of the Solicitor General (“OSG”) with the CA,
MERALCO filed a motion for the reception of its evidence ex-parte with the RTC-Pasig pursuant to
the ruling of the CA. In a Decision dated May 29, 2012, the RTC-Pasig declared the SA valid and
binding, independent of the pass-through for the settlement amount which is reserved for the ERC.
The OSG has filed a Notice of Appeal with the RTC-Pasig on June 19, 2012. After both parties filed
their respective appeal briefs, the CA rendered a Decision dated April 15, 2014 denying the appeal
and affirming the RTC Decision, which declared the SA as valid and binding. The OSG filed a
Petition for Review with the SC. On November 10, 2014, MERALCO filed its comment to the
Petition. PSALM likewise filed its comment to the Petition. In a Resolution dated July 8, 2015, the SC
resolved to serve anew its Resolutions requiring NPC to comment on the Petition. In compliance,
NPC submitted its Comment dated September 8, 2015. MERALCO submitted its Motion for Leave to
File and to Admit Attached Reply on October 12, 2015. Pursuant to the SC Resolution dated
November 11, 2015, the OSG filed a Consolidated Reply to the comments filed by NPC, MERALCO
and PSALM. MERALCO then filed a Motion for Leave to File and to Admit the Attached Rejoinder.
The parties have filed their respective memoranda. In a Resolution dated September 28, 2022, the SC
denied the Petition filed by the OSG and affirmed the validity of the Settlement Agreement. The
implementation of the SA is subject to the approval of the ERC.

Sucat-Araneta-Balintawak Transmission Line

The Sucat-Araneta-Balintawak transmission line is a two (2)-part transmission line, which completed
the 230 kV line loop within Metro Manila. The two (2) main parts are the Araneta to Balintawak leg
and the Sucat to Araneta leg, which cuts through Dasmariñas Village, Makati City.

On March 10, 2000, certain residents along Tamarind Road, Dasmariñas Village, Makati City
“the Plaintiffs”, filed a case against NPC with the RTC-Makati, enjoining NPC from further installing
high voltage cables near the Plaintiffs’ homes and from energizing and transmitting high voltage
electric current through said cables because of the alleged health risks and danger posed by the same
through the electromagnetic field emitted by said lines. Following its initial status quo Order issued
on March 13, 2000, RTC-Makati granted on April 3, 2000 the preliminary injunction sought by the
Plaintiffs. The decision was affirmed by the SC on March 23, 2006, which effectively reversed the
decision of the CA to the contrary. The RTC-Makati subsequently issued a writ of execution based on
the Order of the SC. MERALCO, in its capacity as an intervenor, was constrained to file an Omnibus
Motion to maintain status quo because of the significant effect of a de-energization of the Sucat-
Araneta line to the public and economy. Shutdown of the 230 kV line will result in widespread and
rotating brownouts within MERALCO’s franchise area with certain power plants unable to run at their
full capacities.

On September 8, 2009, the RTC-Makati granted the motions for intervention filed by intervenors,
MERALCO and NGCP and dissolved the Writ of Preliminary Injunction issued, upon the posting of
the respective counter bonds by defendant NPC, intervenors MERALCO and NGCP, subject to the
condition that NPC and intervenors will pay for all damages, which the Plaintiffs may incur as a
result of the Writ of Preliminary Injunction.

In its Order dated February 5, 2013, the RTC-Makati granted the Plaintiffs’ motion and directed the
re-raffle of the case to another branch after the judicial dispute resolution failed.

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This case remains pending and is still at the pre-trial stage. During the pre-trial stage, Plaintiffs filed a
Manifestation stating that they are pursuing the deposition of a supposed expert in electromagnetic
field through oral examination without leave of court in late January or early February 2016 or on
such date as all the parties may agree amongst themselves at the Consulate Office of the Philippines
in Vancouver, Canada. NPC and intervenors filed their Opposition and Counter-Manifestation.
Intervenor NGCP filed a Motion to Prohibit the Taking of the Deposition of the said expert.
Intervenor MERALCO intends to file its Comment/Opposition in due course. As at
February 27, 2023, MERALCO is awaiting further action of the SC on the matter.

Petition for Dispute Resolution against PEMC, TransCo, NPC and PSALM

On September 9, 2008, MERALCO filed with the ERC a Petition for Dispute Resolution, against
PEMC, TransCo, NPC and PSALM, as a result of the congestion in the transmission system of
TransCo arising from the outages of the San Jose-Tayabas 500 kV Line 2 on June 22, 2008, and the
500 kV
600 Mega Volt-Ampere Transformer Bank No. 2 of TransCo’s San Jose, Bulacan substation on
July 11, 2008. The Petition seeks to, among others, direct PEMC to adopt the NPC- Time-of-Use
(“TOU”) rate or the new price determined through the price substitution methodology of PEMC as
approved by the ERC, as basis for its billing during the period of the congestion and direct NPC and
PSALM to refund the transmission line loss components of the line rentals associated with
NPC/PSALM bilateral transactions from the start of WESM operation on June 26, 2006.

In a Decision dated March 10, 2010, the ERC granted MERALCO’s petition and ruled that there is
double charging of the transmission line costs billed to MERALCO by NPC for the Transition Supply
Contract (“TSC”) quantities to the extent of 2.98% loss factor, since the effectivity of the TSC in
November 2006. Thus, NPC was directed to refund line rental adjustment to MERALCO. In the
meantime, the ERC issued an Order on May 4, 2011 allowing PEMC to submit an alternative
methodology for the segregation of line rental into congestion cost and line losses from the start of
the WESM. PEMC has filed its compliance submitting its alternative methodology.

On September 8, 2011, MERALCO received a copy of PEMC’s compliance to the ERC’s directive
and on November 11, 2011, MERALCO filed a counter-proposal which effectively simplifies
PEMC’s proposal.

In an Order of the ERC dated June 21, 2012, MERALCO was directed to submit its computation of
the amount of the double charging of line loss on a per month basis from June 26, 2006 up to
June 2012. On July 4, 2012, MERALCO filed its Compliance to the said Order. Thereafter, the ERC
issued an Order directing the parties to comment on MERALCO’s submissions. Hearings were
conducted on October 2, 2012 and October 16, 2012 to discuss the parties’ proposal and comments.

In an Order dated March 4, 2013, the ERC approved the methodology proposed by MERALCO and
PEMC in computing the double charged amount on line losses by deducting 2.98% from the NPC-
TOU amount. Accordingly, the ERC determined that the computed double charge amount to be
collected from NPC is = P5.2 billion, covering the period November 2006 to August 2012 until actual
cessation of the collection of the 2.98% line loss charge in the NPC-TOU rates imposed on
MERALCO. In this regard, NPC was directed by the ERC to refund said amount by remitting to
MERALCO the equivalent amount of = P73.9 million per month until the over-recoveries are fully
refunded. In the said Order, the ERC likewise determined that the amount to be collected from the
successor generating companies (“SGCs”) is = P4.7 billion. Additionally, MERALCO was directed to
file a petition against the following SGCs: MPPCL, Aboitiz Power Renewables, Inc. (“APRI”), TLI,
SMEC and Sem-Calaca, within 30 days from receipt thereof, to recover the line loss collected by
them. On April 19, 2013, MERALCO filed a Motion for Clarification with the ERC regarding the

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directives contained in the March 4, 2013 Order. On April 30, 2013 and May 8, 2013, PSALM and
NPC, respectively, filed motions seeking reconsideration of the March 4, 2013 Order. MERALCO
filed a motion seeking for an additional 15 days from its receipt of the ERC’s Order resolving its
Motion for Clarification, within which to file its Petition against the SGCs.

In an Order dated July 1, 2013, the ERC issued the following clarifications/resolutions: (i) SPPC
should be included as one of the SGCs against whom a petition for dispute resolution should be filed
by MERALCO; (ii) amount to be refunded by NPC is not only = P5.2 billion but also the subsequent
payments it received from MERALCO beyond August 2012 until the actual cessation of the collection
of the 2.98% line loss charge in its TOU rates; (iii) petition to be filed by MERALCO against the
SGCs should not only be for the recovery of the amount of = P4.7 billion but also the subsequent
payments beyond August 2012 until the actual cessation of the collection of the 2.98% line loss
charge in its TOU rates; (iv) “SCPC Ilijan” pertains to SPPC instead. Thus, the refundable amount of
=706 million pertaining to “SCPC Ilijan” should be added to SPPC’s refundable amount of
P
=1.1 billion; (v) grant the Motion for Extension filed by MERALCO within which to file a petition
P
against the following SGCs: MPPCL, APRI, TLI, SMEC, Sem-Calaca and SPPC; and (vi) deny the
respective MRs filed by NPC and PSALM.

On September 12, 2013, MERALCO filed a Manifestation with Motion with the ERC seeking
approval of its proposal to offset the amount of =
P73.9 million per month against its monthly
remittances to PSALM. PSALM and NPC filed their comments Ad Cautelam and Comment and
Opposition Ad Cautelam, respectively, on MERALCO’s Manifestation with Motion. On
November 4, 2013, MERALCO filed its reply. As at February 27, 2023, MERALCO’s Manifestation
with Motion is pending resolution by the ERC.

On October 24, 2013, MERALCO received PSALM’s Petition for Review on Certiorari with the CA
(With Urgent TRO and/or Writ of Preliminary Mandatory Injunction Applications) questioning the
March 4, 2013 and July 1, 2013 Orders of the ERC.

On February 3, 2014, MERALCO filed a Comment with Opposition to the Application for TRO or
Writ of Preliminary Injunction dated January 30, 2014. PEMC filed a Comment and Opposition
Re: Petition for Certiorari with Urgent TRO and/or Writ of Preliminary Mandatory Injunction dated
January 6, 2014. On June 4, 2014, the CA issued a Resolution declaring that PSALM is deemed to
have waived the filing of a Reply to the comment and opposition of MERALCO and PEMC and
directing the parties to submit their simultaneous memoranda within 15 days from notice. On
December 1, 2014, the CA issued a decision dismissing the Petition for Certiorari filed by PSALM
against the ERC, MERALCO and PEMC and affirming the ERC’s ruling on the refund of the
=5.2 billion of transmission line losses double charged by PSALM and NPC. On January 30, 2015,
P
PSALM filed its MR on the December 1, 2014 Decision of the CA. MERALCO has filed its
Opposition to the MR. In a Resolution dated August 11, 2015, the CA denied PSALM’s MR. On
October 27, 2015, MERALCO received PSALM’s Petition for Review with the SC. The Petition has
been given due course and the parties have filed their respective memoranda. As at
February 27, 2023, MERALCO is still awaiting further action of the SC on the Petition.

Petition for Dispute Resolution against SPPC, MPPCL, APRI, TLI, SMEC

and Sem-Calaca

On August 29, 2013, MERALCO filed a Petition for Dispute Resolution against SPPC, MPPCL,
APRI, TLI, SMEC and Sem-Calaca. Said Petition seeks the following: 1) refund of the 2.98%
transmission line losses in the amount of =
P5.4 billion, inclusive of the =
P758 million line loss for the
period September 2012 to June 25, 2013, from said SGCs; and 2) approval of MERALCO’s proposal

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to correspondingly refund to its customers the aforementioned line loss amounts, as and when the
same are received from the SGCs, until such time that the said over-recoveries are fully refunded, by
way of automatic deduction of the amount of refund from the computed monthly generation rate. On
September 20, 2013, MERALCO received the SGCs’ Joint Motion to Dismiss. On October 7, 2013,
MERALCO filed its Comment on the said Joint Motion.

On October 8, 2013, MERALCO received the SGCs Manifestation and Motion, which sought, among
other things, the cancellation of the scheduled initial hearing of the case, including the submission of
the parties respective Pre-trial Briefs, until the final resolution of the SGC’s Joint Motion to Dismiss.
On October 11, 2013, MERALCO filed its pre-trial brief. On October 14, 2013, MERALCO filed its
Opposition to the SGC’s Manifestation and Motion. On October 24, 2013, MERALCO received the
SGC’s Reply to its Comment on the Joint Motion to Dismiss. On October 29, 2013, MERALCO filed
its Rejoinder. Thereafter, the SGC’s filed their Sur-Rejoinder dated November 4, 2013. As at
February 27, 2023, the Joint Motion to Dismiss is pending resolution by the ERC.

Petition for Dispute Resolution with NPC on Premium Charges

On June 2, 2009, MERALCO filed a Petition for Dispute Resolution against NPC and PSALM with
respect to NPC’s imposition of premium charges for the alleged excess energy it supplied to
MERALCO covering the billing periods May 2005 to June 2006. The premium charges amounting to
=315 million during the May-June 2005 billing periods have been paid but are the subject of a protest
P
by MERALCO, and premium charges of = P318 million during the November 2005, February 2006 and
April to June 2006 billing periods are being disputed and withheld by MERALCO. MERALCO
believes that there is no basis for the imposition of the premium charges. The hearings on this case
have been completed. As at February 27, 2023, the Petition is pending resolution by the ERC.

SC TRO on MERALCO’s December 2013 Billing Rate Increase

On December 9, 2013, the ERC gave clearance to the request of MERALCO to implement a staggered
collection over three (3) months covering the December 2013 billing month for the increase in
generation charge and other bill components such as VAT, LFT, transmission charge, and SL charge.
The generation costs for the November 2013 supply month increased significantly because of the
aberrant spike in the WESM charges on account of the non-compliance with WESM Rules by certain
plants resulting in significant power generation capacities not being offered and dispatched, and the
scheduled and extended shutdowns, and the forced outages, of several base load power plants, and the
use of the more expensive liquid fuel or bio-diesel by the natural gas-fired power plants that were
affected by the Malampaya Gas Field shutdown from November 11 to December 10, 2013.

On December 19, 2013, several party-list representatives of the House of Representatives filed a
Petition against MERALCO, ERC and DOE before the SC, questioning the ERC clearance granted to
MERALCO to charge the resulting price increase, alleging the lack of hearing and due process. It also
sought for the declaration of the unconstitutionality of the EPIRA, which essentially declared the
generation and supply sectors competitive and open, and not considered public utilities. A similar
petition was filed by a consumer group and several private homeowners’ associations challenging
also the legality of the AGRA that the ERC had promulgated. Both petitions prayed for the issuance
of TRO, and a Writ of Preliminary Injunction.

On December 23, 2013, the SC consolidated the two (2) Petitions and granted the application for TRO
effective immediately and for a period of 60 days, which effectively enjoined the ERC and
MERALCO from implementing the price increase. The SC also ordered MERALCO, ERC and DOE to
file their respective comments to the Petitions. Oral Arguments were conducted on January 21, 2014,
February 4, 2014 and February 11, 2014. Thereafter, the SC ordered all the Parties to the

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consolidated Petitions to file their respective Memorandum on or before February 26, 2014 after
which the Petitions will be deemed submitted for resolution of the SC. MERALCO complied with said
directive and filed its Memorandum on said date.

On February 18, 2014, acting on the motion filed by the Petitioners, the SC extended for another
60 days or until April 22, 2014, the TRO that it originally issued against MERALCO and ERC on
December 23, 2013. The TRO was also similarly applied to the generating companies, specifically
MPPCL, SMEC, SPPC, FGPC, and the NGCP, and the PEMC (the administrator of WESM and
market operator at that time) who were all enjoined from collecting from MERALCO the deferred
amounts representing the = P4.15 per kWh price increase for the November 2013 supply month.

In the meantime, on January 30, 2014, MERALCO filed an Omnibus Motion with Manifestation with
the ERC for the latter to direct PEMC to conduct a re-run or re-calculation of the WESM prices for the
supply months of November to December 2013. Subsequently, on February 17, 2014, MERALCO
filed with the ERC an Application for the recovery of deferred generation costs for the December
2013 supply month praying that it be allowed to recover the same over a six (6)-month period.

On March 3, 2014, the ERC issued an Order voiding the Luzon WESM prices during the November
and December 2013 supply months on the basis of the preliminary findings of its Investigating Unit
(“IU”) that these are not reasonable, rational and competitive, and imposing the use of regulated rates
for the said period. PEMC was given seven (7) days upon receipt of the Order to calculate these
regulated prices and implement the same in the revised WESM bills of the concerned DUs in Luzon.
PEMC’s recalculated power bills for the supply month of December 2013 resulted in a net reduction
of the December 2013 supply month bill of the WESM by P =9.3 billion. Due to the pendency of the
TRO, no adjustment was made to the WESM bill of MERALCO for the November 2013 supply month.
The timing of amounts to be credited to MERALCO is dependent on the reimbursement of PEMC
from associated generator companies. However, several generating companies, including MPPCL,
SN Aboitiz Power, Inc., Team (Philippines) Energy Corporation, PanAsia Energy, Inc. (“PanAsia”),
and SMEC, have filed MRs questioning the Order dated March 3, 2014. MERALCO has filed a
consolidated comment to these MRs. In an Order dated October 15, 2014, the ERC denied the MRs.
The generating companies have appealed the Orders with the CA. MERALCO has filed a motion to
intervene and a comment in intervention. The CA consolidated the cases filed by the generation
companies. In a Decision dated November 7, 2017, the CA set aside ERC Orders dated
March 3, 2014, March 27, 2014, May 9, 2014 and October 15, 2014 and declared the orders null and
void. The Decision then reinstated and declared valid WESM prices for the November and
December 2013 supply months. MERALCO and the ERC have filed their respective motions for
reconsideration. Several consumers also intervened in the case and filed their respective motions for
reconsideration. In a Resolution dated March 29, 2019, the CA denied the motions for reconsideration
and upheld its Decision dated November 7, 2017.

MERALCO and several consumers have elevated the CA Decision and Order to the SC where the case
is pending. In a Resolution dated November 4, 2020, the SC consolidated ERC’s and MERALCO’s
petitions and transferred MERALCO’s petition to the member-in-charge of ERC’s petition which was
the lower-numbered case. The petitions filed by the consumers were denied by the SC.

In view of the pendency of the various submissions before the ERC and mindful of the complexities
in the implementation of the ERC’s Order dated March 3, 2014, the ERC directed PEMC to provide
the market participants additional 45 days to comply with the settlement of their respective adjusted
WESM bills. In an Order dated May 9, 2014, the parties were then given an additional non-extendible
period of 30 days from receipt of the Order within which to settle their WESM bills. However, in an
Order dated June 6, 2014 and acting on an intervention filed by Angeles Electric Corporation, the

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ERC deemed it appropriate to hold in abeyance the settlement of PEMC’s adjusted WESM bills by the
market participants.

On April 22, 2014, the SC extended indefinitely the TRO issued on December 23, 2013 and
February 18, 2014 and directed generating companies, NGCP and PEMC not to collect from
MERALCO. In a Decision promulgated on August 3, 2022, the SC affirmed the December 9, 2013
ERC letter approving MERALCO’s proposal to implement a staggered collection over three (3)
months covering the December 2013 billing month. However, it voided the ERC March 3, 2014
Order which voided the Luzon WESM prices during the November and December 2013 supply
months and imposed the use of regulated rates for said period. The ERC and the petitioners filed
motions for reconsideration which were denied with finality in the SC Resolution dated
October 11, 2022. The implementation of any staggered collection is subject to the approval of the
ERC.

ERC IU Complaint

On December 26, 2013, the ERC constituted the IU under its Competition Rules to investigate
possible anti-competitive behavior by the industry players and possible collusion that transpired in the
WESM during the supply months of November 2013 and December 2013. MERALCO participated in
the proceedings and submitted a Memorandum.

An investigating officer of the IU filed a Complaint dated May 9, 2015 against MERALCO and TMO
for alleged anti-competitive behavior constituting economic withholding in violation of Section 45 of
the EPIRA and Rule 11, Section 1 and 8(e) of the EPIRA IRR. In an Order dated June 15, 2015, the
ERC directed MERALCO to file its comment on the Complaint. MERALCO and TMO have filed their
respective answers to the Complaint.

In an Order dated September 1, 2015, the ERC directed the investigating officer to file his reply to
MERALCO. In a Manifestation and Motion to Set the Case for Hearing dated November 9, 2015, the
investigating officer manifested that he would no longer file a reply and that the case be set for
hearing.

On May 24, 2016, the ERC promulgated Resolution No. 14, Series of 2016, which resolved to divide
the Commission into two (2) core groups for the conduct of hearings and to designate the
commissioners to act as presiding officers in anti-competition cases. The raffle pursuant to said
Resolution was conducted on June 15, 2016.

In a Notice of Pre-Trial Conference dated June 16, 2016, the ERC set the pre-trial conference on
August 18, 2016 and required MERALCO and TMO to submit their respective pre-trial briefs.
However, on July 27, 2016, the complainant filed two (2) omnibus motions for the consolidation and
deferment of the pre-trial conferences. Hence, in an Order dated August 1, 2016, the respondents
were given 10 days to submit their comments on the Motion for Consolidation, with the complainant
given five (5) days to file his reply. As such, the pre-trial conferences as scheduled were deferred
until further notice and all parties were granted 20 days to submit their respective pre-trial briefs.

In the meantime, MERALCO likewise filed an Urgent Motion to Dismiss with Motion to Suspend
Proceedings which was adopted by TMO in its Manifestation and Motion filed on July 28, 2016.
MERALCO maintained that the Complaint should be dismissed due to the absence of subject matter
jurisdiction as it is now the Philippine Competition Commission (“PCC”) which has original and
primary jurisdiction over competition-related cases in the energy sector. On August 23, 2016,
MERALCO filed an Urgent Motion Ad Cautelam for suspension of proceeding including period to
file pre-trial brief and judicial affidavit.

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In a Motion dated August 25, 2016, complainant filed a Motion to defer the submission of the
complainant’s pre-trial brief and judicial affidavit. In an Order dated June 13, 2017, the ERC denied
the motion to consolidate but upheld the authority of private counsel to represent the complainants.
MERALCO filed a Motion for Partial Reconsideration to question such authority.

In an Order dated February 2, 2017, the ERC denied the motion to dismiss and asserted jurisdiction
over the Complaint. MERALCO filed its MR to the Order on February 23, 2017. In an Order dated
June 20, 2017, the ERC denied the MR. On September 19, 2017, MERALCO filed a Petition for
Certiorari with the CA. In a Resolution dated October 2, 2017, the CA required respondents to file
their Comment on the Petition within 10 days and held in abeyance its resolution on the prayer for
injunctive relief until the comments have been filed. MERALCO was likewise given five (5) days to
file its reply. In a Manifestation dated October 23, 2017, the ERC stated that it is a nominal party in
the case as the quasi-judicial tribune that issued the assailed ordinances. The IU filed its own
Comment dated December 19, 2017. In a Manifestation and Motion dated December 22, 2017, the
OSG informed the CA that it will no longer represent the IU and will instead participate as “tribune of
the people”. In the meantime, TMO also filed a separate Petition for Review on Certiorari with the
CA. In a Resolution dated January 10, 2018, the CA ordered the consolidation of the petitions of TMO
and MERALCO. In a Decision dated May 23, 2018, the CA denied the consolidated Petitions filed by
MERALCO, TMO, and APRI, and ruled that the jurisdiction to resolve the IU cases remains with the
ERC because the Philippine Competition Act (“PCA”) does not apply retroactively.

On June 20, 2018, MERALCO filed an MR with the CA. The ERC likewise filed its Motion for Partial
Reconsideration on the ground that it retained concurrent jurisdiction together with the PCC over
cases involving alleged anti-competitive conduct supposedly because the PCA did not repeal
Section 45 of the EPIRA.

In Resolution dated January 28, 2019, the CA denied the motions for reconsideration filed by all of
the parties. While it sustained its finding that the PCC now holds original, exclusive, and primary
jurisdiction over all competition-related cases, the CA reiterated its view that the PCA has no
retroactive effect.

The ERC has elevated the matter to the SC. MERALCO, TMO and APRI have all filed their respective
manifestations before the SC. In a Resolution dated September 29, 2021, the SC affirmed the CA in
that the ERC had jurisdiction over these cases as they were filed before the enactment of the PCA.
However, the SC did not rule on whether the PCC and the ERC now have concurrent jurisdiction as
these issues were not fully litigated.

In the meantime, the ERC called for a conference on March 26, 2021 in order to discuss updates and
developments regarding the case. On April 14, 2021, MERALCO filed an Urgent Motion Ad
Cautelam to Suspend Proceedings in view of the pendency of the case before the SC. The ERC then
issued an Order dated August 13, 2021, setting the pre-trial conference on August 27, 2021.
MERALCO filed a Manifestation and Urgent Omnibus Motion Ad Cautelam to (A) Resolve the
Urgent Motion Ad Cautelam to Suspend Proceedings dated April 14, 2021 and (B) Cancel the
August 27, 2021 Pre-Trial Conference dated August 20, 2021. The pre-trial conference proceeded on
August 27, 2021. However, the ERC stated that, after the pre-trial conference and before the case can
proceed with trial on the merits, the ERC will first resolve MERALCO’s motions. The ERC also
issued an open court order denying the motion of the ERC IU that the case be resolved through the
submission of the position papers and other supporting documents. The ERC IU filed a Motion for
Reconsideration to which MERALCO filed an opposition. As at February 27, 2023, MERALCO is
awaiting further action by the ERC on the matter.

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Ombudsman Cases Against MERALCO Directors

On January 30, 2018, MERALCO received an Order dated January 22, 2018 from the Office of the
Ombudsman directing MERALCO’s directors to comment on a complaint-affidavit for syndicated
estafa filed by certain consumer group which charged that there was conspiracy between MERALCO
directors and the ERC regarding the alleged misappropriation of the bill deposits received from
MERALCO consumers. On February 9, 2018, MERALCO’s directors filed their Counter-Affidavits
where they refuted the arguments of the consumer group. In a Resolution dated May 18, 2018, the
criminal complaint for syndicated estafa was dismissed for insufficiency of evidence. The case was
referred to the COA for the conduct of audit on the bill deposits collected by MERALCO from the
public consumers and to inform the Ombudsman of the compliance therewith. The consumer group
filed a Motion for Partial Reconsideration dated June 16, 2018 to which MERALCO filed its
Comment. The consumer group’s Motion for Partial Reconsideration was denied through an Order
dated July 30, 2018. NASECORE filed an Urgent Motion for Immediate Execution dated
September 21, 2018 praying that the Ombudsman issue a writ of execution to implement the
Resolution dated May 18, 2018.

On February 28, 2018, MERALCO received an Order dated February 20, 2018 from the Office of the
Ombudsman directing MERALCO’s directors to comment on a complaint-affidavit for syndicated
estafa filed by certain consumer group which charged that there was conspiracy between MERALCO
directors and the ERC regarding the MERALCO’s investment activities in other businesses for being
violative of its legislative franchise and the EPIRA. On March 12, 2018, MERALCO’s directors filed
their Counter-Affidavits where they refuted the arguments of the consumer group. On May 4, 2018,
MERALCO filed a Manifestation with Motion for Early Resolution of even date. Another Motion to
Resolve and Dismiss was also filed by MERALCO on June 2, 2021. In a Joint Resolution dated
February 22, 2022, the Ombudman dismissed the cases.

Others

Liabilities for certain local taxes amounting to =


P535 million and P
=423 million as at
December 31, 2022 and 2021, respectively, are included in the “Other noncurrent liabilities” account
in the consolidated statements of financial position.

Management and its internal and external counsels believe that the probable resolution of these issues
will not materially affect MERALCO’s financial position and results of operations.

30. Significant Contracts and Commitments

MERALCO

Independent Power Producers (“IPPs”)

FGPC and FGP

In compliance with the DOE’s program to create a market for Camago-Malampaya gas field and
enable its development, MERALCO contracted 1,500 MW of the 2,700 MW output of the Malampaya
gas field.

Accordingly, MERALCO entered into separate 25-year PPAs with FGPC (March 14, 1995) and FGP
(July 22, 1999) for a minimum number of kWh of the net electric output of the Sta. Rita and San

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Lorenzo power plants, respectively, from the start of their commercial operations. The PPA with
FGPC terminates on August 17, 2025, while that of FGP ends on October 1, 2027.

On January 7, 2004, MERALCO, FGP and FGPC signed an Amendment to their respective PPAs.
The negotiations resulted in certain new conditions including the assumption of FGP and FGPC of
community taxes at current tax rate, and subject to certain conditions increasing the discounts on
excess generation, payment of higher penalties for non-performance up to a capped amount, recovery
of accumulated deemed delivered energy until 2011 resulting in the non-charging of MERALCO of
excess generation charge for such energy delivered beyond the contracted amount but within a 90%
capacity quota. The amended terms under the respective PPAs of FGP and FGPC were approved by
the ERC on May 31, 2006.

Under the respective PPAs of FGP and FGPC, the fixed capacity fees and fixed operating and
maintenance fees are recognized monthly based on the actual Net Dependable Capacity tested and
proven, which is usually conducted on a semi-annual basis.

QPPL

MERALCO entered into a PPA with QPPL on August 12, 1994, which was subsequently amended on
December 1, 1996. The PPA is for a period of 25 years from the start of commercial operations up to
May 31, 2025.

In a Letter Agreement signed on February 21, 2008, the amount billable by QPPL included a
transmission line charge reduction in lieu of a previous rebate program. The Letter Agreement also
provides that MERALCO shall advance to QPPL US$2.85 million per annum for 10 years beginning
2008 to assist QPPL in consideration of the difference between the transmission line charge specified
in the Transmission Line Agreement (“TLA”) and the ERC-approved transmission line charge in
March 2003. QPPL shall repay MERALCO the same amount at the end of the 10-year period in equal
annual payments without adjustment. However, if MERALCO is able to dispatch QPPL at a plant
capacity factor of no less than 86% in any particular year, MERALCO shall not be required to pay
US$2.85 million on that year. In January 2018, QPPL began repayment of the amount advanced by
MERALCO. As at December 31, 2022, the remaining amount for repayment by QPPL is US$7.125
million. This arrangement did not have any impact on the rates to be charged to consumers and
hence, did not require any amendment in the PPA, as approved by the ERC.

See Note 11 – Financial and other Noncurrent Assets.

Committed Energy Volume to be Purchased


The following are forecasted purchases/payments to FGPC, FGP and QPPL corresponding to the
Minimum Energy Quantity (“MEQ”) provisions of the contracts. The forecasted fixed payments
include capacity charge and fixed operation and maintenance cost escalated using the U.S. and
Philippine Consumer Price Index.
Year MEQ Equivalent Amount
(In million kwh) (In Millions)
2023 15,346 =31,297
P
2024 15,379 30,712
2025 10,739 19,088
2026 4,042 6,226
2027-2032 3,367 5,224

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PSAs with Privatized Plants and IPPAs

MERALCO has a PSA with MPPCL which was approved by the ERC on December 17, 2012, and
entered into Supplemental Agreement on April 8, 2016, for the extension of the term of the PSA for
an additional period of three (3) years up to December 25, 2022.

On December 6, 2019, MERALCO and TLI executed a new short-term PSA for the purchase of
250 MW capacity and energy from TLI’s power plant for the period of December 26, 2019 to
December 25, 2020. On December 19, 2019, the DOE issued a Certificate of Exemption from CSP in
favor of MERALCO for the new short-term PSA. On December 23, 2019, MERALCO filed an
application with the ERC for the approval of its new short-term PSA with TLI. On August 7, 2020,
MERALCO and TLI filed a Joint Manifestation with Motion with the ERC seeking approval of the
extension of the PSA for five days or until December 30, 2020. As at February 27, 2023, hearings
have been completed. The case, including the motion, is still pending approval of the ERC.

The ERC, for the MPPCL case, issued an Order dated October 11, 2016 resolving to consider
MERALCO’s “Manifestation and Motion” as a new application for approval of PSA. In view of the
said Order, MERALCO and MPPCL filed a Joint Application for approval of the Supplemental
Agreement extending the term of their PSA for an additional three (3) years. On December 19, 2019,
MERALCO and MPPCL entered into an Agreement to Amend the Supplemental Agreement, whereby
the Parties resolved to extend the PSA for an additional period of one (1) year reckoned from the date
of the approval by the ERC of the said Agreement to Amend. On June 8, 2020, MERALCO and
MPPCL filed a Joint Manifestation and Omnibus Motion to seek ERC approval of said Agreement to
Amend. On April 14, 2021, due to exigent and emergency reasons (e.g. unforecasted supply
deficiency and to account for outages of power plants with bilateral contracts with MERALCO),
MERALCO and MPPCL further agreed to enter into an Amendment Agreement to amend the
December 19, 2019 Agreement to Amend, to instead extend the PSA for an additional period of
one (1) year from May 26, 2021. On even date, (a) MERALCO and MPPCL filed a Joint
Manifestation and Omnibus Motion to seek ERC approval of the said Amendment Agreement; and
(b) MERALCO sought confirmation from the DOE that the extension of the ERC-approved 2011 PSA,
as embodied in the Amendment Agreement, is exempted from the conduct of a CSP. In its letter dated
July 30, 2021, the DOE denied MERALCO’s request for certificate of exemption from CSP. As at
February 27, 2023, the ERC has yet to act on the parties’ Joint Manifestation and Omnibus Motion.

Philippine Power and Development Company (“Philpodeco”)

On May 15, 2014, MERALCO and Philpodeco executed a PSA. Philpodeco operates three (3) run-of-
river hydro power plants, namely: (i) Palakpakin, a 448 kW hydro power plant located at Barangay
Prinza, Calauan, Laguna; (ii) Calibato, a 75 kW Calibato hydro power plant located at Barangay
Sto. Angel, San Pablo City, Laguna; and (iii) Balugbog, a 528 kW hydro power plant located at
Barangay Palina, Nagcarlan, Laguna. The PSA has a term of five (5) years from the delivery period
commencement date.

On June 2, 2014, MERALCO filed an application with the ERC for the approval of its PSA with
Philpodeco. This PSA provides that MERALCO shall accept all the energy deliveries of Philpodeco as
measured by the latter’s billing meter. Hearings on this case have been completed and MERALCO
has submitted its FOE. On January 25, 2019, MERALCO filed an Urgent Motion to Resolve the case.
On May 22, 2019, MERALCO filed a Manifestation with Motion to Resolve seeking ERC
confirmation of the extension of the term of the PSA with Philpodeco from May 15, 2019 to
October 25, 2019. On October 24, 2019, MERALCO wrote DOE asking for exemption from the
requirement for CSP for a further extension of the term of the PSA with Philpodeco from
October 25, 2019 to May 15, 2020. On the same date, MERALCO also filed a Manifestation with

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Motion to Resolve seeking ERC confirmation of the said extension of term. In its letter to Philpodeco
dated December 18, 2019, the DOE has taken the position that “xxx [u]nder Section 45(b) of Republic
Act No. 9136, ERC is the sole authority mandated to review and approve PSAs.” On May 15, 2020,
the PSA with Philpodeco expired. As at February 27, 2023, the case is pending decision by the ERC.

Bacavalley Energy Inc. (“BEI”)

MERALCO signed a CSE with BEI on November 12, 2010. BEI owns and operates a four (4) MW
renewable energy generation facility powered by landfill gas in San Pedro, Laguna. The CSE has a
term of two (2) years from the delivery period commencement date.

Purchases from BEI, an embedded renewable energy generator, are VAT zero-rated and exempt from
power delivery service charge. MERALCO filed an application for the approval of the CSE with the
ERC, for the provisional implementation of the contract on December 15, 2010. In an order dated
January 31, 2011, the ERC provisionally approved the said application.

After a series of negotiations, MERALCO and BEI signed the Letter Agreements dated
March 1, 2013 and March 5, 2013, extending the CSE between said parties for another two (2) years
from March 16, 2013, or until March 15, 2015. In its Order December 9, 2013, the ERC allowed the
CSE to be extended until March 15, 2015. On March 12, 2015, MERALCO and BEI executed a Letter
of Agreement extending the CSE until March 15, 2016. On March 16, 2015, MERALCO filed a
Manifestation with Motion to the ERC for approval of the extended term. On March 1, 2016, BEI
requested for the extension of the CSE for another two (2) years. In its letter dated April 7, 2016,
MERALCO denied BEI’s request to extend the CSE. On May 18, 2018 and January 25, 2019,
MERALCO filed Urgent Motions to Resolve the case. As at February 27, 2023, the contract term has
expired and the case is pending decision by the ERC.

Pangea Green Energy Philippines, Inc. (“PGEP”)

On May 31, 2012, MERALCO signed a CSE with PGEP, a biomass power plant located in Payatas,
Quezon City using methane gas extracted from the Payatas landfill as its fuel. Its plant has a total
nominal generating capacity of 1,236 kW. The CSE is for a period of two (2) years from the delivery
period commencement date.

On June 15, 2012, MERALCO filed an application for approval of the CSE. On August 28, 2012, the
ERC issued an Order provisionally approving the application. On August 29, 2013, the ERC extended
the provisional authority in its Order dated August 12, 2013. On March 2, 2015, MERALCO and
PGEP executed a Letter of Agreement extending the CSE until February 29, 2016. On
March 4, 2015, MERALCO filed a Manifestation with Motion with the ERC for the approval of the
extended term. On September 16, 2015, MERALCO received a letter from PGEP seeking the
termination of the CSE effective October 15, 2015. The termination of the CSE was thereafter
formalized in the Letter Agreement dated October 29, 2015 where the parties agreed to terminate the
CSE effective October 9, 2015, which was PGEP’s Facility Registration Date with the WESM. On
January 8, 2016, MERALCO filed a Manifestation with Motion with the ERC seeking approval of the
extended term of March 4, 2015 until October 9, 2015. On May 17, 2018 and January 25, 2019,
MERALCO filed Urgent Motions to Resolve the case. In its Order dated February 18, 2019, the ERC
directed MERALCO to submit certain documents to facilitate its evaluation of the application. On
March 29, 2019, MERALCO filed its Compliance with Manifestation. As at February 27, 2023, the
contract term has expired and the case is pending decision by the ERC.

TMO

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On March 4, 2013, MERALCO signed an Interconnection Agreement with TMO for their 243 MW
generating facility at the Navotas Fish Port Complex, Navotas City, which is an interconnection at
MERALCO’s Grace Park-Malabon 115 kV line. TMO is an embedded generator. TMO shall
construct at its own cost, operate and maintain the 115 kV line connecting its generating facility to
MERALCO’s system. TMO and MERALCO subsequently signed a Supplement to the Interconnection
Agreement dated July 3, 2014 covering the construction of a second line from the connection point at
the Grace Park-Malabon 115 kV line to the TMO switchyard.

On September 27, 2013, MERALCO signed a PSA with TMO for the output of the barge-mounted,
bunker oil-fired diesel engines moored at the Fish Port Complex in Navotas, Manila. On
September 30, 2013, MERALCO filed an application with the ERC for the approval of the PSA. In an
Order dated November 4, 2013, the ERC granted the prayer for provisional authority. After hearing
and submission of the required documents, including the FOE, the case is now submitted for decision.

On December 17, 2014, MERALCO and TMO entered into an Amendment to the PSA based on the
power situation outlook for 2015 and 2016 issued by the NGCP that the reserve capacity will be
below the Contingency Reserves due to the maintenance shutdowns and forced outages of major
power plants in Luzon. The amendment to the PSA was filed for approval with the ERC on
January 21, 2015. In an Order dated April 6, 2015, the ERC approved the amendment in the PSA
between MERALCO and TMO with modification. In an Order dated July 1, 2015, the ERC clarified
that the provisional approval, while not specifically modifying nor stating any condition with respect
to the implementation of the outage provisions of the amendment, covers the increase in outage
allowance and the minor change in operating procedures.

On June 16, 2015, MERALCO received the Omnibus Motion for Partial Reconsideration and
Deferment of Implementation of the Order dated April 6, 2015; Urgent Resolution of the Application;
and Confidential Treatment filed by TMO.

In an Order dated April 5, 2016, the ERC ruled that the provisional authority granted to MERALCO
and TMO is extended unless revoked or made permanent. On June 10, 2016 and July 5, 2016,
respectively, MERALCO and TMO filed a Motion for Clarification of the ERC Order dated
April 5, 2016. Said motions are still pending decision by the ERC. On January 3, 2017, MERALCO
filed a Manifestation with Motion informing the ERC of the extension of the term of the PSA from
June 26, 2017 to June 25, 2018. In an Order dated June 6, 2017, the ERC noted MERALCO’s
Manifestation and Motion and confirmed one (1) year extension of the PSA. MERALCO and TMO
were further directed to strictly comply with the provisions of ERC Resolution No. 1, Series of 2016,
in particular, the one (1) time limit for renewal of the PSA. As at February 27, 2023, the contract term
has expired and the case is pending decision by the ERC.

SBPL
On September 26, 2019, MERALCO and SBPL began implementation of the PSA which was
approved by the ERC, subject to ERC’s subsequent issuance of a certificate of compliance to replace
the provisional authority to operate. The PSA is for a period of 20 years from the start of commercial
operations up to September 25, 2039.

PEDC

To address the SC Decision in Alyansa Para sa Bagong Pilipinas, Inc. vs. ERC, et al. (G.R. No.
227670, 3 May 2019) that effectively required all PSA applications for ERC approval filed on or after
June 30, 2015 to undergo CSP, which includes the 2016 20-year PSA between MERALCO and
PEDC, a CSP was conducted in 2021 to cover the 70 MW required contract capacity of MERALCO

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for contract period ending January 25, 2037. The same capacity was won by PEDC under the new 15-
year PSA with MERALCO (“2021 PEDC PSA”). The application for approval of the new PSA with
PEDC was filed on January 22, 2022. Through a “Notice of Resolution” dated February 23, 2022, the
ERC granted provisional authority to implement the 2021 PEDC PSA, and on April 1, 2022, the 2021
PEDC PSA was implemented by MERALCO and PEDC.

On March 18, 2022, PEDC issued to MERALCO a Notice of Change in Circumstance, claiming that
the Ukraine-Russia conflict had a significant negative financial impact to PEDC due to the price
spike in coal prices and if the current situation continues, PEDC’s losses will be massive and ruinous
unless an adjustment in contract price pursuant to the 2021 PEDC PSA is implemented. Thus, on
April 13, 2022, PEDC (joined by MERALCO) filed an Urgent Motion for Contract Price Adjustment
with the ERC. Meanwhile, on April 22, 2022, MERALCO received PEDC’s Notice of Termination,
effective six months thereafter, or until October 22, 2022. After the lapse of October 22, 2022, with
the Urgent Motion for Contract Price Adjustment still pending with the ERC, PEDC has continued
with its obligations under the 2021 PEDC PSA. On December 4, 2022, PEDC sent to MERALCO a
Notice of End of Supply, which formally informed MERALCO of PEDC’s decision to cease supply of
energy beginning midnight of December 5, 2022, because without the ERC’s action on the Urgent
Motion for Contract Price Adjustment, PEDC was already placed in severe financial stress and in
danger of breaching its financial covenants. As at February 27, 2023, further ERC action on the
Urgent Motion for Contract Price Adjustment is pending.

First Bulacan

On May 12, 2021, MERALCO and First Bulacan began implementation of the PSA which was
approved by the ERC, subject to ERC’s subsequent issuance of a certificate of compliance to replace
the provisional authority to operate. The PSA is for a period of 20 years from the start of commercial
operations.

Solar Philippines Tanauan Corporation (“Solar Philippines Tanauan”)

On December 22, 2016, MERALCO signed a 20-year PSA with Solar Philippines Tanauan for the
purchase of 50 MW of electric output from its solar plant in Tanauan, Batangas. On
February 27, 2017, after conduct of a CSP wherein Solar Philippines Tanauan was declared as the
winning power supplier, the application for approval of the PSA with Solar Philippines Tanauan was
filed. In a Decision promulgated on February 28, 2020, the ERC approved the PSA with
modification.

Solar Philippines Tarlac Phase 1

On October 6, 2017, after being declared the winning power supplier in a CSP, MERALCO signed a
20-year PSA with Solar Philippines Tarlac for the purchase of up to 85 MW of electric output from
Phase one (1) of its solar plant in Tarlac. The application for approval of the PSA with Solar
Philippines Tarlac was filed on October 19, 2017. Hearings have been completed and parties await
ERC resolution on Solar Philippines Tarlac’s opposition to a consumer group’s intervention, which
shall prompt submission of case for final decision. Meanwhile, in an Order promulgated on
June 8, 2018, the ERC granted Interim Relief to provisionally implement the PSA. On July 3, 2018,
Solar Philippines Tarlac filed a Motion for Partial Reconsideration of the said Order. MERALCO and
Solar Philippines Tarlac agreed on a way forward, subject to resolution of the Motion for Partial
Reconsideration, and began implementation of the PSA on August 20, 2018. On July 13, 2018,
MERALCO filed its Comment with Opposition in so far as the adjustment of the timelines under the
PSA is concerned. On November 26, 2018, a consumer group filed its Comment with Opposition,

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likewise with respect to Solar Philippines Tarlac’s motion for the adjustment of the timelines under
the PSA. In its Order dated January 23, 2019, the ERC partially granted the Motion for Partial
Reconsideration filed by Solar Philippines Tarlac and allowed the 2% annual escalation under the
PSA. On June 25, 2019, the ERC promulgated its Order leaving the adjustment of the timelines set
under the PSA to the discretion of MERALCO and Solar Philippines Tarlac. Meanwhile, the 20-year
term of the PSA began on commencement date last August 20, 2018. As at February 27, 2023, the
parties are awaiting ERC’s final decision on the Joint Application.

FNPC

Following conduct and completion of a CSP, MERALCO confirmed effectivity of the PSA with
FNPC dated December 13, 2017, for the purchase of 414 MW electric energy generated by the San
Gabriel Gas Plant beginning ERC approval and ending on February 23, 2024. A joint application for
approval of the PSA with FNPC was filed on March 19, 2018. Pursuant to an ERC Order granting
interim relief, on June 26, 2018, MERALCO and FNPC began implementing the PSA. On
July 13, 2022, MERALCO received the ERC Decision approving the joint application subject to
certain modifications and conditions. On July 28, 2022, FNPC filed a motion seeking reconsideration
and to hold in abeyance the implementation of the ERC Decision. As at February 27, 2023, further
ERC action remain pending on the FNPC’s Motion for Reconsideration and to Hold in Abeyance the
Execution of the ERC Decision.

Solar Philippines Tarlac Phase 2

On February 22, 2019, after being declared the winning power supplier in a CSP, MERALCO signed
a 20-year PSA with Solar Philippines Tarlac for the purchase of up to 50 MW of electric output from
Phase 2 of its solar plant in Tarlac. The application for approval of the PSA with Solar Philippines
Tarlac was filed on March 18, 2019. As at February 27, 2023, the case is pending decision by the
ERC.

SMEC, AC Energy and SPPC – Baseload PSAs

On September 13, 2019, after being declared the winning power suppliers in a CSP, MERALCO
signed three (3) PSAs for baseload capacity with AC Energy for 200 MW, SMEC for 330 MW, and
SPPC for 670 MW. On October 22, 2019, the joint applications for approval of these three (3)
baseload PSAs were filed before the ERC. In its letters to MERALCO, all dated December 23, 2019,
the ERC granted provisional authority to implement MERALCO’s three (3) PSAs for baseload
capacity with AC Energy, SPPC and SMEC. On January 30, 2020, MERALCO received the orders of
the ERC granting provisional authority to implement MERALCO’s PSA for baseload capacity with
AC Energy. On March 16, 2020, MERALCO received the orders of the ERC granting provisional
authority to implement MERALCO’s PSAs for baseload capacity with SPPC and SMEC. In its Orders
dated November 26, 2020, the ERC granted interim relief authorizing continued implementation of
the PSAs, until revoked or until the issuance of a final decision by the ERC. As at February 27, 2023,
the three (3) PSA applications are pending final decision by the ERC.

On April 18, 2022, SMEC and SPPC issued to MERALCO Notices of Change in Circumstances,
claiming that the worsening conflict between Russia and Ukraine and other geopolitical and
economic factors related and/or emanating therefrom had impacted SMEC and SPPC’s capability to
perform their obligations under the respective PSAs in terms of unexpected increase in fuel cost.
Thus, on May 12, 2022, SMEC and SPPC (joined by MERALCO) filed Joint Motions for Price
Adjustment with the ERC. On June 27, 2022 and July 22, 2022, SMEC, SPPC and MERALCO filed
motions for urgent resolution of the Joint Motion. On August 30, 2022, the ERC conducted a
clarificatory hearing with SMEC, SPPC and MERALCO to clarify several issues in connection with

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the Joint Motions for Price Adjustment. On October 3, 2022, the ERC, voting 3-2, promulgated its
Orders dated September 29, 2022, denying the Joint Motions for Price Adjustment. On
October 5, 2022, SMEC and SPPC notified MERALCO that it will continue with its obligations under
their respective baseload PSAs with MERALCO under protest and without prejudice to their rights
and remedies under pertinent laws and contract. On November 4, 2022, SMEC and SPPC filed
Petitions for Certiorari with prayer for issuance of TRO and Writ of Preliminary Injuction (“WPI”)
with the CA, assailing the ERC Orders dated September 29, 2022. On November 25, 2022, the CA
issued a TRO for the SPPC case, hence, after the TRO bond was posted by SPPC, on
December 7, 2022, SPPC stopped accepting MERALCO nominations. On January 25, 2023, the CA
issued a WPI for the SPPC case, which shall remain in effect until the main case is finally decided.
Meanwhile, for the SMEC case, on January 13, 2023, the CA denied SMEC’s prayer for TRO and
WPI. As at February 27, 2023, SPPC has suspended its obligations under its baseload PSA with
MERALCO, while SMEC has continued with its obligations under its baseload PSA with MERALCO.

FGHPC, AC Energy and SPPC – Mid-merit PSAs

On September 16, 2019, after being declared the winning power suppliers in a CSP, MERALCO
signed three (3) PSAs for mid-merit capacity with FGHPC for 100 MW, AC Energy for 110 MW, and
SPPC for 290 MW. On October 22, 2019, the joint applications for approval of these three (3) PSAs
were filed before the ERC. On January 30, 2020, MERALCO received the orders of the ERC granting
provisional authority to implement MERALCO’s the PSA for mid-merit capacity with AC Energy. On
March 16, 2020, MERALCO received the orders of the ERC granting provisional authority to
implement MERALCO’s other PSAs for mid-merit capacity with FGHPC and SPPC. In its Orders
dated November 26, 2020, the ERC granted interim relief authorizing continued implementation of
the PSAs, until revoked or until the issuance of a final decision by the ERC. As at February 27, 2023,
the three (3) PSA applications are pending final decision by the ERC.

Excellent Energy Resources, Inc. (“EERI”) and MPPCL - Baseload PSAs

On March 2, 2021, after being declared the winning power suppliers in a CSP for 1,800 MW baseload
capacity from greenfield power plants was conducted, MERALCO signed two (2) PSAs with EERI
with commercial operations date in December 2024 for 1,200 MW, and with MPPCL with
commercial operations date in May 2025 for 600 MW. The joint applications for approval of
MERALCO’s PSAs with MPPCL and EERI were filed with the ERC on March 18, 2021 and
March 24, 2021, respectively. As at February 27, 2023, the two (2) PSA applications are pending
final decision by the ERC.

Under the PSAs approved by the ERC, fixed capacity fees and fixed operating maintenance fees are
recognized monthly based on their contracted capacities. The annual projection of these payments is
shown in the table below:

Year Contracted Capacity Fixed Payment Amount


(In Megawatt) (In millions)
2023 2,867 =61,942
P
2024 2,967 64,887
2025 2,956 61,743
2026 3,455 74,383
2027-2032 17,130 339,573

Interim Power Supply Agreements (“IPSAs”)

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On January 24, 2017, in view of the Malampaya shutdown that was to coincide with the scheduled
outage of other plants, MERALCO signed an IPSA with Strategic Power Development Corporation
(“SPDC”) for the supply of 100 MW per hour of electric power from 0901H to 1000H and from
2001H to 2100H, and 150 MW per hour of electric power from 1001H to 2000H, from
January 28, 2017 until February 16, 2017. An application for approval of such IPSA was filed before
the ERC on February 9, 2017. The said IPSA was effective immediately, on the condition that
disallowances and penalties that the ERC may impose as a result thereof shall be for the account of
SPDC. MERALCO and SPDC, in a letter agreement dated February 15, 2017, agreed to extend the
term of the IPSA until March 25, 2017 under the same terms and conditions of the IPSA. On
February 16, 2017, MERALCO and SPDC filed a Joint Manifestation with Motion with the ERC
apprising the Honorable Commission of the extended term and praying that the same be duly
considered and approved accordingly. The hearings on this case have been completed and MERALCO
filed its FOE on July 21, 2017. As at February 27, 2023, the contract term has expired and
MERALCO awaits the ERC’s final decision on the IPSA.

On April 15, 2019, with the NGCP forecast that of voltage situations occurring for the weekdays of
May up to the first half of June 2019 every time the Luzon peak demand exceeds
11,200 MW, MERALCO signed two (2) separate IPSAs with: (i) MEI for the purchase of 70 MW of
electric power, subject to a net dependable capacity test, from April 26, 2019 to June 25, 2019, from
MEI’s Gas Turbine Power Plant in Navotas Fishport Complex, Navotas City; and (ii) TMO for the
purchase of up to 200,000 kW contract capacity and associated energy, subject to restatement based
on the results of capacity test, from April 26, 2019 to April 25, 2020, from TMO’s 242 MW-installed
capacity, barge-mounted, bunker-fired diesel power generating and interconnection facilities in
Navotas City. For the said IPSAs, MERALCO also received the DOE’s grant of exemption from the
requirement for CSP. The applications for approval of said IPSAs were filed before the ERC on
April 17, 2019. In accordance with the said IPSAs, with the filing of the joint applications and DOE’s
exemption, the mutual obligations to sell and purchase power under said agreements were
implemented beginning April 26, 2019. On July 1, 2019, MERALCO filed its Compliance with FOE
on the TMO IPSA Joint Application. In addition, in light of the declarations of yellow and red alerts in
the Luzon Grid by NGCP, MERALCO and MEI, in a Letter Agreement dated June 20, 2019, agreed to
extend their IPSA until September 25, 2019. Further, given continuing declarations of yellow and red
alerts in the Luzon grid by NGCP, MERALCO and MEI, in a Letter Agreement dated
September 23, 2019, agreed to further extend their IPSA until April 25, 2020. MERALCO also
received the DOE’s grant of exemption from the requirement for CSP for said periods. In a Letter
Agreement dated January 28, 2020, MERALCO and MEI agreed on another extension of their IPSA
from April 26, 2020 to June 25, 2020 in view of DOE’s forecast, presented to MERALCO in a
meeting with the DOE on January 16, 2020, which showed red alert situation in the Luzon grid for
the period from April to June 2020. MERALCO wrote DOE on January 29, 2020 to request for
exemption from the requirement for CSP for said period. However, the PSA with MEI was not
extended as the DOE did not issue any exemption to be able to further extend the PSA. Thus, on
April 25, 2020, the PSA with MEI expired. On even date, the PSA with TMO also expired. As at
February 27, 2023, the cases remain pending with the ERC.

On September 28, 2021, in view of the Malampaya shutdown set for October 2021 that was to
coincide with the scheduled outage of other plants, MERALCO signed a Contract for Supply of
Electric Energy (“CSEE”) with PSALM for the supply of 90 MW for the period of ten (10) months
from September 26, 2021 to July 25, 2022. On even date, the DOE issued a Certificate of Exemption
from CSP in favor of MERALCO for the CSEE. With the DOE’s grant of exemption from the
requirement for CSP, the parties began implementation of the CSEE on September 29, 2021. The
application for approval of the CSEE with PSALM was filed on December 29, 2021. As at
February 27, 2023, the contract term has expired and the case is pending decision by the ERC.

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On February 4, 2022, after being declared the winning power supplier in a CSP, MERALCO signed a
5-month PSA with SPPC for 170 MW contract capacity. The application for approval of MERALCO’s
emergency PSA with SPPC was filed with the ERC on March 22, 2022. On July 25, 2022, the
contract term has expired, thus, on September 2, 2022, MERALCO and SPPC jointly filed a
Manifestation with the ERC, informing it of the expiration of the PSA’s contract term and that the
application for approval of the PSA is already deemed moot. As at February 27, 2023, the contract
term has expired and the ERC has not issued its final decision on this PSA.

On December 14, 2022, in connection with the sudden and unforeseen suspension of MERALCO’s
baseload PSA with SPPC for 670 MW and after receiving from the DOE a Certificate of Exemption
from the conduct of a competitive selection process (“COE-CSP”) pursuant to the 2021 Revised CSP
Circular, MERALCO signed a 1-month PSA with GNPower Dinginin Ltd. Co. (“GNPD”). The
GNPD emergency power supply agreement (“EPSA”) was implemented on December 15, 2022 and
submitted to the ERC for assessment of the application for filing. As at February 27, 2023, the
contract term has expired and the ERC has not set this PSA for hearing.

Clark Electric

SCPC

On August 28, 2020, Clark Electric conducted a CSP for the procurement of 20 MW of baseload
power supply for a contract term of ten (10) years commencing on December 26, 2020. SCPC was
selected as the winning bidder for submitting the least cost bid.

On October 26, 2020, Clark Electric executed a PSA with SCPC, the power generation company
which owns, operates and maintains the 600 MW Batangas Coal-Fired Thermal Power Plant located
in Calaca, Batangas. On October 30, 2020, Clark Electric and SCPC filed a Joint Application with
Motion for Confidential Treatment of Information and Prayer for Provisional Authority for the
approval of their PSA. Accordingly, the ERC has set the expository presentation and pre-trial
conference on March 4 and 11, 2021, respectively.

On January 25, 2021, Clark Electric and SCPC, jointly filed an urgent ex-parte motion for the
issuance of provisional authority to implement the PSA. On March 1, 2021, the ERC granted the
provisional authority to implement the PSA between Clark Electric and SCPC.

On February 23, 2022, the ERC granted an Interim Relief upon the expiration of the provisional
authority.

SPDC

On August 28, 2020, Clark Electric conducted a CSP for the procurement of its 25 MW of mid-merit
power supply requirement for a contract term of five (5) years commencing on December 26, 2020.
SPDC was selected as the winning bidder for submitting the least cost.

On October 23, 2020, Clark Electric executed a PSA with SPDC for the supply of 25 MW contract
capacity and associated energy beginning December 26, 2020. The PSA was jointly filed by Clark
Electric and SPDC on October 28, 2020 with Motion for Confidential Treatment of Information and
Prayer for Provisional Authority for the approval of their PSA. Thus, the expository presentation and
pre-trial conference was set by ERC on March 9 and 16, 2021, respectively.

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On January 25, 2021, Clark Electric and SPDC, jointly filed an urgent ex-parte motion for the
issuance of provisional authority to implement the PSA. The provisional authority was granted by the
ERC through its Order which was promulgated on June 11, 2021.

On February 23, 2022, the ERC granted an Interim Relief upon the expiration of the provisional
authority.

TransCo/NGCP

Clark Electric executed a Transmission Service Agreement on December 26, 2013 with NGCP for
the provision of necessary transmission services in accordance with the OATS rules for
five (5) years until December 25, 2018. This was renewed for another five years until
December 25, 2023.

Supply and Equipment Loan Agreement with Shell

Panay Power Corporation (“PPC”) has a Supply and Equipment Loan Agreement with Shell,
whereby Shell will supply PPC’s total requirements of petroleum products at prices based on the
formula indicated in the agreement. The agreement also provides that Shell will install at PPC’s
premises the equipment and facilities for the storage and servicing of products purchased at no cost to
PPC. The agreement is effective for 15 years until 2013. As PPC has not utilized the contracted
quantity, agreement was renewed for another five years or until the contracted quantity is fully
utilized. Under the new agreement, pricing is subject to semi-annual review.

Long-term Coal Supply Agreements (“CSA”)

In order to ensure that there is an adequate supply of coal to operate the power plants, the following
operating plants entered into several long-term contracts with local and foreign coal suppliers:

PEDC
Contract Quantity per
Supplier Coal Type Duration Price Basis Year
PT Sakti Nusantara Bakti Indonesia 2020 - 2026 ICI4 275,000 MT
GNewC and
PT Bayan Resources, TBK Indonesia 2023-2024 ICI4 220,000 MT
Semirara Mining and Power Annual
Corporation Local Contract Fixed Price 200,000 MT
Galaxy Energy and Resources Co.
PTE, Ltd. Indonesia 2020 - 2023 ICI4 110,000 MT
PT Kideco Jaya Agung Indonesia 2021 - 2025 GNewC 110,000 MT
Vitol Asia PTE Ltd Indonesia 2021-2023 GNewC 110,000 MT
Samsung C&T Corporation Indonesia 2020 - 2024 GNewC Index 110,000 MT
Trafigura Asia Trading PTE, Ltd Indonesia 2023 - 2024 ICI4 55,000 MT

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CEDC
Contract Quantity per
Supplier Coal Type Duration Price Basis Year
PT Antang Gunung Meratus Indonesia 2020 - 2025 GNewC 385,000 MT
Semirara Mining and Power Annual
Corporation Local Contract Fixed Price 200,000 MT
PT Adaro Indonesia Indonesia 2020 - 2024 GNewC Index 165,000 MT
PT Kideco Jaya Agung Indonesia 2021 - 2025 GNewC 110,000 MT
Trafigura Asia Trading PTE, Ltd Indonesia 2023 - 2024 ICI4 55,000 MT
RWood Resources DMCC Indonesia 2021 - 2025 GNewC 55,000 MT

TPC
Contract Quantity per
Supplier Coal Type Duration Price Basis Year
Semirara Mining and Power Annual
Corporation Local Contract Fixed Price 200,000 MT
PT Kideco Jaya Agung Indonesia 2021 - 2025 GNewC 110,000 MT
RWood Resources DMCC Indonesia 2021 - 2025 GNewC 110,000 MT
PT Antang Gunung Meratus Indonesia 2020 - 2025 GNewC 55,000 MT
Galaxy Energy and Resources Co.
PTE, Ltd. Indonesia 2020 - 2023 ICI4 55,000 MT

GESC
Contract Quantity per
Supplier Coal Type Duration Price Basis Year
Bulk Bayan Resources, TBK Indonesia 2023-2024 Fixed Price 220,000 MT
GNewC and
PT Bayan Resources, TBK Indonesia 2023-2024 ICI4 110,000 MT
Trafigura Asia Trading PTE, Ltd Indonesia 2023 - 2024 ICI4 55,000 MT

Cagbalete Island Microgrid Electrification Expansion Capital Expenditure Project (“Cagbalete


Microgrid Project”)

On July 23, 2019, MERALCO inaugurated the first phase of its power microgrid in Cagbalete Island,
Quezon Province as part of its continuing initiative of rural energization using sustainable energy.
The microgrid is a hybrid generating plant that features a 60 kW PV system, 150 kWh battery energy
storage system and two (2) units of 30 kW diesel generators, which shall provide 24 x 7 power to the
residents of the island.

On May 31, 2019, MERALCO filed an application dated May 29, 2019 to implement the proposed
Cagbalete Microgrid Expansion Project to allow MERALCO to serve the rest of the residents in
Cagbalete Island. The Cagbalete Microgrid Expansion Project with an estimated cost of
=219 million, will utilize a scaled-up hybrid generation system by similarly using solar photovoltaic
P
(“PV”) panels, diesel generators and lithium-ion battery storage as main components. Hearings have
been completed and MERALCO filed its FOE on August 15, 2019. In an Order dated
August 27, 2020, the ERC requested additional information regarding the Cagbalete Microgrid
Expansion Project. MERALCO filed its Compliance on October 15, 2020. On November 20, 2020,
MERALCO filed another Manifestation reiterating the urgency of immediately implementing the
Cagbalete Microgrid Expansion Project. On May 12, 2021, MERALCO filed a Manifestation with
Urgent Motion for Resolution to urge the ERC to resolve the instant Application. On May 19, 2021,
MERALCO submitted the letter from the Office of Municipal Mayor of Mauban, Quezon Province

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which certified that no generation company has applied to the Municipality of Mauban to secure a
permit in order to build and operate an electricity generating facility in the island of Cagbalete. On
May 31, 2021, MERALCO filed a Supplemetal Submission and Very Urgent Motion for Resolution to
urge the ERC to resolve the instant Application. As at February 27, 2023, MERALCO is awaiting
further action by the ERC.

Lease Agreement with CDC

On June 23, 2004, Clark Electric entered into a lease agreement with CDC for the lease of land and
structures for the period of 18 years beginning July 2005, renewable for 25 years upon mutual
agreement of both parties.

Beginning July 2004, as stated in the lease agreement, CDC charges guarantee fees equivalent to
=0.05 per kWh sold for the first eight (8) years, P
P =0.075 per kWh for the next four (4) years, and
=0.12 per kWh for the succeeding six (6) years.
P

IMC with PELCO II

On February 12, 2014, Comstech entered into an IMC with PELCO II for a period of 20 years.
PELCO II is an electric cooperative with franchise to distribute electric power in certain
municipalities of Pampanga.

Pursuant to the IMC, Comstech shall render technical and management services for the operation,
maintenance and management and improvement of PELCO II’s electric distribution. As consideration
for its technical, consultancy and management services, Comstech is entitled to a performance-based
remuneration and management fee based on a certain percentage of the operating revenues of
PELCO II.

Agreement and Registration with PEZA

MERALCO has a concession agreement with PEZA for 25 years, whereby MERALCO has been
contracted to operate the distribution system of CEZ beginning May 26, 2014.

MERALCO executed a tripartite agreement with PEZA and TLI for the billing and settlement of the
supply of power from TLI to CEZ and its locators. Said tripartite agreement is from
December 26, 2019 until December 25, 2021.With the extension of the PSA of PEZA with TLI for
another year to expire on December 25, 2022, the tripartite agreement is likewise extended until
December 25, 2022.

On December 29, 2014, MERALCO secured its Certificate of Registration No.10-01-U from PEZA,
which confirms MERALCO as an Ecozone Utilities Enterprise at the CEZ.

Joint Venture Agreement with New Clark City

On April 3, 2019, Shin Clark signed a Joint Venture Agreement with the BCDA for the construction,
operation and maintenance of the electric distribution system in New Clark City.

Shin Clark completed the construction of Phase 1A of the Interim Electrical Distribution facilities,
which consists of (i) a 33 MVA, 69 kV-13.8 kV interim substation; (ii) 2.2 kilometers of 13.8 kV
overhead lines; and (iii) 1.5 kilometers of 13.8 kV underground line.

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On September 15, 2021, BCDA secured the endorsement from the Governance Commission for
Government Owned and Controlled Corporation for the incorporation of Shin Clark Power, the joint
venture company. On May 10, 2022, the SEC approved the incorporation of Shin Clark Power. On
June 30, 2022, Shin Clark Power filed its application for a CPCN with the ERC. As at February 27,
2023, the application is subject to the final decision of the ERC.

31. Earnings Per Share Attributable to Equity Holders of the Parent

Basic and diluted earnings per share are calculated as follows:

2022 2021 2020


(Amounts in millions)
Net income attributable to equity holders of the Parent (a) P
=28,431 =23,498
P =16,316
P
Weighted average common shares outstanding (b) 1,127 1,127 1,127
Per Share Amounts:
Basic and diluted earnings per share (a/b) P
=25.23 =20.85
P =14.48
P

Basic and diluted earnings per share amounts are calculated by dividing net income for the year
attributable to common shareholders of the parent by the weighted average number of common shares
outstanding during the year. There are no potential dilutive common shares in 2022 and 2021.

There are no other transactions involving common shares or potential common shares between the
reporting date and the date of completion of these consolidated financial statements.

32. Other Matters

RCOA

The transition period for RCOA commenced on December 26, 2012 in accordance with the joint
statement released by the ERC and the DOE on September 27, 2012 and the Transitory Rules for the
Implementation of RCOA (ERC Resolution No. 16, Series of 2012). The commercial operations of
RCOA started on June 26, 2013.

On May 12, 2016, the ERC issued Resolutions No. 10 and 11, Series of 2016, which:

1. Provided for mandatory contestability. Failure of a contestable customer to switch to RES upon
date of mandatory contestability (December 26, 2016 for those with average demand of at least
one (1) MW and June 26, 2017 for at least 750 MW) shall result in the physical disconnection
from the DU system unless it is served by the supplier of last resort (“SoLR”), or, if applicable,
procures power from the WESM;

2. Prohibits DUs from engaging in the supply of electricity to the contestable market except in its
capacity as a SoLR;

3. Mandates Local RESs to wind down their supply businesses within a period of three (3) years;

4. Imposes upon all RESs, including DU-affiliate RESs, a market-share cap of 30% of the total
average monthly peak demand of all contestable customers in the competitive retail electricity
market; and,

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5. Prohibits RESs from transacting more than 50% of the total energy transactions of its supply
business, with its affiliate contestable customers.

On November 29, 2017, the DOE issued two (2) DOE Circulars, namely: DC 2017-12-0013, entitled,
Providing Policies on the Implementation of RCOA for Contestable Customers in the Philippines
Electric Power Industry and DC 2017-12-0014, entitled Providing Policies on the Implementation of
RCOA for RES in the Philippine Electric Power Industry. The DOE Circulars became effective on
December 24, 2017.

Under the DOE Circular No. DC 2017-12-0013, it is provided that voluntary participation for
contestable customers under RCOA-Phase 2 shall now be allowed upon effectivity of said Circular,
while voluntary participation of contestable customers with a monthly average peak demand of
500 kW to 749 kW for the preceding 12 months and demand aggregation for electricity end users
within a contiguous area with an aggregate average peak demand of not less than 500 kW for the
preceding 12-month period, will also be allowed by June 26, 2018 and December 26, 2018,
respectively.

On December 28, 2020, the ERC released Resolution No. 12, Series of 2020, entitled “A Resolution
Prescribing the Timeline for the Implementation of Retail Competition and Open Access (“RCOA”)”.
In said Resolution, the ERC expanded the coverage of RCOA for end-users with an average monthly
peak demand of at least 500 KW in the preceding 12 months, on a voluntary basis.

On September 24, 2021, MERALCO received a copy of the SC Decision wherein, among other
matters, the ERC was also directed to promulgate the supporting guidelines to DOE Circular No. DC
2017-12-0013 and DC 2017-12-0014.

Retail Aggregation

On June 16, 2022, the ERC issued Resolution No. 04, Series of 2022 entitled “A Resolution Adopting
the Rules for the Electric Retail Aggregation Program.” Under said Resolution, the aggregation of
the electricity requirements of end-users, whose total monthly average peak demand is at least
500 kW, is allowed to accommodate a wider consumer base availing of the benefits of RCOA to
further promote competition in the Competitive Retail Electricity Marktet. Implementation of such
aggregation shall become effective by December 26, 2022. Meanwhile, industry stakeholders are
clarifying certain provisions in the Resolution to allow for the smooth implementation of Retail
Aggregation.

Pre-Emptive Mitigating Measure in the WESM

In December 2014, in its Resolution No. 20, Series of 2014, the ERC adopted and established a
permanent pre-emptive mitigation measure in the WESM. The ERC set a cumulative price threshold
(“CPT”) amounting to an average spot price of =P9,000 per MWh over a rolling 7-day period or
168-hour trading interval. Once this CPT for said period is breached, it triggers the imposition of a
price cap amounting to =
P6,245 per MWh. The price cap shall be imposed until after a determination
that succeeding GWAP rolling average is already below the CPT. The pre-emptive measure has taken
effect beginning January 9, 2015.

The imposition of the mitigating measure was questioned by the Philippine Independent Power
Producers Association (“PIPPA”) in the RTC-Pasig through a Petition for Declaratory Relief with
Application for TRO and/or Writ of Preliminary Injunction. The Petition prayed for, among others,
that the ERC Resolutions pertaining to the secondary cap mechanism be declared void
ab initio. The original petition was subsequently amended to reflect the promulgation of the

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subsequent ERC resolutions extending the effectivity of the WESM price cap. On July 21, 2014,
MERALCO filed its Motion for Leave to Intervene and to Admit Attached Comment in Intervention.
The RTC-Pasig admitted MERALCO’s intervention and comment in its Order dated
October 28, 2014. However, in a Motion for Leave to Admit Supplement Petition, PIPPA moved for
leave to file a supplemental petition to include ERC Resolution No. 20, Series of 2014 which provides
for a permanent mitigating measure in the WESM. In an Order dated May 5, 2015, the RTC-Pasig
denied the Motion for Leave to File and Admit Supplemental Petition. PIPPA filed a Motion for
Partial Reconsideration which was denied by the RTC-Pasig in its Resolution dated
September 10, 2015. PIPPA filed a Petition for Certiorari with the CA. The CA denied the Petition for
Certiorari in its Decision dated June 9, 2017. PIPPA filed a MR dated July 19, 2017. In a Resolution
dated August 16, 2017, the parties were directed to file their comments to the PIPPA’s MR.
MERALCO has filed its comment on the MR. On April 4, 2018, the CA rendered a resolution denying
the MR filed by PIPPA.

On September 29, 2015, the WESM Tripartite Committee issued a Joint Resolution further extending
the interim offer price cap of =
P32,000 per MWh until December 31, 2015. In its Joint Resolution No.
3, Series of 2015, the WESM Tripartite Committee resolved to set the WESM offer price cap
at P
=32,000 per MWh and the WESM offer price floor of negative P =10,000 per MWh effective
January 2016, provided that an annual review shall be undertaken considering the relevant costs
assumptions at the time of review.

On December 7, 2015, the RTC-Pasig rendered a Decision dismissing the Petition for Declaratory
Relief. The MR filed by PIPPA was denied in a Resolution dated June 16, 2016. PIPPA appealed the
RTC-Pasig Decision with the SC. MERALCO has filed its comment thereto. PIPPA filed a
Consolidated Reply on July 17, 2017. As at February 27, 2023, the case is pending before the SC.

On May 9, 2017, the ERC issued Resolution No. 4, Series of 2017, entitled, “A Resolution Adopting
Amendments to the Pre-emptive Mitigating Measure in the WESM”. They adopted a recalculated
cumulative price threshold level of =
P1,080,000 and a shorter five (5)-day (120-hour) rolling average
period. This is equivalent to =
P9,000 per MWh over said period.

The ERC has expressed its intent to further amend the pre-emptive mitigating measure in the WESM
to increase consumer safety nets against price spikes. The highlight of the amendments would be the
lowering of the rolling average period from five (5) days to three (3) days, and the regional/island
imposition of the Secondary Price Cap mechanism when the grid interconnection is on outage. In its
Resolution No. 7, Series of 2021, promulgated on July 28, 2021, the ERC shortened the rolling
average period to seventy-two (72) hours and approved the regional/island imposition of the
Secondary Price Cap mechanism.

PEZA – ERC Jurisdiction

On September 13, 2007, PEZA issued “Guidelines in the Registration of Electric Power Generation
Facilities/Utilities/Entities Operating Inside the Ecozones” and “Guidelines for the Supply of Electric
Power in Ecozones” (“Guidelines”). Under these Guidelines, PEZA effectively bestowed upon itself
franchising and regulatory powers in Ecozones operating within the legislative franchise areas of DUs
which are under the legislatively-authorized regulatory jurisdiction of the ERC. The Guidelines are
the subject of an injunction case filed by the DUs in RTC-Pasig.

On February 4, 2015, the RTC-Pasig issued an Order setting a clarificatory hearing on


April 15, 2015. During the said hearing, MERALCO manifested that it previously filed a Motion to
Withdraw as plaintiff on the basis of letter agreements between MERALCO and PEZA, which is
pending before the RTC-Pasig. MERALCO submitted the Tripartite Agreement among PEZA,

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PEPOA and MERALCO for approval of the RTC-Pasig. In a Decision dated July 3, 2015, the RTC-
Pasig approved the Compromise Agreement between PEZA, PEPOA and MERALCO. In the hearing
on February 10, 2016, the RTC-Pasig dismissed the petition upon motion by PEZA. The ERC filed a
MR which is pending resolution by the RTC-Pasig.

Purchase of Subtransmission Assets (“STAs”)

On April 17, 2012, MERALCO and TransCo filed a joint application for the approval of the Batch 4
contract to sell with the ERC. On April 22, 2013, the ERC issued a Decision on MERALCO’s joint
application for the acquisition of the Batch 4 contract to sell. On June 21, 2013 and July 3, 2013,
MERALCO and TransCo filed a Motion for Partial Reconsideration and MR, respectively, regarding
the exclusion of certain facilities for acquisition.

On May 22, 2014, MERALCO and TransCo received an ERC Order dated May 5, 2014 denying
MERALCO and TransCo’s Motions. On June 5, 2014, MERALCO filed a clarificatory motion and a
MR of the May 5, 2014 ERC Order, which was denied by the ERC through an Order dated
June 16, 2014. On October 10, 2014, MERALCO filed a Motion to Reopen Proceedings for the
reception of new evidence to support MERALCO’s position on the acquisition of excluded STAs. The
Motion was heard by the ERC on October 17, 2014. After the parties have submitted their respective
comments and pleadings, the ERC conducted another hearing on February 23, 2015.

In an Order dated March 4, 2015, the ERC considered but denied the new and substantive allegations
in MERALCO’s Motion to Reopen Proceedings. MERALCO then filed a Petition for Review with the
CA to question the Orders of the ERC. In a Decision dated August 12, 2016, the CA dismissed the
Petition. On September 17, 2016, MERALCO filed a MR. In an Amended Decision dated
September 15, 2017, the CA granted MERALCO’s MR and approved the sale of the Dasmarinas-
Abubot-Rosario 115 kV line and Rosario substation equipment in favor of MERALCO. NGCP filed a
MR (of the Amended Decision) dated October 4, 2017. In a Resolution dated May 31, 2018, the CA
denied the MR. NGCP filed a Petition for Review with the SC.

On March 20, 2015, MERALCO filed a case for “Interpleader with Consignation and Specific
Performance” against TransCo and the Municipality of Labrador, Pangasinan (“Labrador”) with the
RTC-Pasig, praying for the RTC-Pasig to (i) accept and approved the consignation of the amount of
=194.1 million; (ii) declare MERALCO to have paid in full the purchase price of the sale of
P
TransCo’s assets; (iii) direct TransCo to execute the corresponding Deeds of Absolute Sale; and
(iv) direct Labrador and TransCo to interplead their respective claims. On April 14 and 20, 2015,
Labrador and TransCo filed their respective Motions to Dismiss on the ground of impropriety of the
filing of the Interpleader and on the ground of litis pendentia. MERALCO received an Order from
RTC-Pasig granting the Motions to Dismiss of both TransCo and Labrador. MERALCO filed a MR
which was denied by the RTC-Pasig. MERALCO appealed the Decision with the CA, which granted
the appeal, and remanded the interpleader case to the trial court for proper disposition. The CA
decision already attained finality as of May 25, 2018.

TransCo and MERALCO executed the Deeds of Absolute Sale (“DOAS”) on December 10, 2020,
covering the Batch 2 and Batch 4 STAs. Hence, MERALCO has acquired and is in full possession of
these assets. In a letter dated Octobre 26, 2021, NGCP likewise confirmed that, with the turn-over of
these assets, the corresponding Connection Charges and Residual Sub-Transmission Charges
(“CC/RSTC”) of MERALCO starting the December 2021 billing month will be correspondingly
adjusted.

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On December 15, 2016, MERALCO and TransCo filed a joint application for the approval of the
Batch 3 contract to sell with the ERC. Hearings were conducted on August 10, 2018 and
October 15, 2018. The ERC has yet to set the next scheduled hearing of the case.

FiT

Pursuant to RA No. 9513, or the Renewable Energy Act of 2008 (“RE Act”), the ERC issued
Resolution No. 16, Series of 2010, Adopting the FiT Rules, on July 23, 2010. As defined under the
FiT Rules, the FiT system is a renewable energy policy that offers guaranteed payments on a fixed
rate per kWh for electricity from wind, solar, ocean, hydropower and biomass energy sources,
excluding any generation for own use.

To fund the FiT payments to eligible RE developers, a FiT-All charge shall be imposed on all
end-users. The FiT-All will be established by the ERC upon petition by TransCo, which had been
designated as the FiT Fund Administrator.

On February 5, 2014, the ERC released the FiT-All disbursement and Collection Guidelines (“FiT
Guidelines”) to supplement the FiT Rules. This set of guidelines will govern how the FiT-All will be
calculated using the formulae provided. It will also outline the process of billing and collecting the
FiT-All from the electricity consumers, the remittance to a specified fund, the disbursement from the
FiT-All fund and the payment to eligible RE developers.

TransCo applied for FiT-All rates with the ERC, the ERC approval and status of applications are
indicated in the table below:

Year Applied Rate per Approved Rate per Date Approved / Status
kWh kWh
2019 =0.2780
P =0.0495
P October 28, 2019
2020 =0.2278
P =0.0983
P November 23, 2020
2021 =0.1881
P =0.0983
P August 17, 2022
2022 =0.3320 or
P =0.0364
P August 30, 2022
=0.3165
P
(alternative rate
in consideration
of Covid-19)
2023 =0.2382
P – Pending final decision

On December 23, 2014, MERALCO received a copy of a Petition for Prohibition and Certiorari filed
with the SC against the ERC, DOE, TransCo, NREB and MERALCO. The Petition seeks
(i) the issuance of a TRO and/or WPI, and after giving due course to the Petition, a Writ of
Prohibition to enjoin the respondents from implementing the FiT-All, the FiT Rules and FiT
Guidelines; and (ii) the annulment of the FiT Rules and FiT Guidelines. With the parties’ submission
of their respective memoranda, the case is now pending decision. As at February 27, 2023, the said
petition is pending with the SC.

In a Decision dated October 6, 2015, the ERC set the Wind FiT at =
P7.40 per kWh. MERALCO filed a
MR on the Decision. As at February 27, 2023, the MR is pending further action of the ERC.

On September 29, 2016, Alternergy Wind One Corporation, Petrowind Energy, Inc. and Trans-Asia
Renewable Energy Corporation filed a Petition to Initiate Rule-Making to adjust the Wind FiT rate of
=7.40 per kWh to =
P P7.93 per kWh. MERALCO filed an intervention in the case. The hearing on the

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Petition was set on January 6, 2017. MERALCO’s motion on the propriety of the petition has been
submitted for the resolution of the ERC. As at February 27, 2023, the said petition is ongoing and
remains pending with the ERC.

On May 26, 2020, through Resolution No. 6, Series of 2020, the ERC issued the FiT adjustments for
the years 2016, 2017, 2018, 2019 and 2020 using 2014 as the base year for the CPI and foreign
exchange adjustments, pursuant to Section 2.10 of the FiT Rules. The said FiT adjustments are to be
recovered for a period of five (5) years. By way of example, the Wind FiT for =
P7.40 per kWh will be
=8.53 per kWh for year 2020 and the Solar FiT for P
P =8.69 per kWh will be =
P10.12 per kWh for year
2020.

In its Decision dated November 28, 2020, the ERC set the modified FiT2 rate to be applicable from
January 1, 2018 to December 31, 2019. The modified Run of River (“ROR”) Hydro FiT2 rate is
=5.8705 per kWh while for Biomass FiT2, the rate is =
P P6.19 kWh.

On November 26, 2022, the ERC issued Resolution No. 12, Series of 2022, "A Resolution
Adopting the Suspension of the Collection of Feed-in-Tariff Allowance (FiT-All)", approving
the temporary suspension in the collection of the FiT-All for a period of three (3) months,
starting the December 2022 until the February 2023 billing months. According to the ERC, the
FiT-All balance as of November 7, 2022, inclusive of the Cost Recovery Revenue (“CRR”)
collections in November 2022, shows a healthy fund balance that can sufficiently cover the
FiT-All payment requirements for three (3) months, assuming the same average CRR
collection. On February 23, 2023, ERC issued an advisory extending the temporary suspension
in the collection of the FIT-All for six (6) months, starting the March 2023 to August 2023
billing months.

Renewable Portfolio Standards (RPS)

In accordance with the RE Act, the DOE issued Department Circular No. DC2017-12-0015
“Promulgating the Rules and Guidelines Governing the Establishment of the Renewable Portfolio
Standards for On-Grid Areas” or the RPS Rules on December 22, 2017. On June 30, 2020,
MERALCO submitted its RPS Form for 2020 to the DOE as part of its compliance with the RPS
Rules. The RPS form contains MERALCO’s computation of its requirements, as well as plans to
comply with the requirements. MERALCO intends to fully comply with its RPS obligations while
minimizing the rate impact to its customers.

MERALCO is also preparing to register with the Renewable Energy Market (“REM”). On
August 18, 2020, the DOE issued an advisory on the Recalibration of the Commercial Operations of
the REM. According to the advisory, the REM will be launched in June 2021. As at February 27,
2023, the REM is not yet operational.

Green Energy Option Program (GEOP)

Pursuant to the RE Act, the DOE issued Department Circular No. DC2018-07-0019 “Promulgating
the Rules and Guidelines Governing the Establishment of the Green Energy Option Program Pursuant
to the Renewable Energy Act of 2008” or the GEOP Rules on July 18, 2018. On April 22, 2020, the
DOE also issued Department Circular No. DC2020-04-0009, “Guidelines Governing the Issuance of
Operating Permits to Renewable Energy Suppliers under the GEOP” as a supplement to the GEOP
Rules.

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On November 24, 2020, the ERC released a draft “Resolution Adopting the GEOP Rules”. This is in
accordance with Section 15(e) of the DOE’s GEOP Rules stating that “The ERC shall issue the
necessary regulatory framework particularly in setting the technical and interconnection standards
and wheeling fees, to effect and achieve the objectives of the GEOP.” On December 7 and 8, 2020,
the ERC conducted public consultations on the draft. On August 17, 2021, the ERC released its ERC
Resolution No. 8, Series of 2021 (dated April 22, 2021) and put into effect its regulatory framework
to govern the GEOP. The rules became effective on September 3, 2021.

Recovery of NPC Stranded Contract Costs

In an Order dated May 22, 2018, the ERC approved PSALM’s petition for the recovery of NPC’s
stranded contract costs portion of the universal charge (“UC-SCC”). Accordingly, PSALM is hereby
authorized to recover the stranded contract costs for Luzon, Visayas and Mindanao grids totaling
=8,547 million with a monthly rate of =
P P0.1938 per kWh starting May 2018 billing period until the full
amount has been recovered.

On January 14, 2019, MERALCO received a letter dated December 28, 2018 from PSALM advising
MERALCO to cease the implementation of the collection of the = P0.1938 per kWh for the recovery of
the additional SCC effective January 2019 as it already recovered the full amount of the stranded
contract costs. This was after MERALCO had already completed the billing program for
January 2019. Accordingly, on February 6, 2019, MERALCO wrote the ERC proposing to reverse the
said collections of the additional UC-SCC. On February 7, 2019, MERALCO received a letter from
the ERC which allowed the full reversal of the subject UC-SCC in its February billing equivalent to
=0.3876 per kWh, without prejudice to further validation by the ERC as to the final amounts due.
P

In its letter dated January 15, 2020, MERALCO informed the ERC that it accumulated additional total
excess UC-SCC collections in the amount of P =545 million and proposed to implement another
reversal to its customers in the amount of =
P0.1453 per kWh for the month of February 2020. In its
letter dated February 6, 2020, the ERC directed MERALCO to implement the refund, subject to post-
validation. MERALCO was then directed to provide additional information as well as status report to
the ERC with respect to the implementation of refund. MERALCO implemented the refund starting its
March 2020 billing.

On March 4, 2020, MERALCO received a letter dated March 3, 2020, directing it to comment on a
petition filed by a consumer group which sought to stop the colletion of UC-SCC and stranded debts
portion of the universal charge (“UC-SD”) from consumers because of the Murang Kuryente Act.
MERALCO filed its comment on March 16, 2020.

In a Decision dated April 10, 2019, the ERC approved with modification PSALM’s petition for the
availment of the NPC’s stranded contract costs portion of the universal charge for calendar year 2014.
PSALM is hereby authorized to recover the UC-SCC for Luzon, Visayas and Mindanao grids totaling
=5,117 million with a monthly rate of =
P P0.0543 per kWh within a period of 12 months.

In separate Orders dated May 28, 2020, the ERC dismissed PSALM’s petitions for the availment of
the NPC’s stranded contract costs portion of the universal charge for calendar years 2015 to 2018 due
to the promulgation of the Murang Kuryente Act.

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Net Metering Program

The RE Act mandates the DUs to provide the mechanism for the “physical connection and
commercial arrangements necessary to ensure the success of the RE programs”, specifically the Net
Metering Program. The RE Act defines Net Metering as “a system, appropriate for distributed
generation, in which a distribution grid user has a two-way connection to the grid and is only charged
for his net electricity consumption and is credited for any overall contribution to the electricity grid”.
By their nature, net metering installations will be small (less than 100 kW) and will likely be adopted
by households and small business end-users of DUs.

After consultations with stakeholders, the ERC issued on July 3, 2013 its Resolution No. 09, Series of
2013, entitled, “A Resolution Adopting the Rules enabling the Net Metering Program for Renewable
Energy”. The Rules will govern the DUs’ implementation of the Net Metering Program. Included in
the Rules are the interconnection standards that shall provide technical guidance to address
engineering, electric system reliability, and safety concerns for net metering interconnections.
However, the final pricing methodology to determine the rate at which energy exported back to the
distribution system by Net Metering Program participants will be addressed in another set of rules by
the ERC in due course. In the meantime, the DUs’ blended generation cost equivalent to the
generation charge shall be used as the preliminary reference price in the net metering agreement. The
Rules took effect on July 24, 2013. Under ERC Resolution No. 6, Series of 2019, entitled, “A
Resolution Adopting the Amendments to the Rules enabling the Net Metering Program for
Renewable Energy”, the ERC adopted amendments to the Net Metering Rules. On June 23, 2020, the
ERC issued Resolution No. 5, Series of 2020 entitled, “A Resolution Clarifying ERC Resolution No.
6, Series of 2019, entitled "A Resolution Adopting the amendments to the Rules Enabling the Net-
Metering Program for Renewable Energy". As at December 31, 2022, MERALCO has already
installed 7,590 meters and energized 7,304 net metering customers.

Interruptible Load Program (“ILP”)

In an ERC Order dated April 11, 2014, the ERC approved with modification MERALCO’s request
that it be allowed to adopt and implement the ILP. ILP protocols, compensation and recovery
mechanism are governed by ERC Resolution No. 5, Series of 2015 “A Resolution Adopting the
Amended Rules to Govern the Interruptible Load Program”, DOE Circular No. DC2015-06-0003
“Providing the Interim Manner for Declaring Bilateral Contract Quantities in the Wholesale
Electricity Spot Market and Directing the Philippine Electricity Market Corporation to Establish
Necessary Protocols to Complement the Interruptible Load Program” and ERC Resolution No. 3,
Series of 2019 “A Resolution Clarifying Section 3, Article III of the Amended Interruptible Load
Program Rules”.

As at December 31, 2022, there are 117 companies with a total committed de-loading capacity of
560.59 MW that have signed up with MERALCO, MPower and with other retail electricity suppliers
as ILP participants.

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Long-Term Indebtedness Application

On June 25, 2015, MERALCO filed an application, with prayer for provisional authority, for
continuing authority to (a) issue bonds or other evidence of indebtedness for as long as it maintains
50:50 long-term debt to equity ratio; and (b) whenever necessary, to mortgage, pledge or encumber
any of its property to any creditor in connection with its authority to issue bonds or any other
evidence of long-term indebtedness. The hearing on the application was conducted on
October 6, 2015. In an Order dated October 12, 2015, the ERC directed MERALCO to submit
additional documents in support of its application which MERALCO complied with. However, due to
changes in the financial climate which may affect the terms and conditions of any financial
borrowings, MERALCO has filed a Motion to withdraw the application without prejudice to its
refiling at a later date. In an Order dated March 22, 2016, the ERC granted MERALCO’s Motion to
Withdraw but still required MERALCO to submit certain documents. MERALCO filed a Motion for
Partial Reconsideration questioning the requirement which is pending before the ERC. As at
February 27, 2023, the ERC has yet to resolve MERALCO’s Motion for Partial Reconsideration.

On October 29, 2019, MERALCO filed an application, with prayer for provisional authority, for
continuing authority to (a) issue bonds or other evidence of indebtedness; and (b) whenever
necessary, to mortgage, pledge or encumber any of its property to any creditor in connection with its
authority to issue bonds or any other evidence of long-term indebtedness. Hearings have been
completed and MERALCO filed its FOE. On January 21, 2021, MERALCO filed its Manifestation
with Urgent Motion to Resolution. MERALCO has filed a Motion to Withdraw the Application to
align with the changes brought about by the amended Public Service Act. As at February 27, 2023,
MERALCO is awaiting the resolution of the ERC of its motion.

CSP Requirement for PSAs

On February 9, 2018, the DOE published the 2018 DOE Circular. Upon effectivity of the Circular,
all prospective PSAs in grid and off-grid areas shall be procured through CSP. The CSP under the
2018 DOE Circular involves publication of invitation to bid, pre-bid conference, bid evaluation, and
pre-/post-qualification of winning bidder. Exemption from CSP may be granted by the DOE in the
following instances:

i. Generation project owned by the DU funded by grant or donations


ii. Negotiated procurement of emergency supply
iii. Generation project embedded in the DU, utilizing indigenous energy resources in the franchise
area of the DU and subject to a maximum capacity of 10 MW per Luzon DU and 5 MW per
Visayas and Mindanao DU (introduced by the 2021 Revised CSP Circular, see discussion
below)
iv. Provision of supply in off-grid areas prior to the entry of new power providers
v. Provision of supply by PSALM through bilateral contracts for power produced from undisposed
generating assets and IPP contracts sanctioned by EPIRA.

PSAs that were granted exemption from CSP by reason of need for emergency supply shall be
implemented by the DU immediately without prejudice to the evaluation and final decision of the
ERC.

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The DU’s CSP may be managed by a Third Party Bids and Awards Committee (“TPBAC”) or a Third
Party Administrator (“TPA”). The DU’s TPBAC shall be composed of the following (a) one (1) DU
officer or employee knowledgeable in the technical operations of the DU; (b) One (1) DU officer or
employee with knowledge and/or experience with any local or international competitive bidding
procedures; (c) one (1) lawyer; (d) one (1) finance officer or accountant that has knowledge on
electricity pricing; and (e) one (1) technical person, or a person with knowledge and/or experience
with any local or international competitive bidding procedures. Any two of the last three (3)
members shall be captive customer representatives. The selection process of the representatives of
the captive customers to the DU’s TPBAC shall be submitted to the DOE for approval. The DOE has
already approved the selection process of MERALCO’s TPBAC captive customer representatives.

Direct negotiations may be made by the DUs after at least two (2) failed CSPs and there is no
outstanding dispute on the conducted CSP. A CSP is considered failed when during its conduct:

i. No proposal was received by the DU


ii. Only one (1) generator submitted an offer
iii. Competitive offers of prospective generators failed to meet the requirements prescribed in the
bid document

On October 14, 2021, the DOE published a DOE Circular entitled “Amending Certain Provisions of
and Supplementing [the 2018 DOE Circular] on the Competitive Selection Process in the
Procurement by the Distribution Utilities of Power Supply Agreement for the Captive Market”
(“2021 Revised CSP Circular”). The 2021 Revised CSP Circular mainly improved the procedural
process and flow prescribed under the 2018 DOE Circular and, most importantly, introduced a new
alternative mode of CSP – a competitive challenge for unsolicited proposals (“USP”), if the USP
offers a New Technology and does not exceed twenty-five percent (25%) of the distribution utility’s
peak demand for the year of the USP’s required commercial operations minus any capacity
previously procured through USP for commercial operations in the same year.

New Technology is defined under the 2021 Revised CSP Circular as referring to “a technology that is
novel or a novel use or arrangement of existing technology that has not yet been commercially
operating or applied in the country upon effectivity of the Circular. Such technology, whether in
whole or in part, is compliant to international test standards in the power generation industry.”

Under the 2021 Revised CSP Circular, each CSP shall be completed within seven (7) months from
the time of the publication of the Invitation to Bid until filing of the PSA to the ERC.

Meanwhile, following the 2018 DOE Circular, MERALCO constituted its TPBAC to conduct CSP in
accordance with the 2018 DOE Circular and its submitted Power Supply Procurement Plan.

SC Petitions on CSP

On September 5, 2019, representatives of the Bayan Muna partylist filed a petition with the SC
claiming that the 2018 DOE Circular, which repealed portions of the 2015 CSP Circular, is void for
violating policies/provisions intended to protect consumers under EPIRA and the Constitution (the
“Bayan Muna Petition”). The Bayan Muna Petition also sought for the issuance of TRO and/or writ
of preliminary injunction to prevent continuation of the on-going CSPs of MERALCO and some
electric cooperatives. On December 17, 2019, MERALCO filed its Comment to the Bayan Muna
Petition.

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On March 3, 2021, MERALCO received a copy of the petition dated February 17, 2021 filed with the
SC by representatives of various consumer groups led by the Power for People (P4P) Coalition (the
“P4P Petition”) against the DOE and MERALCO’s TPBAC. The petition claims that the terms of
reference for the 1,800 MW baseload CSP completed in March 2021 are unfavorable to the consumers
and non-compliant with the 2018 DOE Circular and that it would not result in the least cost of
electricity. The P4P Petition also sought for the issuance of TRO and/or writ of preliminary
injunction to prevent continuation and/or nullify the 1,800 MW baseload CSP of MERALCO. In a
Resolution dated March 18, 2021, the SC dismissed the P4P Petition. The SC held that the issues
raised by P4P are factual in nature, which require the SC to inquire into wisdom of the terms of
reference. Hence, the petition was deemed premature as P4P itself admitted that DOE has yet to act
on its protest letter and the ERC has yet to determine reasonableness of the rates resulting from the
CSP.

True-up Adjustments of Fuel and Purchased Power Costs (“TAFPPC”) and Foreign Exchange-
Related Costs (“TAFxA”)

On June 20, 2017, the ERC issued a Decision, a copy of which was received by MERALCO on
December 29, 2017, authorizing PSALM to recover, within a 60-month period, the amount of
=3,592 million in the Luzon grid, among others, as part of the TAFPPC and TAFxA; and directed all
P
distribution utilities to comply with the directive.

On January 1, 2018, MERALCO filed a Motion for Partial Reconsideration praying for the suspension
of the Order and requesting that MERALCO be allowed to charge the recovery to all types of
customers, regardless of whether they were covered or not during the relevant test periods. As at
February 27, 2023, the ERC has yet to act on the Motion.

Clean Air Act

The Clean Air Act and the related IRR contain provisions that have an impact on the industry as a
whole and to TPC, PPC, GRPI, PEDC and CEDC (“the Operating Subsidiaries of GBPC”) in
particular, that need to be complied with within 44 months from the effectivity date or by July 2004.
Based on the assessment made on the Operating Subsidiaries of GBPC’s existing facilities, the
Operating Subsidiaries of GBPC believe that they have complied with the provisions of the Clean Air
Act and the related IRR.

Energy Regulation (ER) 1-94

Based on ER 1-94 and the IRR of the EPIRA, generation companies are mandated to provide benefits
to its host communities, equivalent to P=0.01 per kWh of energy generated and sold. The operating
subsidiaries of GBPC accrue the required benefits to their host community (included under “Trade
payables and other current liabilities” account in the consolidated statements of financial position)
prospectively from the date of effectivity of ER 1-94. Such amount accrued is remitted to the trust
account of the DOE upon their audit.

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33. Notes to Consolidated Statements of Cash Flows

2022 2021
Interest- Interest-
bearing bearing
long-term long-term
financial Notes Dividends financial Notes Dividends
liabilities payable payable liabilities payable payable
(Amounts in millions)
Balance at beginning of
year P61,834
= =28,834
P =2,021
P =16,771
P P23,373
= =1,251
P
Payments (18,676) (2,263) (17,213) (7,388) (17,419) (13,748)
Availments 32,507 2,920 – 24,513 22,880 –
Dividend declarations – – 18,070 – – 14,518
Preferred stock redemption (3) – – (2) – –
Reclassifications – – – – – –
Interest accretion (577) – – (153) – –
Effect of consolidation of
GBPC – – – 28,323 – –
Amortization of fair value
on the acquisition of
GBPC (743) – – (230) – –
Balance at end of year =74,342
P =29,491
P =2,878
P =61,834
P =28,834
P =2,021
P

34. Event After the Financial Reporting Date

On February 27, 2023, the BOD of MERALCO approved the declaration of cash dividends of =
P11.028
a share to all shareholders of record as at March 29, 2023, payable on April 26, 2023.

*SGVFS169563*

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